This is something that has been bugging me for a long time…
One might naively imagine that when two countries trade with each other then in the long term the net flow of trade would be neutral. i.e. if there was a period which was dominated by A selling goods to B then this would naturally be followed by a period of predominantly B selling goods to A. But looking at the real world this barely seems to be the case, or if it is the case then whatever re-balancing forces there are must be very weak or work on a timescale of many decades. Leading to all sorts of problems. I suspect that this will have something to do with government interference in trade flows.
Now my question is this: if most coutries round the world were working on AE principals, how would this balancing mechanism play out. i.e. would it be a much stronger force? Would short term imbalances get “corrected” in just a few short years? And also, what exactly is the rebalancing mechanism? How is it supposed to work? Is it all to do with the effects of trade on the value of each countries currency?
What if country A is based on AE but country B is erm, China or the US? If one of the two parties is a non-AE country then does that screw the balancing mechanism? And if it does, then is there anything the AE country should be tweaking to avoid long term problematic imblances developing.
There is no reason that two individuals need have a “neutral” trading relationship. I personally do not have “neutral” relationship with the board of directors at Home Depot. The same applies to groups as large as countries. There are economic processes that will tend to make the trade relationship between two countries more “neutral” however. They are:
Law of Comparative Advantage: That states that even if say China can manufacture exactly the same things as the US, there will be some manufacturing in the US as the folks in China will decide to make more one thing than another leaving that demand to be satisfied by US suppliers.
Diminished Marginal Utility of the Unit of Currency. Using a market based currency like gold: Gold will flow out of the US into China. Due to the Law of Diminishing Marginal Utility the gold will become more valuable to US individuals than the stuff from China or the gold will be less valuable to the individuals in China than the stuff.
People want stuff not money. Money has no value itself. It is what individuals can do with money that gives it value. So as money leaves the US into China, the individuals in China will want to trade money for stuff. Eventually these individuals will seek out stuff to satisfy their desires outside of China giving suppliers in the US a chance to get the money back.
Now the problems come in when govenrments exert force on individuals in these countries trying to get the stuff they want with the money they have. For example the GREAT OBAMA has put tariffs on tires from China. So individuals in the USA have fewer options on buying tires. The suppliers in the USA will then charge higher prices for tires making individuals in the USA poorer.
Thank you for that. 1,2 and 3 sound good to me… and presumably 2 gets screwed if the currencies are not based on anything - right?
Ok, so what should an OE based country do when faced with a trading partner that is interfering in the free trade process? And/or the trading partner insists on using a currency that is not based on anything? Just put up with the consequences?
Free market trade ideas don’t work well with countries or states. Legal and territorial monopolies are a hinderance, not an enabler of trade.
I’m not trying to be patronizing, but start with trying to understand trade between two individuals. Then work your way out from that, rather than starting with the global economy, and trying to drill down to the individual through layers of intervention and obfuscation.
The answer is that nations should do nothing when trading partners interfere with trade. Just as I do not want to do anything to Home Depot if they get money from government to reduce prices, nations should not react or retaliate when other nations give suppliers money to reduce prices. Similarly if I sell say John Deere tractors to Home Depot and Home Depot decides not to buy my tractors, I can still shop there (Probably will choose not to do so.) to get their low prices on other things. I do not want the govenrment to step in and say no-one can buy from Home Depot because they won’t buy John Deere tractors. This same holds true for countries.
The only moral, efficient and effective trade agreement between nations would say the following:
Any individual in country A can buy anything from another individual in country B as long as both individuals choose to do so.
Any individual in country B can buy anything from another individual in country A as long as both individuals choose to do so.
Hmmm… you may be right. Let me chew on that. I just have a niggling worry about the fact that if one side is undergoing a phase of saving for the future, then what that side gets is a mounting pile of IOU’s of various kinds. And IOU’s can unexpectedly change their value, in a way such that, had this been known in advance, the exchange would not have taken place in the first instance.
I get the impression that a large part of AE is based on the premise that if A sells B product X then that proves that both sides are happy with the deal. But thats only true at the precise moment of exchange. It may be that B finds out that the product X, wrapped in the shiny paper, breaks after a few days and he wishes he had never purchased it in the first place. Now Austrians then say that if B was disappointed with X then A gets a bad reputation and so the system is fixed. But thats only true if there is a reasonable number of trials of purchasing X from A. But with a big trade imbalance it seems that the side that builds up the pile of IOU’s does not really get to have many “trials” to see what they’re worth.
