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Economics on the slant

by rootless2 Wed Apr 6th, 2011 at 10:44:01 PM EST

Crossposted at People's View

Most of us think of economic theories as lining up from left to right, from communism to free-marketism, but there is a whole other school of economics that is on a slant to that line and provides an escape from the limits of conventional economics. During the 1800s that school was so influential in the USA that it was called "The American System" or the "high wage system". Here is something from the right winger economists at the Mises Institute complaining about one of the advocates of that system:

And those political views were clearly stated by Lincoln when he first ran for the Illinois legislature in 1832: "My politics are short and sweet, like the old woman's dance. I am in favor of a national bank . . . in favor of the internal improvements system and a high protective tariff." These three things -- protectionism, government subsidies to railroad and canal-building companies, and central banking -- were called the "American System" by Henry Clay. Economists have another word for them: "mercantilism."
Practically every conventional economist from Marx to Hayek to Paul Krugman and Gary Becker shares this same contempt for the American System. According to them, it's just dumb "mercantilism" and economics theory proves that it can't work. But every single nation that has become wealthy since the dawn of the industrial age has embraced something very much like the American System: China, Korea, Sweden, Taiwan, Germany, and of course the USA. And every nation that has adopted or been forced to adopt the recipes of conventional economics has seen wages fall, manufacturing collapse, and the middle class disappear. That is where we are going in our era of wage cuts where even a decent education is something that middle class people can no longer afford. Sadly for America we have abandoned the American System and we are paying the price.


In the 1800s American economists marveled at how, thanks to conventional economics, the powerful British Empire was driving down wages both in the home country and in its colonies while American businesses were flourishing by paying relatively kingly wages. All the same nonsense about free trade, low taxes to encourage business, "we can't afford it", and so on was used to justify the misery of British workers. British workers, living on tea and bread crusts, working with their children in brutal conditions were told that their suffering was necessary for business to be "competitive", that the country could not afford to provide them living wages, decent housing, education, and that unions were certainly unaffordable luxuries that maybe American workers could get, but not them. They were told that the best they could aspire to was to be a servant - and that the iron laws of economics, not the blind greed of the wealthy was to blame.

The weird thing about the popular acceptance of conventional economics is that the evidence of our own lives shows it to be dangerously wrong. I'm publishing this essay on the Internet, a technology that was created by publicly funded research and built out at taxpayer expense until it was able to stand on its own. Abe Lincoln would have approved. Yet all over the Internet, you can read authoritative explanations of how public investment can't create wealth. People who make that argument often have benefited from public K-12 schools, and land grant universities (all those State U's are a direct result of the policies of the American System). They  drive on public roads, often to their public libraries, plug their computers developed with publicly funded research into power systems that were made reliable by public regulation, and type away slogans like "I never got a job from a poor person" and "you can't spend your way out of debt" (a slogan that doesn't even make sense for private companies) and "the government can't create wealth". Reading "free market" conventional economics arguments on the Internet is like listening to the Flat Earth Society on satellite radio. But we've had this stuff thrown at us with such great advertising and by all these authoritative university professors for so long that too many of us have come to accept it as just the way things are. And it's not as if conventional economics doesn't work - for some people.

The most bitter and implacable enemies of the American System in the USA in the 1800s were the slave owners. Slave owners made money by getting poor white people to beat enslaved black people into growing cotton which the slave owners exported to factories mostly in England. Their wealth came from foreign trade and they could not afford to offend the English government by, for example, having the US develop its own manufacturing industries that would challenge English exports. Slave owners were in favor of small government, low taxes, free trade, ignorant and poor workers, and an economic theory that justified every injustice as required by economic law. They hated the idea of a middle class that would create new business and technology and possibly push them from their place at the top. They particularly hated the idea of paying taxes for projects that would benefit the middle class. And they recognized that middle class people, not just in the North but in the deepest South were the people who had the education and independence to question the morality of the slave economy. The parallels between the Slave Owners before the Civil War and their Confederate System and the people who own petrochemical businesses in our day are hard to miss when you think about it.
The owners of petrochemical companies hate the idea of a middle class that might create new green technologies and business and that has the education and independence to question the morality of pollution. They depend foreign trade and can't afford to offend the Oil Sheiks by developing green energy in the USA.

In Wisconsin today we can see a clear battle between the American System in which middle class unionized teachers provide ordinary people a high quality education and the Confederate System in which wages race to the bottom, education becomes a luxury and power is increasingly concentrated in the hands of the Plantation owners. The states that forbid teachers unions have the worst schools in the country - that's not a negative for the people like the Koch brothers who are at the top of the old petroleum economy. The last thing they want is a smart educated middle class starting new green businesses and asking uncomfortable questions about pollution. But we're not getting good guidance from our economists because they have, both left and right, liberal and conservative, decided that all answers have to be found in conventional economics and not in what they think of as the discredited American System.  

Despite the economists, maybe Abe wasn't so dumb after all.  Right now in the USA, managers of factories complain that they cannot get private finance to invest in American manufacturing - private equity companies and banks think that US companies should be investing in China. And there is no public bank to replace them, no "protectionism" to help them compete with the Chinese companies that the bankers love so much, no "internal improvement" to make it cheaper for them to move products to market or access power or recycle wastes. Meanwhile the Chinese government is providing a perfect illustration of how to use the American System right and is kicking our ass.

