#98 The Myth of National Self-Reliance

The Christian Economist

#98 The Myth of National Self-Reliance

Countries who cut themselves off from global trade become poorer through their own self-reliance.
Discriminating against other countries is not Christian, nor is it economically fruitful.

Early in the semester, I ask the athletes in my class to tell where they’re from and what denominational church they belong to.  The church thing is optional.  This semester, there were eight athletes.  Two are from Dallas and one is a Baptist.  My observation was, “Then your sports teams are open to trade.  Because the sign I passed when entering the campus this morning reads “Dallas Baptist University.”  If our athletic teams were self-reliant, they would be populated only by Baptists from Dallas.  It’s highly likely that a Baptist from Dallas plays on a team in another city, maybe even for a Christian University of a different denomination.  Open trade makes everyone richer.  Restricted trade, which today I’m calling self-reliance, makes everyone poorer.  In this case, the athletes and the teams.

Kevin Rudd, writing in the Wall Street Journal this week explains China’s move to self-reliance in an article titled “What Explains Xi’s Pivot to the State?”  He writes, Mr. Xi – that’s Chairman Xi Jinping – now calls his “New Development Concept”—the economic mantra combining an emphasis on greater equality through common prosperity, reduced vulnerability to the outside world and greater state intervention in the economy. A “dual circulation economy” seeks to reduce dependency on exports by making Chinese domestic consumer demand the main driver of growth, while leveraging the powerful gravitational pull of China’s domestic market to maintain international influence. Underpinning this logic is the recent resuscitation of an older Maoist notion of national self-reliance.

Chairman Xi is now looking to put the genie of free market capitalism back in the bottle. This will end badly.  It always does.  Strange, that Socialism always works in the future, but never in the past.  This plan of self-reliance will fail, as all previous attempts have. 

Buy American

The United States had a nationalist bent during the Trump administration.  He slapped tariffs on China in an attempt to bring manufacturing jobs back to the US.  For more on the evils of tariffs, I’ll refer you to podcast #42 The Terrible Tax of Tariffs.  Oh, manufacturing DID come back to the US during the Trump administration, but it was mostly due to lower taxes and decreased regulation.  

Now President Biden is favoring a “Buy American” theme.  These are generally not very good ideas.  When you cut your country off from free trade, all parties get poorer: The country that wanted to send you products, and the consumers in your country who want to buy them.  Don’t forget that free-market for athletes that I mentioned earlier.  We could easily stock our 23 sports teams at DBU with Baptists from Dallas, but the teams would not be competitive.  A national economy is no different than our athletic teams.  

Let’s go down this rabbit hole, just a little further.  If buying American is good, wouldn’t buying Texan be better?  Why would you stop there?  How about buying products and services only made in Dallas?  Maybe just on your block?  And the logical conclusion is to buy only from those in your house, but then it would follow that your end of the house will be richer than the kids bedrooms if you don’t trade with them.  

As the Christian Economist, I sometimes get caught between Christianity – which concentrates on the means, and Economics, which concentrates on the ends.  But national self-reliance fails on both.  First: There is no Biblical command to discriminate against another country in the purchase of goods and services.  And that’s what self-reliance is: Discrimination.  And the myth of self-reliance that has been proven to be wrong in economic outcomes: Both in theory and practice.

I enjoyed the adventure movie Black Panther, but their economics were upside-down.  They claimed that Wakanda was rich because they were self-reliant on a hidden supply of vibranium.  That’s not how it works.  What did the Wakandans, do with vibranium, eat it?  Build a home of it?  No, you have to TRADE IT!  It’s that simple: When you trade what you have for what you don’t have, you get richer.  This is pretty simple economics.  Wakanda forever!  Only if you trade. If you don’t, it’s Wakanda for never!

Politics

So what about those sanctions on Cuba?  Those are in place because the value that’s created by trade with that country is captured by the government, enabling them to further oppress their citizens.  Particularly in tourism.  Ginger and I love international travel.  I’ve been to 55 countries, and she has been to 40.  And we are tempted to visit an exotic place like Cuba.  But, Ginger and I have been told that hotel, restaurant, and tour fees go to the military which makes the country poorer, not richer.  You see, they don’t have free trade within the country, so international sanctions prevent them from trading outside the country.   

To some extent, Russia uses gas money from Western Europe to prop up the dictatorship.  This week, China announced a significant step in that direction, which will make China poorer. 

