On the Wealth of Nations

by P. J. O'Rourke

  Leftist critics of free markets assume that there is a fraudulent aspect to capitalism. They're right. We tricked the feudal powers into setting us free, and we remained free by continuing to bamboozle them. We used chicanery and sharp dealing to found our cities, become rich bourgeoisie, and supply ourselves with creature comforts. We left the barbarian aristocracy in their drafty castles throwing chicken bones on the floor.

  And we were by no means finished with cheating the nobility. We did the worst that can be done to fools; we gave them what they wanted. The towns imported luxury goods and developed arts and crafts. Among these products the nobles discovered things that they'd rather spend their money on than feeding thugs. Feast budgets were trimmed. Barbarian hospitality was curtailed.

  Adam Smith argued that the inclination of the feudal overlords to be selfish was so strong that it overwhelmed their instinct for self-preservation:

  All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged … the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people … and thus, for the gratification of the most childish, the meanest and the most sordid of all vanities, they gradually bartered their whole power and authority.29

  Never complain that the people in power are stupid. It is their best trait. In recent years we've seen a variety of powerful figures barter their authority for the gratification of childish vanities. Perhaps the Saudi royal family will be next to suffer the fate that Adam Smith described:

  Having sold their birth-right, not like Esau for a mess of pottage in time of hunger and necessity, but in the wantonness of plenty, for trinkets and baubles, fitter to be the play-things of children than the serious pursuits of men, they became as insignificant as any substantial burgher or tradesman in a city.30

  The destruction of feudal oppression, the establishment of the principle of self-government, and the creation of 'freedom in our present sense of the word Freedom' – it was all a swindle. There were no passionate orations by visionary idealists. No heroes led the masses in throwing off their chains. No one was martyred for the cause. 'A revolution of the greatest importance to the public happiness,' wrote Smith, 'was in this manner brought about by two different orders of people, who had not the least intention to serve the public.'31

  CHAPTER 8

  The Wealth of Nations, Book 4 'Of Systems of Political Economy' Adam Smith Tackles the Chinese Trade Menace

  If a single practical reason for reading The Wealth of Nations had to be given, it could be stated in three words, 'global free trade'. Or, since there's a particular example of global free trade that alarms us more than any other, one word will suffice: China.

  Thinking about China seems to induce intellectual Chinese fire drills and cause otherwise clear-thinking individuals to fuddle themselves with calculations – harder than Chinese arithmetic – about what this, that, or the other thing has to do with the price of tea in you-know-where. We have been amazed and perplexed by China since The Travels of Marco Polo. It's so big, so populous, so … Chinese. And until the end of the thirteenth century we didn't even realize it was there.

  Of course we'd been trading with China, whether we knew it or not, since the time of the Roman Empire. But trade with China remains a source of surprise and shock. It seems the Chinese are selling everything to us. And we are selling hardly anything to the Chinese. China is growing ferociously rich. And what will become of us?

  Panicky articles about balance of trade clutter the New York Times and other broadsheets. In 2005 I began tearing these items out of the papers and stuffing them into my pockets until I looked like something that was going to be burned in effigy (a fate not always undeserved by amateurs who write about economics).

  The United States imports a great deal more than it exports, due in large part to the China trade. At my house I see a MADE IN CHINA label on everything but the kids and the dogs. And I'm not sure about the kids. They have brown eyes and small noses.

  In June 2005, the US quarterly trade deficit reached $195 billion. The New York Times claimed that 'the news reignited worries that the economy cannot sustain the growing level of global debt.' Importing all of our goods except for golden retrievers means American money must be sent overseas to pay the bills. Money is a promissory note. American IOUs are piling up. The Times article pointed out that 'the United States borrows, in essence, $2.1 billion every day to keep the economy afloat.'

  Never mind that an international 'current account deficit' is not comparable to a private debt. Hu Jintao is not going to show up at my door threatening to repossess my DVD player because he has a fifty-dollar bill that I owe on.

  This fact did not stop the New York Times from finding panickers to quote. North Dakota Senator Byron Dorgan said that the deficit was reaching 'dangerous levels that are hurting this country's future'. And Maryland Congressman Benjamin L. Cardin said (using the synonym for 'future' that sets off the baloney alert), 'The deficit raises serious questions about our ability to control our destiny.'

  A New York Times Magazine article, also in June 2005, proclaimed that, 'A low-level panic about the debt crisis, and its possible effect on the American economy, is gathering strength.' Former Federal Reserve Chairman Paul Volcker was quoted: 'Altogether, the circumstances seem to me as dangerous and intractable as any I can remember.' Volcker became chairman of the Federal Reserve during the woeful Carter administration, so that's a strong statement. Although maybe Volcker was forgetting how dangerous and intractable Rosalynn Carter could be.

  In a Washington Post op-ed piece in February 2005, senior foreign correspondent Jim Hoagland wrote, 'A handful of Asian countries headed by China … hold nearly 70 percent of the world's foreign exchange reserves … This is the new global balance of terror: China … could bring the U.S. economy to its knees by massively selling off the dollar.'