For a good example of what China is doing, consider its recent moves to limit exports of the
of rare-earth elements that are used in a lot of high tech manufacturing. China exports 97% of the rare earth used worldwide and according to conventional economics China should be happy to accept a division of labor where they dig it up and Japanese and US companies use it to make stuff. In fact, this is the classic example of what conventional economists call "comparative advantage" - China has mines, Japan has high tech manufacturing, free trade allows the materials to move from the mines to the factories. According to conventional economics, Chinese should be happy with the low wage work of digging holes in the ground in their rare earth mines. But the Chinese government is not big on believing such stupid theories and it sees no reason why Chinese workers in China should not be manufacturing valuable stuff with rare earth elements and building up the Chinese economy. So the Chinese government is saying to Japanese and American manufacturers, we know that right now you can outbid and outsell our manufacturers using this material, but we spent a lot of money on infrastructure and education and we have smart business owners and capable workers and we're going to give them a running start in this area - we'd rather have Chinese workers doing high wage, high tech manufacturing than just operating shovels, thanks all the same.

According to conventional economics what the Chinese are doing is hopeless. And if the Chinese government is too incompetent and too corrupt it could easily fail by providing aid to people who don't operate the manufacturing business well and are just wasting money. But experience shows that the Chinese government can be great at protecting infant industries and letting competent businesses develop - just as our government did when our machine industries and steel mills grew to challenge the British. And consider the results. Following the conventional theory of comparative advantage the Chinese could hope to have a couple of successful mines, a railroad to the port, some workers in the mines and some lugging freight. When the mines played out or technology changed they'd have something like the dead mining towns we have in Pennsylvania. But if they don't mess up what they'll have is both the mining industry and high technology companies that employ workers and engineers and that invest in new technology. Ten years from now those factories may be exporting extremely valuable finished products like solar power units. And those factories will be buying sophisticated goods and services from other Chinese companies.  Theory says it can't work, but despite theory, China has a number of  of hugely prosperous companies that are able to pay higher and higher wages and compete worldwide thanks to just that sort of government assistance. Meanwhile, by following the theories of conventional economics, the USA has become a nation that exports scrap metal and recycled paper boxes that were used for manufactured goods imported from China. Theory is wrong: the American System works and you don't have to be American to use it.

Henry Carey who was one of the most well known economists in the USA in the 1850s and was a very influential advocate of the American System is practically unknown these days. Carey said that conventional economics was a theory designed to explain and justify the misery that it caused. One of the conventional economists who was angered by Carey's ideas was a guy named Karl Marx. As I said above, conventional economics is accepted from left to right - we have to get off that line to see an alternative. Marx accepted many of the basic ideas of standard economics. He just thought that increasing misery would result in a revolution that would destroy capitalism once and for all. Marx wrote a series of articles that attacked Carey by defending the British colonization of India. Marx's thesis was that under British rule, "free trade" and comparative advantage would modernize India, sweeping away the superstition and ignorance of the unfortunate Indians and bringing them the benefits of the British civilization and a modern economic system which would eventually lead them, somehow, to a revolution.  Indians didn't see things the same way. What they saw was that "free trade" was a method of destroying Indian manufacturing and locking Indians into low wage jobs picking cotton while English companies manufactured valuable cloth for export. They saw that before "free trade" was imposed on them by British soldiers, India had its own textile industries. They didn't accept the idea that the iron laws of economics condemned them to slaving in the cotton fields while English factories used modern machinery to process the raw materials. And if you look in the center of the Indian flag you will see a spinning wheel symbolizing Mahatma Gandhi's "unrealistic" campaign for Indians to make their own cloth despite the "laws" of economics. Gandhi urged Indians to defy British laws and the claimed efficiency that comes from economics laws of comparative advantage and to spin their own cloth by hand. And  by doing so, they forced the British to give them independence and then, despite those iron laws and Karl Marx, it turned out that Indians could also build a mechanized textile industry and even make their own machinery.

Today we are told by conventional economists to accept the iron laws of economics, work harder for less, get used to school closings, roads with potholes, slums, trains that make people from other countries laugh, sitting in endless traffic jams, pollution, and social disorder because - why because we can't afford anything better. We could accept that and leave the American system to other countries, or we could follow the leads of  Abraham Lincoln and Mahatma Ghandi and make the world better.

See Ecoomic Reconstrution blog and The Other Canon for more detailed information.

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Until 1929 the American System worked quite well. Run amok finance derailed it during the Great Depression of the 1930s, but WWII and the post war period set it right again. But by 1971 or so US economic elites came to prefer first milking the wealth that had accumulated in the USA since colonization and then looting that wealth. For those purposes the American System was not so useful.

They had been undermining that system since the 1880s with their efforts to spread neo-classical economics via the universities and through the establishment of the Federal Reserve system. The incompetence of that approach to economics should have been revealed for all by the Great Depression. Fisher clearly showed the role of debt and the unwinding of unsustainable debt in the creation of depressions and Keynes created an alternative approach that better explained economic activity and gave rise to useful insights and practical policy recommendations.

