#WealthofTweets: Book 4.3

international trade restraints on trade protectionism #wealthoftweets read the wealth of nations "speaking of smith"

Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds

9 Feb • 20 tweets • adamsmithworks/status/1359144866362646529

Today #AdamSmith is talking about stuff that sounds pretty contemporary. But remember: it's 240 years old. Today it's all about attempts by the political system to manipulate the balance of trade. (IV.iii.) #WealthOfTweets #SmithTweets

The "Commercial System" that Smith is talking about here is also called the mercantile system, or mercantilism. (IV.iii.) #WealthOfTweets #SmithTweets

The gist of mercantilism is:
* If your imports and exports are equal, that's fair. But,
* If you export more than you import, you bring in silver. That's good! And,
* If you import more than you export, you pay out silver. That's bad. (IV.iii.)
#WealthOfTweets #SmithTweets

If it hasn't before now, it may be dawning on you why Smith is so relentlessly, tediously preoccupied with and determined to debunk the myths that silver is money and money is wealth. So let's do this thing. (IV.iii.) #WealthOfTweets #SmithTweets

In this part, Smith wants to point out why even if money were wealth, WHICH IT'S NOT, and a country got richer by getting more silver, WHICH IT CAN'T, preoccupation with the balance of trade wouldn't make sense. (IV.iii.a) #WealthOfTweets #SmithTweets

#TLDR: France and Britain have kiboshed their chance of being great trading partners. (Unless you count the smugglers.)Restrictions might come from scheming merchants, but now the arguments are about "national prejudice and animosity". (IV.iii.a.1) #WealthOfTweets #SmithTweets

We don't actually know how trade with France would shake out in terms of Britain's trade balance. Trade with France might replace other foreign trade, might be re- exported, or it might supply domestic industry. (IV.iii.a.2–3) #WealthOfTweets #SmithTweets

And we can't really know, anyway, how even to determine the trade balance objectively. It's always going to be determined by principles of private interest and public animosity. That's not about national wealth. (IV.iii.a.4) #WealthOfTweets #SmithTweets

The idea of the balance of trade comes from the way we think about debts and exchange rates. Between two countries, you can look at exchange rates and have an idea of the state of debt and credit between two countries. (IV.iii.a.5–6) #WealthOfTweets #SmithTweets

But you can't conclude from the exchange rate between two countries anything about the trade balance, let alone whether the trade balance is advantageous. (IV.iii.a.6) #WealthOfTweets #SmithTweets

Exchange rates depend not just on the two countries, but on all the other countries they deal with. And how the government supports the currency. And when people who take bullion to the mint. And and and. (IV.iii.a.6–10) #WealthOfTweets #SmithTweets

And it gets even more complicated when you talk about small places that do a lot of foreign trade! Then you've got to think about "bank money", which is always worth more than the common currency. (IV.iii.a.11) #WealthOfTweets #SmithTweets

Dear readers, #AdamSmith wrote so many beautiful, meaningful, insightful, and sometimes even touching things over his life. Alas. He also wrote the Digression concerning Banks of Deposit, particularly concerning that of Amsterdam. (IV.iii.b) #WealthOfTweets #SmithTweets

Really small states have a problem: most of their dealings happen in foreign currency. This means that the government can try to reform its coin, but it can't actually control the value of money. The solution? Bank money. (IV.iii.b.1–4) #WealthOfTweets #SmithTweets

Bank money is basically credit with a special bank that tries to fix this problem. It allows merchants in these small states to transact with a predictable currency. (IV.iii.b.1–4) #WealthOfTweets #SmithTweets

Are you the sort of person who wants to know EXACTLY, in TEDIOUS DETAIL, how this works? Cool. Cool cool cool. It doesn't tweet well. Check out IV.iii.b.6–16. #WealthOfTweets #SmithTweets

*record scratch*"four reigning burgomasters"?!Come on. Is Amsterdam even a real place, @nescio13? (IV.iii.b.15)#WealthOfTweets #SmithTweets


So #TLDR: Bank money is generally better than common currencies regardless of a country's trade balance. (IV.iii.b.17) #WealthOfTweets #SmithTweets

The success of the Bank of Amsterdam illustrates that it's silly to focus on exchange rates. You can get a better exchange rate in ways that have nothing to do with trade, like addressing problems of risk. Exchange rates are just prices. (IV.iii.b.17) #WealthOfTweets #SmithTweets

So trade doesn't determine exchange rates, exchange rates don't tell us about the debt or wealth of a country, and it's a fool's game to worry about the balance of trade to fix either. And Smith ain't done—more Book IV Chapter 3 tomorrow. #WealthOfTweets #SmithTweets

• • •

#AdamSmith corrects a lot of economic errors in #WealthOfNations "Nothing, however, can be more absurd than this whole doctrine of the balance of trade," upon which nearly all protectionism is based. But we still worry about it today. (IV.iii.c.2) #WeathOfTweets #SmithTweets

Both the supposition that an even balance of trade = fair trade and that an uneven balance of trade implies one side wins and the other loses are false. That's how he puts it. "Both suppositions are false."