  Pundits were upset about what was happening with American money, and they were upset about what was happening with Chinese money, too. It seems that the Chinese have been insisting that their money, the yuan, is worth much less than whatever the fashionable price theory of the moment says it's really, truly worth. 'Critics of China,' noted the New York Times (itself being a significant one), 'charge that the yuan is badly undervalued … giving Chinese manufacturers an unfair competitive advantage.'

  A Times op-ed piece written by Senators Charles Schumer and Lindsey Graham (or, rather, written by some underpaid junior staffers who majored in the vagaries of Poli Sci) began: 'Dismayed by China's failure to play fair on free trade, we have offered legislation to impose a tariff on Chinese exports to the United States if Beijing continues to keep the value of its currency, the yuan, artificially low compared with the dollar.'

  In the matter of free trade, the other country's currency can't be too low. It's like going to a Los Angeles real estate agent and being told, 'There's a house in Beverly Hills. The price is five million dollars. But the sellers will accept five million Mexican pesos.'

  Even a cursory read of The Wealth of Nations would calm Schumer, Graham, Hoagland, and the rest of them.

  Or maybe it wouldn't. These men are members of the American establishment. And Adam Smith was an anti-establishment activist – a threat to their power and privilege. Smith was trying to better the economic condition of ordinary people. This is a subversive enterprise, as Wealth's book 3 on the destruction of feudalism showed. And an important part of Smith's subversion was his attempt to refute the mercantilist thinking of his tim
e (and of the Times, if he could have seen into the future).

  In book 4 of Wealth, Smith devotes as much space to squelching the mercantilists as he devotes, in book 1, to setting forth his basic principles of unfettered division of labor and freedom of trade. His attack on the mercantile establishment caused Smith to revisit certain of his earlier arguments. He reapplied logic to such subjects as government subsidies for domestic industry: 'the trade which cannot be carried on but by means of a bounty being necessarily a losing trade.'1 And he offered additional proofs that the worth of money is subjective, in case some eighteenth-century New York Times editorial board didn't get it the first time. Smith tried to make these reiterations worthwhile for his more astute readers. Concerning currency valuations, Smith offered this anecdote:

  For some time after the discovery of America, the first enquiry of the Spaniards … used to be, if there was any gold or silver to be found in the neighbourhood? … Plano Carpino, a monk sent as ambassador from the king of France to one of the sons of the famous Gengis Khan, says that the Tartars used frequently to ask him, if there was plenty of sheep and oxen in the kingdom of France? Their enquiry had the same object with that of the Spaniards. They wanted to know if the country was rich enough to be worth the conquering. Among the Tartars … cattle are the instruments of commerce and the measures of value. Wealth, therefore, according to them, consisted in cattle, as according to the Spaniards it consisted in gold and silver. Of the two, the Tartar notion, perhaps, was the nearest to the truth.2

  The mercantilists could never quite bring themselves to believe that the cows in their pockets weren't the real measure of their wealth. They could not see that, as Smith put it, 'Goods can serve many other purposes besides purchasing money, but money can serve no other purpose besides purchasing goods.'3

  Money going out must be some sort of problem no matter how many high-quality, low-priced consumer electronic goods are coming in. 'That foreign trade enriched the country, experience demonstrated,' Smith wrote, 'but how, or in what manner, none of them well knew.'4

  Mercantilists believed that a positive balance of trade, with its current account surplus, was something to be sought – or better, per Senators Schumer and Graham – legislated. Would that one could say Smith triumphed in this debate. There are many pleasant things to read in book 4 of Wealth, but it would be more pleasant to tell you to skip it, that Smith is beating a dead horse. However, right now in America it's Night of the Living Dead Horses.

  'There is no commercial country in Europe of which the approaching ruin has not frequently been foretold … from an unfavourable balance of trade,'5 Smith wrote, making the news in the New York Times and the Washington Post very old news indeed. 'Nothing,' Smith wrote, 'can be more absurd than this whole doctrine of the balance of trade.'6 As Smith had already made clear, every freely conducted trade is balanced by definition. The definition doesn't change because one trader gets an iPod and the other gets an IOU.

  Let us concede, for argument's sake, that incurring large debts to get tiny iPods is bad. But doing something about it is worse. Imposing government restrictions on trade means giving up our freedom. We surrender our decision-making skill to, in Smith's words, 'the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs'.7 And of those who are vulgarly so called, Smith wrote:

  The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would … assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.8

  Furthermore, Smith argued, this insidious and crafty animal of a Schumer or Graham is a pig oppressor as well:

  To prohibit a great people … from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind.9

  If, at the moment, the Chinese are the 'great people', so what? Adam Smith foresaw China's industrial capacity (even if he didn't foresee the Industrial Revolution): 'By a more extensive navigation, the Chinese would naturally learn the art of using and constructing themselves all the different machines made use of in other countries.'10 But in Smith's day the problem was their deep thinkers, not ours. 'The Chinese,' Smith wrote, 'have little respect for foreign trade. Your beggarly commerce! was the language in which the Mandarins of Peking used to talk to Mr. de Lange, the Russian envoy.'11 (Apparently they convinced him. Russia's commerce is still beggarly in everything except oil, gas, and purloined nuclear warheads.)