But those recommendations were not to the liking of the economic elites, as they led to too much money being given to labor and the bottom 95% of the population. So no expense was spared to discredit Keynes and pump up Chicago School economics, especially from the mid 60s onward. Fisher's later work was simply ignored. These efforts came to fruition with the election of Ronald Reagan and it has been downhill at increasing velocity every since.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 8th, 2011 at 12:44:57 AM EST
After World War One, the last significant repository of American System thinking - or something that at least resembled American System thinking - was the U.S. military, in particular the Army. I was just beginning to nose around to research this in the mid-1990s, when I finally was forced by penury to cease my career as a poorly paid "activist" journalist. I think what happened was that the Army's top officers were very shocked at how poorly U.S. manufacturers performed in meeting military requirements during the war. A small group of Army officers created the Army Industrial College in the mid-1920s, and conducted a national survey of every U.S. manufacturing facility, all recorded on index cards. If I recall correctly, the students who passed through this college included some of the most important generals of the next war, such as Eisenhower, Bradley, Hodges, Arnold and others. I have no idea if these officers were directly studying Carey and the American System, or if they were simply determined to find a way to get U.S. industry prepared so that the near disaster of World War One would not be repeated. The "Arsenal Democracy" story is actually mostly myth: U.S. captains of industry had to be dragged, kicking and screaming, into industrial mobilization by some very determined and angry Army officers.

In any event, when Japan and Germany were occupied, the U.S. Army just happened to be America's repository for economic thinking that actually understood the problems of industrial production. So, you get people like W. Edward Deming coming into Japan to help administer and oversee the rebuilding of Japanese industry.

I'll also note here that in the late 1800s, the American System was transmitted to Europe, in particular Germany, by Friedrich List, and to Japan by E. Peshine Smith. When James Fallows went to Asia in the early 1980s to figure out what was driving the unbelievable economic growth of Japan and the "Asian Tigers" he "got an earful" on Carey and the American System, and came back to write a blockbuster article in The Atlantic.  

by NBBooks on Fri Apr 8th, 2011 at 01:59:58 AM EST
[ Parent ]
What I found most bewildering, as someone who had read Marx 30 years ago, was to realize that Marx's essays on India and Engels Anti-during were arguments against an economic view that had been hidden. We were taught that the USA was the imperialist/colonial power and that Marxism was the ideology of the anti-colonial forces - and obviously that was partly correct. But the world changes and seeing Marx/Engels through the lens of Carey, the similarities between the Communist Manifesto and the works of Thomas Friedman become more explicable.

"The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate."

Was there ever a more false and more enthusiastic endorsement of "free-trade"?

by rootless2 on Fri Apr 8th, 2011 at 09:33:40 AM EST
[ Parent ]
Communist Manifesto (Chapter 1)
The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbarian, nations into civilisation. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.
I don't read as an endorsement of free trade but a description of free trade as a political weapon for the benefit of the "Bourgeois" model of society.

Veblen's description of "business enterprise" and how it dominates economic activity is very similar.

Economics is politics by other means

by Migeru (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 09:39:47 AM EST
[ Parent ]
Start with the fact that the heavy artillery of European trade was actually heavy artillery not cheap commodities and you begin to see what's wrong with that passage. Lancashire textiles did not displace Indian textiles because of the efficiencies of the European capitalist economy, rather it was the intervention of British mercenaries and soldiers and the following imposition of ruinous taxes on local production that made the difference. The British opened China to free trade (what we now call drug dealing) with gunboats. If you read Anti-During with that knowledge, you can see why Engels was so angry that Dühring said raw force not the laws of economics drove exploitation.
by rootless2 on Fri Apr 8th, 2011 at 10:00:53 AM EST
[ Parent ]
Rounding up the Calcutta weavers and cutting off their thumbs also disrupted the Indian homespun industry.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Apr 8th, 2011 at 12:04:53 PM EST
[ Parent ]
efficiency isn't free
by rootless2 on Fri Apr 8th, 2011 at 12:19:41 PM EST
[ Parent ]
See? The steam driven weaving mills were superior.

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 01:23:52 PM EST
[ Parent ]
Since the Imperial Raj was built primarily on Indian troops bearing Indian-made arms, the access to the American silver to finance the whole enterprise at more competitive rates than local Indian princes could do also may have played a role.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sun Apr 10th, 2011 at 10:44:04 PM EST
[ Parent ]
Well, the purpose of the Opium Wars was to force the Chinese Empire to allow the British to use Burmese opium to extract gold from China in payment for the opium sold to wealthy landowners.  This was the stuff of popular historical drama in Mao's China.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:06:15 AM EST
[ Parent ]
access to the American silver

From whom and by what means? I know the Spanish dollar was de facto currency in the 18th and early 19th centuries in the colonies and the USA.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 12:09:59 AM EST
[ Parent ]
How?

One way...

Near Lima, Drake captured a Spanish ship laden with 25,000 pesos of Peruvian gold, amounting in value to 37,000 ducats of Spanish money (about £7m by modern standards). Drake also discovered news of another ship, Nuestra Señora de la Concepción, which was sailing west towards Manila. It would come to be called the Cacafuego. Drake gave chase and eventually captured the treasure ship which proved their most profitable capture. Aboard Nuestra Señora de la Concepción, Drake found 80 lb (36 kg) of gold, a golden crucifix, jewels, 13 chests full of royals of plate and 26 tons of silver.

...or the other (pdf)

IMPACT OF GOLD AND SILVER IMPORTS
● Increased purchasing power of Spain
● Expansion of demand for goods and services
● Expansion of international trade (gold and silver were accepted all over the world as a means of payment)
● Stimulation of industry throughout Europe (in particular northern Netherlands, England, and France, which competed for Spanish custom)
● Innovations in industries in northern Netherlands, England, and France, leading to rapid development of these countries.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon Apr 11th, 2011 at 01:14:26 PM EST
[ Parent ]
Great chart in the pdf link. But it doesn't really show where England got silver, especially from the mid 17th century onward. Profits from English slave traders selling slaves to Spanish and Brazilian planters is one possibility. Piracy is another, but is an intermittent and declining source. One of the characteristics of English colonies, especially in the "new world" was the relative absence of significant sources of gold.

