Tuesday , April 20 2021
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China and Overseas Trade

Summary:
It is over two centuries since Ricardo's "On The Principles of Political Economy and Taxation (1817)" but it is still influential in the teaching of economics.  Obviously we have moved on from talking about brute labour to more refined inputs to the production process but Ricardo's ideas still haunt us.  One idea in particular is creaking in the modern age: the universal benefit of overseas trade.  Ricardo was a successful banker and a stockbroker.  Other great economists have been academics and philosophers.  What they all share is that they divorce money and trade from the actual process of creating goods and services. The support of overseas trade as a "universal benefit" is partly a result of this detachment and disdain for the process of business.Most production begins with enthusiasm

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It is over two centuries since Ricardo's "On The Principles of Political Economy and Taxation (1817)" but it is still influential in the teaching of economics.  Obviously we have moved on from talking about brute labour to more refined inputs to the production process but Ricardo's ideas still haunt us.  One idea in particular is creaking in the modern age: the universal benefit of overseas trade.  

Ricardo was a successful banker and a stockbroker.  Other great economists have been academics and philosophers.  What they all share is that they divorce money and trade from the actual process of creating goods and services. The support of overseas trade as a "universal benefit" is partly a result of this detachment and disdain for the process of business.

Most production begins with enthusiasm and skill.  Usually an individual develops an idea that produces something that other people will buy.  This could be any idea from an insurance product to resale of goods.  At first the motivation for the individual is to enjoy the use of their skill and to gain financial advancement and independence. People who do this are the bedrock of democracy because they desire freedom and the bedrock of society because they provide employment.

The individuals who desired to create goods and services were tightly controlled until the end of the Middle Ages but were then increasingly freed to perform their work as even the landowners came to see that they created a vibrant and free society.  By the time of Ricardo the creators had spawned a whole class of bankers and stockbrokers who partly fostered and partly parasitised the creative class.

In the nineteenth century large corporations developed a method of growing creative people in their workforce so that new, successful departments could be generated to replace fading departments which could then be cut.  The creative individual often became an interchangeable part of the corporate machine.   Following Marx economists came to regard the creative class as a freely available resource.  However, this is not the case because the individuals who create will only do so if they are rewarded individually.  Having learnt this lesson large corporations and even whole countries such as China have managed to distil the economic benefit of creativity and strip it of its social context.  This process accelerated after WWII.

We can now see that large corporations and corporate states such as China can be creative and economically successful without the development of a free society.

Is a free society more important than a prosperous society?

What is a free society?  It is a society where individuals can be freely creative both in their actions and their beliefs.  Only monks and academics would limit the idea of freedom to beliefs.  Most creative actions are expressed in business and are evident as individuals produce attractive shops, services and products.  A few creative actions are valued despite limited popularity, such as some forms of art and scientific research.

As we saw above, large corporations and some countries can hijack the creativity of individuals, denying them freedom and using their creativity to increase the wealth of the powerful.

Those who run and own large corporations have power.  China has become a "holding company" that run sets of large corporations and this gives it enormous power.  The difference between China and a classical Marxist state is that Marxists dream of everyone imprisoned within a single corporation whereas Chinese capitalism involves multiple corporations.

When we look at China we can see that it is the large corporation that is the modern antithesis of a free society.  The large corporation cages creative people and milks them for the wealth and power of the corporation.  This cuts the legs out from under free societies that necessarily entail freedom of creative action.  

Once a person is captured by a large corporation their freedom of action and belief becomes limited.  Governments in the UK, especially Labour governments, have used the archaic legal precedent of the "vicarious liability" of employers to enforce modes of behaviour and speech within a workforce. Contracts specify that employees may not leave work to become competitors. After COVID surveillance technology is being used to monitor the activity and location of employees.  

Large corporations benefit from their size in other ways. Banks regard large corporations as inherently credit worthy and whilst smaller businesses require real collateral for loans banks will often forego adequate collateral on large corporate loans. This means that large corporations can outlast smaller businesses and gobble them up during downturns. 