We love a decisive Smith. (IV.iii.c.2) #WealthOfTweets #SmithTweets

The trap is thinking that the country that brings in the most silver and gold wins. Since bullion is the currency of international trade, exporting more than you import (having a positive trade balance) means you bring in more bullion. (IV.iii.c.3) #WealthOfTweets #SmithTweets

But it’s not helpful just to know if a country has giant piles of coins to swim around in. You have to focus on “the exchangeable value of its annual produce.” (IV.iii.c.3) #WealthOfTweets #SmithTweets

When the trade balance is even, both sides gain equally. But when the trade balance is uneven, both sides still gain. How much they gain depends on how much capital they can put into motion, a la Book III. (IV.iii.c.4–5) #WealthOfTweets #SmithTweets

Plus, it's also the trade in foreign goods. Trade in foreign goods is "round-about", and puts into motion capital all over the darned place, not just in the two countries trading the goods. (IV.iii.c.6–7) #WealthOfTweets #SmithTweets

Gold is like foreign goods. You're not more rich if you've got £100,000 worth of gold than if you've got £110,000 worth of wine in your cellars. Neither puts capital into motion. IOW, precious metals are just goods. (IV.iii.c.6–7) #WealthOfTweets #SmithTweets

There's no reason to think workmen at an alehouse will be taken advantage of. Some will spend too much. Some won't. But they're better off than if they had to make their own ale.

Why is he discussing this now? .(IV.iii.c.8) #WealthOfTweets #SmithTweets

Might as well call this paragraph the Digression on dubious Claims about the effects of Prices, particularly concerning those of Alcohol. (IV.iii.c.8) #WealthOfTweets #SmithTweets

Portugal sells Britain wine, which nudges Smith back on task. The fact that the Portuguese are better customers than the French is no reason to treat Portugal as a favored trading partner. No trader would do business that way. (IV.iii.c.8) #WealthOfTweets #SmithTweets

British people should buy and sell at the best prices, and for the best goods, they can manage. Restricting the extent of the market to countries that also buy British goods is no way to do that. (IV.iii.c.8) #WealthOfTweets #SmithTweets

Wait. We just got it. (We think.) The point of the alehouse thing is that no one should be telling you what your interests are when you're deciding with whom to trade. The French are the alehouse, the workmen are the Brits. We get it now. (IV.iii.c.8–9)

(We're still confused about the Digression on dubious Claims about the effects of Prices, though.) (IV.iii.c.8) #WealthOfTweets #SmithTweets

The ideas that your trading partners will exploit you and that you should only trade with your customers are the root of the idea that we're better off if we're rich and our neighbors are poor. (IV.iii.c.9) #WealthOfTweets #SmithTweets

This is so sad! Trade "ought naturally to be, among nations, as among individuals, a bond of union and friendship", but instead countries use it as an excuse to fight. (IV.iii.c.9) #WealthOfTweets #SmithTweets

And now, some #SmithSnark. (IV.iii.c.9–10) #WealthOfTweets #SmithTweets

Why would we mistake a chance at friendship for a source of "discord and animosity"? Because of "the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be the rulers of mankind". (IV.iii.c.9) #WealthOfTweets #SmithTweets

But don't just blame the merchants and the spirit of monopoly. "they who first taught it were by no means such fools as they who believed it." Ouch. Tell us what you really think, Dr. Smith. (IV.iii.c.10) #WealthOfTweets #SmithTweets

Part of the problem is that war is old and commercial society and trade are relatively new. Your neighbours' wealth is something to celebrate if you trade with them (they can buy more stuff!) but is scary if you're at war. (IV.iii.c.11) #WealthOfTweets #SmithTweets

Smith uses a neat little analogy: If a rich customer moves to a neighborhood, the local manufacturers are happy. But if a rich manufacturer moves to the neighborhood, the local manufacturers have reason to worry. (IV.iii.c.11) #WealthOfTweets #SmithTweets

Competition is good for the people, but makes merchants and manufacturers work harder to earn business. They'd rather have a monopoly so they can sit back and count on business without having to cater to those pesky customers. (IV.iii.c.11) #WealthOfTweets #SmithTweets

And so merchants and manufacturers encourage the older impulse in the public to treat foreign countries as a threat, because foreign merchants and manufacturers seem like a threat to them. (IV.iii.c.11) #WealthOfTweets #SmithTweets

And if the protectionists win, the effect is to make foreign commerce "insignificant and contemptible", so it's even harder to realize what you're giving up by restricting it. (IV.iii.c.11) #WealthOfTweets #SmithTweets

France and Britain, says Smith, should be frens. But these forces create a perfect storm that make that impossible. (IV.iii.c.12–13)

#WealthOfTweets #SmithTweets

The "pretended doctors" of the mercantile system (#SmithSnark), have kept saying that countries are doomed because of their trade balances. But no country has so far been doomed. Instead, freer traders get richer. (IV.iii.c.14)
#WealthOfTweets #SmithTweets

Stop👏Saying👏It👏Matters!👏 - Adam Smith (probably). (IV.iii.c.14) #WealthOfTweets #SmithTweets

You wanna worry about something? We get it. We, the SmithTweeters, can be worriers, too. So how 'bout this: Worry about the "balance" between production and consumption. (IV.iii.c.15) #WealthOfTweets #SmithTweets

If this "balance" is positive, you'll produce more than you consume, and the excess is reinvested to make even more! 🥳 If this "balance" is negative, you'll have to consume productive capital, leading to economic decay. 😱 (IV.iii.c.15) #WealthOfTweets #SmithTweets

The production/consumption "balance" has got zilch to do with foreign trade. It can apply to a country that doesn't trade or to the world as a whole. And it can be positive in a country with a negative balance of trade. (IV.iii.c.16–17) #WealthOfTweets #SmithTweets

It's only if you can see that the growth of the wealth of a country is independent of how much bullion goes in and out that you can understand why nations are growing the way they are and what trade's got to do (got to do) with it. (IV.iii.c.17) #WealthOfTweets #SmithTweets

And it's only once you understand how nations get richer and poorer that you can really assess specific trade policies. Which we'll start doing tomorrow. See you then! (IV.iv) #WealthOfTweets #SmithTweets

See also the AdamSmithWorks Reading Guide for this chapter.