Of course, with the relative decline in the purchasing power of gold and silver from 1500 through 1650, export goods could buy more silver than before. But that silver would have to be gotten out of the hands of the merchants who received it, who had to use something to pay those who sold them the goods which they exported.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 02:16:52 PM EST
[ Parent ]
The Spice Traders, the various "East India Companies," took over an existing system where the ruler of the country, e.g. Bandam, where the spice, e.g., nutmeg, grew already held the growers of the spice in economic peonage.  They replaced the ruler with themselves and kept the local system intact.

This resulted in the very nice, for the "East India Companies," situation where they sold the spice in Europe at a 1,000% to 4,000% percent mark-up over cost (purchase, shipping, etc.,) took some of the money and shipped it to, e.g., Bandam, where they paid themselves for the nutmegs they, effectively, stole from the growers.  

Part of the money was used to purchase tea, porcelain, lacquer ware, and other products from the Chinese merchants who arrived at Bandam to purchase nutmegs.  (For instance)  Of those goods, porcelain was the most lucrative; the upper crust went bananas over porcelain ware and would pay through the nose to acquire examples, an exact example of Veblen's conspicuous consumption for exactly the reasons he presented.

One reason the trading companies were able to do this because the European economy was on the up and up and able to support increased manufacturing of goods beyond local demand since the large trading companies could fill their ships with European manufactured goods and sell them in their colonies because the locals there weren't permitted to produce, as they had before, for their local market.

With European manufactured goods being shipped overseas and the steady increase of the amount of silver sloshing around in Europe due to the silver mining the Hartz mountains, the silver strike near Joachimsthal in Bohemia, and the silver flowing from the Spanish mines in the Latin and South Americas the total amount of silver being bid against a much slower rise in available goods led to a slow decline of the former versus the latter.

The supply of gold increased at a much slower rate and, thus, shared in the general price (in silver) rise.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Apr 11th, 2011 at 02:57:55 PM EST
[ Parent ]
But So that silver would have to be was gotten out of the hands of the merchants who received it those who could afford the imported luxury goods, by the BEIC who had to use something used some of the silver to pay for mercenaries in India and elsewhere and used other goods from other places or used English exportsto pay those who sold them the goods which they exported imported from the spice islands or elsewhere..

Sort of like Ollie North's "neat" little scheme to use the proceeds the sale of Columbian drugs to the USA and weapons to Iran to provide arms and money to the Contras. "The System of the World" as it were.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 04:06:40 PM EST
[ Parent ]
Yeah.

I didn't 'Go There' to reduce the length of my comment.

Same old thing repeated endlessly.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Apr 11th, 2011 at 04:19:14 PM EST
[ Parent ]
The silver from Hartz Mountain mines via porcelain, etc. sold to German nobles would be a much more accessible source to English companies than would be the silver from Mexico, and Bolivia. The china porcelain for the Catholic countries more likely came from the Spanish Philippines and the Jesuit Black Ship from Japan, via Acapulco and portage across Mexico.  

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 04:20:51 PM EST
[ Parent ]
The British East India Company was found smack in the middle (1600) of the period we're discussing.  For a couple of decades they screwed around unsuccessfully trying to oust the Dutch East India Company.  Eventually they decided to plant their butts in India ...

and the rest is history.

The unbelievable profits the BEIC reaped from India was the trigger and sustaining force for the British Empire allowing, among other things, the Brits to conquer more territories with equally lucrative resources.  As an example, ONE 10,990 square kilometer (4,243 sq mi) Caribbean island - Jamaica - returned more yearly profit than ALL of their North American colonies put together.  

The trade in, what we would call basic commodities, was the Oil Wealth of their time.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Apr 11th, 2011 at 04:47:02 PM EST
[ Parent ]
basic commodities...

such as sugar and indigo.

But the BEIC got a leg up after the Dutch became involved in their long struggle with Louis 14th and the English got past the Civil War and Protectorate period. Charles II's Queen Consort, Catherine of Braganza's dowry included the port cities of Tangiers and Bombay and good relations were maintained with the Mughal Emperors from 1612 until the mid 18th century.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 08:09:45 PM EST
[ Parent ]
Out of links, I will have to rely on scetchy recollection. As I was tought, the standard model was something like this:

  • Spain plunders America.
  • England and Netherlands gets a little from pirating Spains silver transports and a lot from producing stuff like wool and selling to wealthy Spainish.
  • Inflation unseats land-owning nobility in favor of new merchant/entrepreneur-class (in particular England, Netherlands was already merchant-dominated).
  • So money landing in England and Netherlands is re-invested in trade.
  • First Netherlands, then England takes over world trade and extracts rent from basically everything.


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Mon Apr 11th, 2011 at 05:32:36 PM EST
[ Parent ]
That was the consensus and for all I know is still taught as the consensus.  But it's not quite, quite, accurate.

For example, the political leadership of England during most of this period was Monarchy supported by and supported land-based Aristocracy.  While the great merchants gained power during this period they never achieved Decision Making power.  An example of this, was a continuous un-met demand by the merchants for the King to do something about pirates infesting the English Channel.  It was only when the mayor of London fitted out a fleet, out of his own pocket, that piracy faded.  


