Globalization over the last several decades has greatly reduced inflation and allowed the first world to “gain” far more wealth than would have actually happened otherwise.
For instance, 70 years ago, more American cars were built in America. The money that consumers paid for cars went to American companies. This caused increased demand for (American) workers, which increased workers’ wages, and thus their spending power, and thus increased the price of goods. Their pay increased sufficiently to allow them to maintain, and in fact improve, their quality of life, because the inflation was driven by wage growth.
Compare to a globalized world. The money Americans spend on cars today mostly ends up in foreign nations. The demand for the produce of foreign companies pushes up wages in foreign countries, and causes inflation there. Americans get items for cheaper than they could be produced in their own nation, due to labor cost differences. The rub is that they’re not fueling their own economies, which leaves workers unable to afford items which cannot be produced elsewhere.
Devils advocate: what are the limits of this? I.e., does it imply any arbitrarily boundary of commerce is invalid?
It strikes me that most people would feel like spending money on your own family/tribe/community may be reasonable despite what mercantilism says as an economic concept.
> does it imply any arbitrarily boundary of commerce is invalid
Not invalid as much as leaves everyone in the measured system materially worse off. Mercantilism is simply a failed way to raise your own living standards. (It might be a good way to concentrate wealth within your system. But only within, not from without.)
Isn’t this just playing a trick with system boundaries though?
If I hire my son to do my yard work instead of my neighbor, how does that make my son objectively worse off?
Within system/family, obviously this has increased wealth compared to hiring my neighbor.
Without system, it has only made me worse off to the proportion that I have "overpaid" my son. But because it's zero-sum, my son has benefited to the exact proportion that I've been made worse off.
Edit: Back to the context of globalization, "overpaying" my neighbor to build my car only makes me worse off to the same proportion s/he has been helped. When you factor in the concept of preference for psychological distance, that might be a worthy tradeoff. I.e., there's a psychological basis for valuing the financial well-being of my son/neighbor over the abstract person in another country* and this action seems logically consistent with that psychological framework.
* This isn't to say the decision is morally justified. That's a different argument than the economic one.
> Isn’t this just playing a trick with system boundaries though
We agree. Consider the world to be your street and your country your neighbor and your houses. Paying your neighbor more to keep the money local doesn't work to make your "country" richer. It just helps concentrate wealth with your neighbor. Mercantilist protectionism is about redistributing, not increasing, domestic resources.
Right, but isn't there value in concentrating wealth to those who you have psychological proximity with?
Consider a more dire twist: you have money to pay for a life-saving operation for either your own child or another child on the other side of the world. Are you saying there is should be no personal preference in this scenario?
I'm saying there are perfectly reasonable expectations to concentrate that wealth due to human psychology once you move away from the academic and abstract.
> isn't there value in concentrating wealth to those who you have psychological proximity with
Yes. That's why I said the difference isn't invalid. It's just more like a hidden redistributive tax.
In small doses, this is fine and a way democracies repay their patrons. In larger doses, it leaves everyone poor. Too poor to afford a life-saving operation for anyone around.
Ah, I see you point. Sorry it took me awhile to get there :)
Regarding "it leaves everyone poor", how is the case if it's zero sum? It seems like it comes down to how you define your metric of 'poor'. It seems like it presupposes there isn't enough money to go around, so it's better to have a few people rich and the rest destitute, rather than have everyone just be marginally poor.
Or are we getting into productivity incentive territory here?
Trade isn’t zero sum. Ricardian mechanics is what overturned mercantilism. You paying more for your neighbour to do work than someone down the street deprives you of money and everyone of economies of scale.
Doesn’t this break down once your utility function goes beyond strict economics? E.g., economics may say it’s best to let Taiwan specialize in semiconductors, but that may not be optimal once you factor in other dimensions like national security. Humans are not Homo Economicus
> economics may say it’s best to let Taiwan specialize in semiconductors, but that may not be optimal once you factor in other dimensions like national security. Humans are not Homo Economicus
And those other dimensions come at a cost. National security seems like a reasonable thing to pay a cost for. Enriching an oligarch does not. A lot of protectionism is about the latter.
Sure, just like the hypothetical yard work has a cost. I think what you’re illustrating is that protectionism doesn’t make people poorer per se, but it’s bad when it’s abused for individual purposes rather than broader purposes.
> what you’re illustrating is that protectionism doesn’t make people poorer per se
It makes people materially poorer and redistributes wealth, typically up. That is a fair price to pay in some circumstances, e.g. bolstering defence manufacturers.
So on some dimensions, protectionism can make people better off (eg more secure). It seems your issue isn’t that it makes “everyone” poorer (there seems to be a contradiction between your previous and last statement), but more so you aren’t comfortable with how the decision is made (eg by fiat)
If you son can make 4x the hourly rate doing something else and does not do that because he is doing yard work, then you have decreased wealth. The key is in the if.
I agree that forced labor completely changes the scenario. Nobody is forcing my son to do yard work in this scenario though. Both the neighbor and son are willing, but only one can do the work.
> does it imply any arbitrarily boundary of commerce is invalid?
Yes. It says exactly that.
Now, there are details that can change things either way. But the one thing about economics, that is known for about 3 centuries, is that usually arbitrary boundaries to commerce make people poorer. Usually, both on average and on the poor extreme. There is more variability of impact for rich people.
What if 100% of your economy's money goes out to foreign tax havens then?
Something that works for the general case should work for both extremes, because then that better informs usage for the general case (this applies to development too, imo).
If we know how to manage the economy when: no money is flowing out to foreign countries + all the money is flowing out to foreign countries, then we have a good idea of the best way to handle _some_ money flowing out to foreign countries.
That strikes me as true. I would argue that it increases consumption, but not necessarily "wealth". But with it comes the uncomfortable truth that what's bad for America might also mean it's good for other parts of the world.
For instance, 70 years ago, more American cars were built in America. The money that consumers paid for cars went to American companies. This caused increased demand for (American) workers, which increased workers’ wages, and thus their spending power, and thus increased the price of goods. Their pay increased sufficiently to allow them to maintain, and in fact improve, their quality of life, because the inflation was driven by wage growth.
Compare to a globalized world. The money Americans spend on cars today mostly ends up in foreign nations. The demand for the produce of foreign companies pushes up wages in foreign countries, and causes inflation there. Americans get items for cheaper than they could be produced in their own nation, due to labor cost differences. The rub is that they’re not fueling their own economies, which leaves workers unable to afford items which cannot be produced elsewhere.