In very feeble defense of Ricardo, it is worth remembering that in his grossly-oversimplified world model, it was impossible for a country to run sustained trade deficits. That would have resulted in changes in currency exchange rates which would have balanced the trade by making imports more expensive and exports cheaper.
But it is amazing how many apparently intelligent people have been taken in by the “Free Trade” scam.
Fair enough but even absent sustained trade imbalances, it would still be bad for the people of a country to adopt a GDP über alles policy that economists love so well, as Luckey points out. Ricardo was right within the narrow domain of economics but there’s more to life than that.
In the age of Ricardo and Smith, all great powers transacted in gold and one of the weaknesses of a gold standard according to Milton Friedman was fixed exchange rates. One reason why Friedman also opposed Bretton Woods.
Adam Smith advocated free trade in Wealth of Nations (published March 1776) but it was Ricardo who pointed out ‘comparative advantage’.
Economists have a strange affection for a slow-and-steady inflation. It seems to spring from an extreme fear of deflation because of past financial crises. Is this just a case of generals preparing to fight the last war instead of the next one?
Not quite right. The problem with Ricardo and Smith was they had a greatly over-simplified view of the complicated world of trade. Let’s look at a real world example.
In the 1800s, the manufacturing powerhouse of China had no interest in English goods, no matter how cheap those English goods might be. As a devotee of precious metals, China would accept payment for their exports to England only in silver. (They had little interest in gold). Jin Xu’s book “Empire of Silver” is a readable account of China’s monetary history.
England began to run out of silver, and needed to find something to export to China in exchange for the goods they desired. They fixed on opium grown in the English colonies in India. When China objected to this highly damaging trade, the English launched their victorious Opium Wars, beginning China’s never-forgotten “Century of Humiliation”.
Trade has to balance in the long term, one way or another. An interesting question for today is that nearly two centuries later China is again running an unsustainable trade surplus with the rest of the world. How will trade get balanced this time around? Because eventually it will.
I think slow and steady inflation or slight deflation is the goal for monetarists like Friedman.
What is the purpose of a central bank? price stability
Friedman proposed one alternative to the Fed Reserve is raise the money supply by 3 percent per annum regardless of boom or bust, pandemic or not.
But to answer your question, it’s not the last war or the next one but a perpetual battle
Regarding deflation when is the last time we had it? 1933? Maybe the 1997 crisis in Asia?
China was a manufacturing powerhouse in the 1800s?
I said “great power” which China was not during the age of Smith and Ricardo
So why not 0%?
I asked David Friedman and his response was:
M doesn’t have to increase.
The argument for increasing it is that economic activity is simpler if prices are reasonably stable over time. You know how much you used to be able to charge for your services because of what people were willing to pay you last year or the year before, at what prices a restaurant is expensive or inexpensive. You can make long term contracts without having to try to figure out how much more or less dollars will be worth when a debt comes due, ten years from now.
If the economy is growing and the money supply is stable, prices will be falling. Not nearly as serious a problem as inflation due to expanding the money supply since that, in a fiat system, can cause much larger changes, but still a problem. If you expand the money supply to match increasing monetary demand due to economic growth, you get reasonably stable prices.
The article of my father’s that I mentioned actually argues for a pattern of long term falling prices, on somewhat technical grounds.
The East India Company was no more operating under a free trade system than we are today.
crony capitalism isn’t capitalism and what is being debated as free trade is not free trade.
Absolutely! In terms of the type of manufacturing at the time. That was why England (and much of the rest of the world) ran trade deficits with China.
Products exported from China included high end pottery (which we still call “china”), silk, tea, and more. Mostly luxury goods because of the high costs of long-distance transportation at the time. But I guess you already knew all of this.
Yeah, 'cause China led the Industrial Revolution while the Brits were eating fish & chips and drinking warm ale. We all know the Chinese invented the steam engine and had a massive industrial infrastructure. That’s the kind of manufacturing China was into back in the day.
The 19th century marked a stark contrast in manufacturing between Britain and China. Britain led the Industrial Revolution, transitioning from agrarian handicrafts to mechanized, factory-based production powered by steam engines, coal, and innovations in textiles, iron, and machinery. This made Britain the “workshop of the world,” with massive cotton mills and factories driving economic growth.
China, under the Qing Dynasty, relied on traditional handicraft manufacturing. It excelled in high-quality artisanal goods like porcelain, silk, and tea, produced through labor-intensive methods in workshops rather than factories. China did not industrialize during this period, remaining largely pre-industrial until the 20th century. [from Grok]
A bunch of peasants making things by hand does not a “manufacturing powerhouse” make. Britain was the workshop of the world.
The important word in that sentence for us today is “was”. Even AI output knows it.
Even back then, England’s advances in mechanics still left it running an unsustainable trade deficit. Some manufacturing superpower!
They had a good run; about a century at the top. During that time, this small island nation ruled the waves and much of the world. There are few historical examples that matched or exceeded this accomplishment — Rome comes to mind.
Nothing lasts forever and, frankly, trade deficits weren’t what brought down the empire. There were a couple of world wars but the underlying cause was a loss of will. Glubb’s Fate of Empires spells it out.
Will we soon experience the fentanyl wars?
Great Britain should have stayed out of WW1, the Liberal Prime Minister (I think it was Asquith) broke his promise to stay out of any conflict in Europe.
Without Great Britain, France and Germany would have stalemated and reach a ceasefire by 1916
The real issue was France staying out of World War I.
Please explain how there could’ve been a stalemate if the UK did not enter the war.
Even if you ignore the UK contribution on land, imagine the Kriegsmarine free to blockade and attack France.
Also, as a neutral, the US would be freely trading with Germany, unencumbered by a British blockade
Arguably, what prevented a stalemate was the US entry to the war. But without US entry, there was a substantial chance of French surrender.
Well, their reward for entering WW I was the rise of Hitler and WW II. Such a deal!
Perhaps there would have been no stalemate but it’s hard to see how the outcome could have been worse than what actually happened. Even WW I itself proved to be a disaster for the world and the West in particular; the Russian Revolution resulted in he deaths of tens of millions in the Gulag, regional conflicts throughout the world, and Stalin’s support for Mao’s victory.
Historical counterfactuals are tricky because there’s no way of being sure what might have been. Given what actually happened, alternative paths seem more benign, stalemate or no stalemate.
US entry in 1917 broke the stalemate on the western front: military stalemate then breakthrough…
The Schlieffen Plan almost worked because Russia withdrew after the Bolshevik Revolution.
If France ‘surrendered’ and UK and US were ‘isolationist’ on land, what would have been the worst case scenario? Germany swallows all of Belgium and possibly Netherlands?
WW 1 was a disaster for the West. Donald Kagan compares it to the Peloponnesian War, 431 to 404 BC.
No WW 1 would have meant:
no Bolshevik Revolution
no Sykes Picot agreement
no British Mandate in Palestine
no French Mandate/Protectorate in Syria/Lebanon
no Anschluss
We are barely scraping the surface here.