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Apr 12th, 2011 at 12:48:58 PM EST
[ Parent ]
It does omit the profits from gaining a share of the East and South Asian carry trade. After selling your fine woolens for silver, your big money comes from taking that silver to the East, where it can be used to buy into the trade among the most productive, highest income economies in the world. And you can reap your profits from that trade in the form of goods to send back to Europe to sell for more silver to finance further expansion.

There's a reason why it's "sailing the Seven Seas" rather than "sailing to the Seven Seas" ~ there was a lot of money to be made plying the waters of the Andaman, Java, Banda, Molucca, Celebes, Sulu and South China Seas.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue Apr 12th, 2011 at 11:43:35 PM EST
[ Parent ]
From the Spanish, by selling them stuff. That was the purpose of mercentalism, to accumulate silver that could be used to finance entry into the carrying trade among the wealthier nations of South and East Asian.

The Governor and Company of Merchants of London Trading in the East Indies was established around 1600, but with the much greater success of the United East India Company of the Netherlands in the East Indies trade, they became more focused in carrying trade in India and China.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Mon Apr 11th, 2011 at 05:36:55 PM EST
[ Parent ]
Dutch domination of the carry trade was as important as the importation of high-value goods by the East India company.  It was the carry trade that allowed them to cheaply import the ship building materials from, e.g., Sweden, that allowed them to build the ships they required to keep the system chugging along.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Tue Apr 12th, 2011 at 12:55:58 PM EST
[ Parent ]
Which carry trade are you talking about? By the 1700's, European vessels had as much as 10% of the East Asian / South Asian carry trade. That required silver to buy into, since at the time few in the high income countries would have been interested in buying cheap European knockoffs of the products of the higher income nations.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Tue Apr 12th, 2011 at 11:27:00 PM EST
[ Parent ]
Intra-European carry trade.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Wed Apr 13th, 2011 at 07:50:40 PM EST
[ Parent ]
Working from the main event backwards, the inside edge that the European merchants have in the Asian carry trade is access to cheaper silver, which is to say cheaper finance, than local merchants.

So you need ships that can go back and forth between Europe and the Indian Ocean and/or the Seven Seas, bringing silver in, leveraging the silver into trading profits in the Asian carry trade, and skimming some profits as high value merchandise in Europe to go home and raise more silver.

You will lose ships in both long legs, which is a big reason why the active carry trade on both sides is important ~ you have to be able to keep generating profits in the European trading zone to be able to keep skimming profits as silver and sending it over, even if the last ship went down (or was taken out by Javanese pirates), and have to be able to do the same in the Asian trading to be able to keep skimming profits as high quality trade goods and sending it over.

They are complementary, so its hard to say how much strength in the European carry trade support building up strength in the Asian carry trade, and visa versa.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu Apr 14th, 2011 at 11:37:16 PM EST
[ Parent ]
The organization and operation of the Dutch East India Company neatly divides into a pre-Jan Pieterszoon Coen era and post Jan Pieterszoon Coen era.  I'm going to 'locate' this comment by ignoring the first.

Coen was a nasty piece of work:

On 30 May 1619, Coen, backed by a force of nineteen ships, stormed Jayakarta driving out the Banten forces; and from the ashes established Batavia as the VOC headquarters. In the 1620s almost the entire native population of the Banda Islands was driven away, starved to death, or killed in an attempt to replace them with Dutch plantations.

but who solved:

A major problem in the European trade with Asia at the time was that the Europeans could offer few goods that Asian consumers wanted, except silver and gold. European traders therefore had to pay for spices with the precious metals, and this was in short supply in Europe, except for Spain and Portugal.

by [VOC = Dutch East India Company]:

... start[ing] an intra-Asiatic trade system, whose profits could be used to finance the spice trade with Europe. In the long run this obviated the need for exports of precious metals from Europe, though at first it required the formation of a large trading-capital fund in the Indies. The VOC reinvested a large share of its profits to this end in the period up to 1630. The VOC traded throughout Asia. Ships coming into Batavia from the Netherlands carried supplies for VOC settlements in Asia. Silver and copper from Japan were used to trade with India and China for silk, cotton, porcelain, and textiles. These products were either traded within Asia for the coveted spices or brought back to Europe.

Simultaneously, the invention of the fluyt lowered the costs of intra-European trade by increasing cargo capacity per-ship.  I know this ship was the backbone of the intra-European trade, I do not remember (it's been a while!) if it was used as a long distance carrier.  For the 'long haul' they used the specially designed Dutch East Indiaman for the 'retour' (there and back again) route.  IIRC, the Dutch used the Chinese Junk in Asia mostly from the fact it was designed for those waters.  How extensively the Junk was used I cannot say.

Anyway, the distribution of goods imported by the DEIC from Asia was wholesaled out to other Dutch merchants and companies - thus the multitude of warehouses in Amsterdam - who then distributed across Europe.  The "odd-job" merchants completed the European side of the trade cycle.  Two important "strangle-points" in this trade was the English Channel (piracy/interdiction) and the Danish Kattegat (transition fees) leading to a couple each of Dutch-English and Dutch-Danish wars.  

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Apr 15th, 2011 at 01:57:11 PM EST
[ Parent ]
Quite, and you can't do any of that at such a long remove from your home country without silver ~ investing silver into building their position in the Asian carry trade. The Dutch East India company and the British East India company could afford to hire more troops in pursuit of their commercial ends than local traders, because they were originally trading mercenary's pay for goods, rather than trading goods for goods.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Sat Apr 16th, 2011 at 01:07:31 PM EST
[ Parent ]
For fun - if by fun you mean a geeky contemporary critique of Marx - I recommend Kropotkin.