  Smith disdained trade retaliation: 'Those workmen … who suffered by our neighbours' prohibition will not be benefited by ours. On the contrary, they and almost all the other classes of our citizens will thereby be obliged to pay dearer than before for certain goods.'12

  And Smith gave the lie to claims that tariffs protect working stiffs: 'To lay a new tax upon them … and because they already pay too dear for the necessaries of life, to make them likewise pay too dear for the greater part of other commodities, is certainly a most absurd way of making amends.'13

  As for all our money going overseas, Smith had shown in book 2 of Wealth why this doesn't harm an economy: 'we must not imagine that it is sent abroad for nothing.'14 And Smith was referring to gold bullion. Gold always has some value, at least on wedding anniversaries if you want a quiet life. The American money that the Chinese are getting is fiat currency that could turn into wastepaper at any time. Presents of wastepaper aren't recommended, even on first, or 'paper', anniversaries.

  By holding dollars and dollar-denominated securities, China is buying our debt. Smith had declared, 'A man must be perfectly crazy who … does not employ all the stock which he commands, whether it be his own or borrowed.' If Americans think they're using all the capital they can get their hands on 'in the way that they judge most advantageous to themselves', they'd be crazy not to be in debt.

  The Chinese are obviously confident that American money isn't going to become trash. And the Chinese are confident that Americans are making good use of capital, or they wouldn't be loaning it to us. Indeed, the whole world seems to be confident in America, more confident than it is in China. There's no rush to accumulate Chinese debt. Smith Barney isn't urging you to buy yuan.

  Everyone's confident in America except America's opinion-makers. They're worried about … Actually, I can't tell from the panicky newspaper clippings what, exactly, it is that they're worried about.

  If the dollar stays valuable, we'll keep having this terrible trade deficit. But if the dollar turns into what you train puppies on, the Chinese may want something more substantive in return for what they send us. We may have to give them a stealth fighter to get a new cell phone.

  Adam Smith, were he alive, would have us consider the parable of Japan in the 1980s. The Japanese kept giving us radios, TVs, stereos, and cars, and we kept giving them money. The Japanese didn't want anything America made except Michael Jackson audio cassettes, and we didn't even make the valuable part – the cassette part – of those. So the Japanese decided to buy America itself. They bought office complexes, golf courses, and hotels. The Japanese bid up the price of American real estate until the bubble did what bubbles do. By the 1990s America had all the radios, TVs, stereos, and cars, and all the office complexes, golf courses, and hotels, and all the money, too.

  Maybe the Chinese will be more successful than the Japanese in their attempt to make us poor by giving us things. But we are free to refuse the offer. The Chinese have no way to coerce us into trade. They haven't fought a war with us, the way the British fought the Opium Wars with them, to force us to accept their products on their terms. (Although someone seems to have fought an Opium War with us, to judge by what goes on in American s
lums.)

  War, Smith pointed out, was the mercantilists' best excuse for curtailing imports and limiting foreign debt. A current account deficit may be economically meaningless, 'but it is otherwise, they think,' wrote Smith, 'with countries … which are obliged to carry on foreign wars, and to maintain fleets and armies in distant countries. This, they say, cannot be done, but by sending abroad money to pay them with; and a nation cannot send much money abroad, unless it has a good deal at home.'15

  The mercantilist policy was 'restraints upon importation, and encouragements to exportation'.16 But if we implement this policy, then we're trying to do to our own nation in peacetime what we try to do to an enemy nation in a war. That is, in wartime we restrict an enemy's importation by blockade, and we encourage the enemy to export bombs, bullets, and artillery shells.

  Attacking both ourselves and others at the same time doesn't seem to be a good way to conduct a war. And I didn't even know that certain members of the US Senate were planning a war against China. Although I shouldn't be surprised. In reference to the superpowers of the eighteenth century, Britain and France, Smith wrote, 'Being neighbours, they are necessarily enemies.'17 And nowadays we're all neighbors in the global village.

  Smith thought that a nation should 'regard the riches of its neighbours, as a probable cause and occasion for itself to acquire riches'.18 But he didn't think this attitude was likely to take hold:

  Each nation has been made to look with an invidious eye upon the prosperity of all the nations with which it trades, and to consider their gain as its own loss. Commerce, which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity.19

  So maybe we will end up in armed conflict with China – the Consumer Electronic Goods Wars, with Chinese gunboats cruising the fountains in our malls. But even if war comes we shouldn't worry that the Chinese have all our money. 'Fleets and armies are maintained, not with gold and silver,' Smith wrote, 'but with consumable goods.'20 Oops, we should worry. The Chinese are making all our consumable goods. Our unfavorable balance of trade with China has destroyed our industrial infrastructure. We don't have the factories and skilled workers to fight a major war.