There is little doubt that half the population, especially academics and public sector workers, desire to be controlled but the rest of the population would prefer to create their own life and deeply desire the freedom and space to do so.

A major corporate threat to this freedom is from Multinational Corporations.  These span continents and often use near slave labour to undercut production costs. Once established in a country they can threaten governments with the sudden withdrawal of production.  The greatest corporate threat is from China which is a holding company for thousands of large corporations and has opaque investments that give it control of apparently non-Chinese corporations. China is currently using this influence to ensure that its trade is continued.

Most international trade is, by definition, managed by Multinational Corporations.  Those who agitate and lobby for the endless increase in international trade are de facto serving Multinational Corporations and China.  If we want a free society then the greatest threat to our desire in the twenty first century is unbridled overseas trade.  Overseas trade is necessary because the UK requires resources that it cannot obtain at home but unbridled overseas trade is a disaster.

Unbridled overseas trade leads to the dispersion of the parts of production globally which then excludes local producers from obtaining those parts.  We have seen this in the EU where much of the economic discussion revolved around "just in time" deliveries from other countries.  Uncontrolled overseas trade also leads to the concentration of capital in countries that pursue mercantilist policies (those that only trade at a surplus) such as China and Germany (now the EU). Giant Multinational Corporations are regarded by banks as so creditworthy that they can beat any competition from smaller entities and so ensure trading dominance.  

The worst problem with excess overseas trade is that it produces an unstable global economy.  A subprime crisis in the USA rapidly spreads to become a global financial crisis, someone catches cold in China and the world spirals into recession, a group of nations operate a cartel on mineral supplies and everyone gets poorer and so on.  This was understood after the 1920s and the world decoupled from trading interdependence for 50 years.  This ushered in a period of exceptional growth and stability in the West.  Stable systems are composed of multiple, largely autonomous parts.  Excess global trading removes too many independent parts and risks disaster.

Excess overseas trade has clearly negative effects on national prosperity:

China and Overseas Trade
The optimal level of global trade for the UK economy is around 40% of GDP (imports + exports).  Exceeding this level leads to low domestic production and hence low domestic consumption.  We have not discovered the lowest level of global trade consistent with high economic growth, it may be much less than 40%.

How do we stop corporate dominance?  The corporates corrupt the democratic process by offering senior positions to legislators which corrupts and undermines any resistance.  It is strange that everyone agrees that a single, large, domestic company should not be allowed to dominate any sector of the economy but when Multinational Corporations such as Microsoft or Amazon are involved they are given carte blanche to exert total control.

In the UK 60% of employment is provided by small and medium sized companies with the rest due to the public sector and large corporations. Those politicians who lobby on behalf of multinationals for unbridled overseas trade should ask who it is that they are elected to represent.  Unbridled overseas trade is a threat to our democracy and economy and, increasingly, our security and must not be allowed to happen.

29/3/2021

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It is two centuries since Ricardo's great work.  The following excerpt is worth reading because it lies at the core of twentieth century thought:

"The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries. Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by regarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically.. while, by increasing the general mass of productions, it diffuses general benefit, and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England."

Ricardo argued the pure economic case for foreign trade extremely well and has rightly been honoured by generations of economists.  However, the moment we depart from "pure" economics the whole edifice collapses.  Political economy should begin at the desired society and derive an optimal economy to serve this, with due regard to global threats, and not indulge in "pure" economics.

In the modern world it is possible to manufacture and grow crops almost anywhere given sufficient technical innovation.  Some countries already have tens of square kilometres of glass houses to provide crops that would normally grow in warm areas and producing anything from microchips to rolled steel joists can be achieved locally.

Ricardo also shows little awareness of the instability of interconnected systems and regards business purely in terms of pounds sterling rather than as a foundation for freedom.  He is already, in 1817, viewing production in terms of Multinational Corporations without consideration of the effect of this on society.  This is not surprising for a banker and stockbroker.

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