The parts where Kropotkin criticises Marx use of math could have been written today at ET. Kropotkin was a geologist and took his math seriously.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Apr 8th, 2011 at 02:33:44 PM EST
[ Parent ]
Kropotkin was interested in production. The idea of writing about market gardens would have seemed ridiculous to Marx and Engels.

If you were into that kind of thing, you could draw a left right diagram for american system economics

kropotkin -> list

and one for  english system

marx -> hayek

and come up with something.

by rootless2 on Fri Apr 8th, 2011 at 02:47:24 PM EST
[ Parent ]
Kropotkin's book Mutual Aid is a good antidote to the "Nature red in tooth and claw" school of thought as well as the Social-Darwinists.  

Kropotkin, George, Veblen, "The American System,"  ... we seem to be off on a 'forgotten economists' kick.

:-)

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Apr 10th, 2011 at 10:25:49 AM EST
[ Parent ]
More like repressed or "actively" forgotten economists.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 01:58:23 PM EST
[ Parent ]
What I found most bewildering, as someone who had read Marx 30 years ago...

A presentation of 19th century history that properly contextualizes and critiques Marx goes a long way to providing a solid understanding of the period. That is one of the virtues of Eric Hobsbawm's histories and Nitzan and Bechler's political economies.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 12th, 2011 at 08:35:08 PM EST
[ Parent ]
... and Wesley Clair Mitchell's National Bureau for Economic Research were also bastions for American Institutionalists, many of whom were champions of one or another version of the American System.

Of course, in the New Deal and then in greater numbers in WWII, many of them got jobs with the Government, while British System Economists, aka neoclassicals, were fairly useless in those positions unless they forgot their academic economics when they stepped in the door in the morning, leave the academy well stocked with neoclassicals to train the next generation of economists to take the place of the New Dealers in the post-WWII boom in US University Education.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Apr 9th, 2011 at 02:52:33 PM EST
[ Parent ]
How to win the war abroad while loosing the war at home.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 02:00:04 PM EST
[ Parent ]
this here. I was the person who transcribed and uploaded the excerpts from Henry Carey's Harmony of Interests to the University of Groningen Humanities Computing project back in 1994.

In the early 1990s, I used the Bicentennial Statistical Abstract - Colonial and Historical Statistics, to plot out steel production, railroad mileage built, and coal production, against the various tariff regimes in the 1800s to 1920s. The results were very stark: low tariffs are strongly correlated with downturns in real production, and high tariffs are strongly correlated with increased in real production. Exactly like the leading American economist, Henry Carey, wrote in the mid-1800s.

Free Trade Coal v Tariff

Free Trade Iron v Tariff

Carey explained that the ability to import is based on the ability to pay. The ability pay, in turn, is based on the earning power of the nation's workforce. If the workforce has to compete against cheaper labor in other countries, then its earning power will be diminished.

Carey even anticipated the situation we find ourselves in today, noting in his time that as earning power diminished, the U.S. must buy imports on credit, creating a bubble of indebtedness that must sooner or later burst.

Recently, in Economics as Cultural Warfare, I wrote:

I don't have as much of a problem with mistakenly identifying the founder of economics, as I do with the veneration of Adam Smith by DeLong and almost all other economists. Simply put, Smith was a factotum for the British oligarchy, and as such, was fundamentally hostile to the United States and its grand experiment in self-government. Is it just coincidence that a "science" of economics that holds as its guiding light an oligarchical apologist should give us a body of economic thinking that has ruined our economy, impoverished our working people, and debased our public finances? Was that the intent of "classical economics" based on Smith and Ricardo, and its ugly step-child, neo-liberalism, all along? If you get your economic thinking from oligarchs, perhaps you should expect that thinking, when put into practice, to result in the creation of an oligarchy. "By their fruits ye shall know them."

In 1834, there was published in Boston a little book entitled Tracts on Sundry Topics of Political Economy, written by Oliver Putnam, a sickly but wealthy merchant of Newburyport, Massachusetts. To preserve his health, Putnam retired in his thirties, but busied himself with an intense study of political economy. Putnam's ideas were informed by his travels throughout the U.S. and Europe, travels he had undertaken in search of a cure for his ailments. The second part of the book is entitled "Observations on Smith's Wealth of Nations," and I venture to assert they were typical of American views of Smith, and British political economy in general, in the mid-1800s.

In the following remarks, the writer's aim has been briefly to expose the fallacy, not of every thing in the Inquiry, which is open to exception ; but chiefly of doctrines, which, he conceives, are of tendency injurious to the welfare of his country. Adam Smith has founded a school in political economy, who, like the school of Quesnay and his fellow economists in France, are too plausible in the defence and too zealous in the advancement of their favorite theory, not to have gained a host of proselytes. What influence they may obtain abroad, is of little consequence to us; or certain it is, rather, that the more influence they do exert in Europe, the better they will promote the interests of America. But it is time for us to be vigilant and circumspect, when men and men of letters among us, who deservedly possess great credit in the public mind, profess themselves emulous to pin their faith on the infallibility of Adam Smith. When this becomes apparent, it is evidently time to exhibit the proofs of his fallibility, and of the pernicious effects arising from injudicious application of his theories to practice. . . .