As I’ve been typing this I’ve just brewed up a little hypothetical scenario that Illustrates my point:
Imagine there are just two countries in the world. One base on AE the other is rather like America. In the AE country, people like to save for the future. Oil may be running out, global warming may be coming, people are aging… etc etc, they better save for the future. One way to save for the future is to consume less than you make, sell the excess to the other country in return for IOU’s and store your IOU’s for the future. After all, when the hard times come they can always cash in their IOU’s. Meanwhile the other country (USA) is rather short sighted - their government are interfering with the market, the national philosophy is spend spend spend. They see that this neighboring AE country is willing to swap their real produce for IOU’s and they take full advantage. Both economies will gradually become skewed towards this arrangement. The USA will become full of shopping malls and have few factories. This may go on for a few decades. Both countries appear to be doing fine, the people in both countries seem fully employed (the americans in shops, the AE country in factories). Now fast forward a few decades and some hard times hit the AE country. Oil shortages hamper production. The people are getting poorer… but never mind, they have the big pile of american IOU’s. They can make up for their shortfall of produce by buying some from the americans. But as soon as they start spending their IOU’s on american goods the (now very few) amarican factories quickly reach full capacity and their prices will shoot up. This effectively slashes the value of the IOU’s… Product X, wrapped in the shiny paper, has broken… Maybe the leaders in the AE country should have seen this coming and taken evasive action.
I think that statement is far too sweeping. Different countries do have differing taxes/tariffs/traditions/pension systems/health systems.
Besides, if their are too many multinational companies muddying the waters of this question then consider it more hypothetically. Imagine my scenario was set decades ago when countries were more distinct.
Balancing IOUI’s. i.e. with balanced trade there is no significant IOU build up in either country. If there was no balancing mechanism at all then IOU’s could pile up in one country indefinitely which seems unlikely.
It seems that your and “liberty student’s” position on this thread can be summed up as “please don’t ask this question”. Well sorry, but I think its an important one and I think it is worth examining.
Sorry, I didn’t mean that countries don’t exist today. Sure as hell they do. What I meant is that countries are an artificial creation and that sooner or later they will disappear.
Rather we explained why the question doesn’t make much sense. And you seemed to ignore the reason why…
The kind of trade we have today is taxed and regulated by national governments and the transactions are paid using national ‘money’. There’s lobbying, tampering with the currencies, protectionism, etc. None of that would exist in a real free market.
In a free market individuals who accept IOUs instead of real money will pay the consequences ? In that scenario ‘countries’ and a mythical balance of trade play no role. It seems you are talking about problems caused in China and America by government intervention. Yet you asked
The answer is : if the governments of most ‘countries’ did not mess up the economy the problems you talk about would not exist.
Now, If you are asking “how can the market solve problems created by the government” ? - Well, it can’t. But remove the government and the problems disappear.
I just thought the arguments were too feeble to even discuss. I didn’t fancy starting a meta-discussion about whether I should be asking the question or not.
I am not asking about china and America. I am asking about a country like America and a hypothetical AE based country. Say that you personally have been selected (by God) to be the ruler of the AE country (you are allowed to “do nothing, and allow everything” as ruler if you wish). Now your citizens are building up mountains of American IOU’s that will be worth a lot less than your citizends expect when the rainy day comes. Do you take any action? Do you even warn them?
“My” citizens would never accept IOUs from a bankrupt government =P And if some of them do, too bad for them.
People in a free society would trade with people in America or any other place if they found the terms to be convenient.
You seem to be assuming that the majority of people in the “AE based country” are too stupid to realize that they are accepting probably worthless IOUs, and that the ‘leaders’ of the AE country are enlightened. Why would that be the case ? Your assumption sounds unrealistic to me.
Are you suggesting that on average the general population, plumbers, gardeners, factory workers, are just as clever as you? Your assumption sounds unrealistic to me
I don’t really care what questions you ask, except that the premise is utterly fallacious, so don’t expect answers, as you have in other threads.
I told you once before, get these constructs of countries out of your mind. Stop trying to imagine the macro, and instead begin on the micro level. If you can establish an understanding at the micro level, that is based on sound deduction, then it must by necessity, also be sound at the macro level.
Imagine two people. Wing from China, and George the American. Now implement your IOU issue between these two men. Solve it.
People in a free society are bound to be responsible. But let’s consider the other possibility. They would be tricked into selling, let’s say, high-tech stuff abroad and get paid in colored paper. What’s your solution to that problem ?
Also, a currency like the dollar is accepted because of different reasons and one of those reasons is that the dollar is a not-so-bad currency when compared to the rest of fiat currencies. However if the dollar had to compete against real free-market currencies, it wouldn’t fare so well.
I don’t think I’m particularly clever and I do think that ordinary people can look after themselves.
With only two people, you can not encapsulate the " ‘working in shopping malls’ vs ‘working in factories’ " issue, so the conclusions you draw from analyzing two people will be different from modeling two countries.
Sorry, but I have lost the will to argue with you liberty student. I have no motivation because I get too little out of the process. I will only respond to this your posts if they make an intelligent point.