As Americans, also, we are all bound to take exception to his illiberal reflections on the dispute, which led to the revolutionary war, and on our causes of complaint against the mother country.-- We have not been sufficiently awake to the mischievous effects of introducing many English writings into our seminaries of education, and of giving credence to their authors on subjects of political economy and politics. --It is a truism to say that our institutions are radically different from the English. Ours are throughout republican, theirs are substantially monarchical. Theirs are the oft-changed remnants of feudal barbarism ; ours are a great political invention, which undergoes its first trial in this country.--And yet we have Blackstone and Paley for our text books in politics, who, whatever may be their excellencies on other accounts, are certainly the bigoted advocates, the courtly apologists, of whatever, in the system of the British government, is corrupt in itself, and most adverse to the genius and principles of our own government.

And so also we take Smith as our magnus Apollo in political economy, the basis of whose theory is, that the country gentlemen, that is, the landed aristocracy, of Britain, are the only class for whose benefit government is instituted, laws enacted, or who deserve the regard of the statesman, and that all the other productive classes, the mechanical, the manufacturing, the mercantile, are a set of sharpers, who have been constantly engaged, ever since the Conquest, in a conspiracy to defraud the simple, innocent, and defenceless country gentlemen, and to impoverish and ruin the country. [AKW: Is this not exactly the Republican / conservative argument in America today, aimed at every social and economic program designed and intended to assist and aid any other than the richest amongst us?] These are strong terms, but they are not stronger than the text warrants. . . Surely it is not for our interest to allow the opinions of our national enemy to acquire a kind of prescriptive authority in the country.--It is not for our interest to place the writings of our national enemy in the hands of our youth, and thus administer, ourselves, poisoned aliment to the lips of the rising generation.

Many persons are accustomed to attribute a sort of oracular authority to Adam Smith, who never attentively perused the Inquiry.--It may not be generally known, therefore, that he takes pains to ridicule our colonial legislatures as little knots of factious rebels; that he sneers at the high minded men, who composed our continental congress, as being upstart shopkeepers and attorneys, animated only with the little pride of becoming provincial dukes and marquises ; and that he stigmatises, with the grossest terms of opprobrium, the master spirits of seventy-six, Washington and Adams, Franklin and Jefferson and their compeers, whose glorious names are and will be the watchword of millions, who shall never dream of the learned Glasgow sage's existence. Americans may not be apprised of these things; but they ought to be, ere they determine to repose implicit reliance upon the opinions of Adam Smith.

The opinions of Adam Smith on this subject, are introduced here, not for the purpose of refuting them, for they do not deserve so much attention; but only to hold them up to the reprobation and indignation of an insulted people.

Let it be holden in remembrance then, that, in treating of colonies, he traduces, in good set phrases, the whole American people.

Let it be remembered, further, that he invidiously represents the metropolis as having sustained wars and heavy expenses for our defence.--Kind mother country ! Ungrateful child !--The colonists come hither as exiles driven by oppression from their native land, the government of which, so far from assisting them to establish settlements here, would scarcely grant half the colonies even the poor boon of a charter. Most of the New England colonies founded their governments without any legal authority so to do.--They fought their own way into consequence, unaided by the metropolis, although but a handful themselves, in the midst of warlike savages.-- England took little notice of us until she found out we were thriving and industrious, and rapidly increasing in numbers. Then she graciously condescended to remodel our government, to appoint officers over us, and to receive the monopoly of our trade, authorising us to buy of her, and at her price, any commodity which we had means to buy withal, and to sell our own produce to her at such prices as she chose to give, provided we took especial care to produce nothing which she produced, or which could interfere with her manufactures, and provided we did not attempt to sell to any body else. . . .

Let it be remembered, finally, that [Smith] attributes the war of independence to the intrigues of a few ambitious factionaries, and not to its true cause, the spontaneous throes of a nation resolved to be free.

by NBBooks on Fri Apr 8th, 2011 at 01:38:36 AM EST
the landed aristocracy, of Britain, are the only class for whose benefit government is instituted, laws enacted, or who deserve the regard of the statesman, and that all the other productive classes, the mechanical, the manufacturing, the mercantile, are a set of sharpers, who have been constantly engaged, ever since the Conquest, in a conspiracy to defraud the simple, innocent, and defenceless country gentlemen, and to impoverish and ruin the country.

This, it should be remembered, was not objectively poor advice at the time it was written. Agricultural production held the dominant economic position in the European political economy, which meant that manufacturing and merchantile occupations captured little rent. Since the point of an economic development policy is to a large extent to strengthen those industries which capture the rent of the international economic system (incidentally, this is one of several reasons self-respecting Serious economists have such a record of Fail at industrial policy), focusing on the development and improvement of land was not an absurd recommendation at the time.

It may perhaps be taken to task for an insufficient attention to the importance of the carry trade (which, in a rather jarring case of special pleading for an otherwise reasonably scholarly enquiry, is dismissed as a by-product rather than a source of wealth), and to the changes in the relative power of agriculture and industry that were beginning to emerge. But the question of whether agriculture or industry would be the dominant economic force of the 19th century was not firmly and finally settled until after Smith had been dead for some decades.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 8th, 2011 at 07:24:39 AM EST
[ Parent ]
a diary or article.
by NBBooks on Fri Apr 8th, 2011 at 09:42:36 AM EST
[ Parent ]
Not by me, I'm afraid. I don't know much more about the subject than what's in the comment.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Apr 8th, 2011 at 10:59:23 AM EST
[ Parent ]
thanks very much for that excerpt.

It's kind of shocking to see how deeply buried all this has become. What a successful campaign by the classicists/neo-classicists.

by rootless2 on Fri Apr 8th, 2011 at 09:21:53 AM EST
[ Parent ]
NBBooks:

Let it be holden in remembrance then, that, in treating of colonies, he traduces, in good set phrases, the whole American people.

Let it be remembered, further, that he invidiously represents the metropolis as having sustained wars and heavy expenses for our defence.--Kind mother country ! Ungrateful child !--The colonists come hither as exiles driven by oppression from their native land, the government of which, so far from assisting them to establish settlements here, would scarcely grant half the colonies even the poor boon of a charter. Most of the New England colonies founded their governments without any legal authority so to do.--They fought their own way into consequence, unaided by the metropolis, although but a handful themselves, in the midst of warlike savages.-- England took little notice of us until she found out we were thriving and industrious, and rapidly increasing in numbers. Then she graciously condescended to remodel our government, to appoint officers over us, and to receive the monopoly of our trade, authorising us to buy of her, and at her price, any commodity which we had means to buy withal, and to sell our own produce to her at such prices as she chose to give, provided we took especial care to produce nothing which she produced, or which could interfere with her manufactures, and provided we did not attempt to sell to any body else. . . .

Let it be remembered, finally, that [Smith] attributes the war of independence to the intrigues of a few ambitious factionaries, and not to its true cause, the spontaneous throes of a nation resolved to be free.

I think this is an unfairly nationalistic reading of Smith.

He contrasts the American colonies to the Indian subcontinent and observes that America had prospered in part because it was not under the exploitative influence of the East India Company. So the relation of the British Empire to the American colonies was not as exploitative as that with Bengal. And I don't think that can be disputed. Indeed, the praise for the British dominion of North America is limited to things like this:

An Inquiry Into the Nature and Causes of The Wealth Of Nations., by Adam Smith

This, perhaps, is nearly the present state of Bengal, and of some other of the English settlements in the East Indies. In a fertile country, which had before been much depopulated, where subsistence, consequently, should not be very difficult, and where, notwithstanding, three or four hundred thousand people die of hunger in one year, we maybe assured that the funds destined for the maintenance of the labouring poor are fast decaying. The difference between the genius of the British constitution, which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot, perhaps, be better illustrated than by the different state of those countries.
For the rest, he was rather critical of the benefits of the colonial relation, both for the American colonies and for the Metropolis. The only ones he saw benefitting were the merchant class.

Adam Smith's Economic Case Against Imperialism - by David R. Henderson

The benefits, in Smith's estimate, were the monopoly profits that British merchants had on sales to consumers in the colonies. The costs that Britons bore were the costs of using the military to defend that monopoly. Here's an excerpt from Smith:

"The maintenance of this monopoly [on trade with the American colonies] has hitherto been the principal, or more properly perhaps the sole end and purpose of the dominion which Great Britain assumes over her colonies. ... The Spanish war, which began in 1739, was principally a colony quarrel. Its principal object was to prevent the search of the colony ships which carried on a contraband trade with the Spanish Main. This whole expence is, in reality, a bounty which has been given in order to support a monopoly. The pretended purpose of it was to encourage the manufactures, and to increase the commerce of Great Britain. But its real effect has been to raise the rate of mercantile profit. ... Under the present system of management, therefore, Great Britain derives nothing but loss from the dominion which she assumes over her colonies." 1

Later, Smith elaborated, showing that the costs to the British government of defending the 13 colonies were greater than the benefits to the British.

...

Smith even predicted the Revolutionary War and implicitly predicted its outcome. He wrote:

"[I]t is not very probable that they will ever voluntarily submit to us; and we ought to consider that the blood which must be shed in forcing them to do so is, every drop of it, blood either of those who are, or of those whom we wish to have for our fellow-citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone."



Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Fri Apr 8th, 2011 at 09:50:17 AM EST
[ Parent ]
Given Carey's father's experience with the English, both in Ireland and the colonies and then the USA, it is not surprising that Carey might paint all English economists with the same brush. Smith was much more balanced and disinterested in the economic interests of various parties in the 18th century than was Ricardo, a banker, James Mill, an employee of the British East India Company or Malthus, a land owner who never could understand why his pleas for protection for English agriculture in combination with his views on Ireland and population growth led some to call him hypocritical.

But Carey's policy of "high wages" was certainly well suited to economic conditions in the USA during his lifetime and his policy recommendations of using tariffs to protect domestic industry was certainly opposed by classical English economists. It would be interesting to know if Carey's work was read by Henry George. George was from California, had come of age during the time Carey was advising the Lincoln Administration and California went Republican in 1860,

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Apr 10th, 2011 at 02:30:04 PM EST
[ Parent ]
Looking again at NBBooks' comment, I see that it was by other than Carey. My mistake, literally.  :-)

Actually, Carey was quite discerning, criticizing Ricardo and Malthus in the preface of his Harmony of Interests, iii and iv, for promulgating a "great law of discords" and setting capital against manufacturers and agriculture through the multiplication of rent seeking intermediaries and by keeping them separate from one another and breaking into separate elements what he saw as a natural whole, which, if allowed to function, would bring prosperity to all. He praises Adam Smith:

That great man was fully possessed of the fact that, if the farmer or planter would flourish, he must bring the consumer to his side; and if the artisan would flourish, he must locate himself where the raw materials were grown and aid the farmer by converting them into forms fitting for the use of men, and thus facilitating their transport to distant lands.

I am becoming quite fond of "The American System"!

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Apr 11th, 2011 at 11:57:27 PM EST
[ Parent ]


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