Lingling Wei’s article in the Wall Street Journal on September 20, 2021 is titled Xi Jinping Aims to Rein in Chinese Capitalism, Hew to Mao’s Socialist Vision.  The Article reads, “For most of the 40 years after Deng Xiaoping first unleashed economic reforms in China, Communist Party leaders gave market forces wider room to flourish. That opening helped lift hundreds of millions of people out of poverty and created trillions of dollars in wealth.”

Sergiy Saydometov and I wrote a little white paper a couple years ago, titled Economics for Widows and Orphans, where we pointed out that during the Cultural Revolution of 1958-1961, China redistributed food and killed an estimated 60 million people.  Then, they turned on their heel and put their foot in the door of free-market capitalism and freed 760 million from starvation level poverty from 1961-81.  To give you some context: 760 million is about the population of the US and the EU put together.  It was the greatest escape from poverty in global history.

Back to the September 20 article, Mr. Xi declared in a speech in January that the goal, is to build China into a “modern socialist power.”

In Mr. Xi’s version, the government would have a level of control that would allow it to steer the economy and industry along a path of its choosing, and channel private resources into strengthening state power.

And listen to the conclusion, The big risk for China and Mr. Xi is that the push winds up suppressing much of the entrepreneurial energy that has powered China’s boom and years of innovation.

It’s not a risk, it’s a guarantee.  At one time, I heard that 60% of Chinese millionaires were planning to leave China.  They’re better informed about this than I am.  In podcast #96 Tax the Rich, I pointed out many examples of people “Voting with their feet.”  So many wealthy Chinese are fleeing to Canada, that real estate prices in Vancouver are astronomical.  Ginger and I visited with a real estate agent – of Chinese heritage, by the way – who told us that foreigners were slapped with a 30% premium when buying real estate in Canada.  That’s an attempt to discourage the rich Chinese from moving into their country.  Think about that one for a minute: They are discouraging wealthy people from bringing their money into the country.  

Self-reliance denies that countries are specialized.  Adam Smith wrote about this in The Wealth of Nations.  Yea, that guy!  He was against the British colonization of America, because he could see that mercantilism was not going to work.  He was prescient, and he was right.  That creates a smooth segue to our next topic. 

National Specialization

In the other course I teach at DBU, Strategic Management, the textbook includes the Diamond Model from Michael Porter.  It has six elements and five of them are not very relevant.  One is.  It’s actually a restatement of Comparative Advantage by David Ricardo.  Porter says there are bundles of relationships that cause some regions to have advantages over others.  The Texas coast specializes in oil production.  Silicon valley is the silicon valley because of…..silicon?! 

No, that’s sand.  It’s actually an interesting economics history lesson.  The US Navy had a research facility in the bay area during World War II.  When the war ended, those scientists went to work in universities and laboratories where the computer industry was spawned.  So it’s a classic case of related industry suppliers.

I have performed very few true consulting gigs in my professional career.  But one of them was for a company called Business Objects in San Jose.  The company was founded by a French guy named Bernard Liatoe.  He had to move the company to San Jose to get the labor he needed.  That’s because of the “bundles of expertise” that Michal Porter writes about. 

An example closer to home: Ginger and I live on a limestone ridge south of Dallas in Midlothian, Texas.  It’s known as the Cement Capitol of Texas because there are three cements plants in our town.  The examples continue on and on.  

The competitive nature of countries is explained in a little book by Simon Jenkins called A Short History of Europe.  He makes the fascinating point that Europe developed before China, because Europe was divided into multiple small fiefdoms where competitive ideas could flourish.  China was the exact opposite: A huge country with centralized planning, where different ideas couldn’t catch on.

The multiple fiefdoms explain how Martin Luther was protected by Prince Frederick the Wise of Saxony from Pope Leo, who wanted to burn him at the stake as his predecessor had done to John Huss in Prague a hundred hears earlier.  Another religious example is John Calvin.  He started in France, but his ideas didn’t get traction.  He went from Paris to Geneva to Strasbourg, then back to Geneva, crossing national borders until he found acceptance.  You see how countries who participate in free trade gain new, innovative ideas, whereas countries who are closed to innovation wither and die.  

China was rich in the 13th century, maybe as rich as the Italians, and for the same reason: They were open to trade.  Then they shut off trade and outlawed sailing.  They became poor, and remained poor until the recent events that I described just a few minutes ago.  

In their very good book The Commanding Heights, Yergin and Stanislav relate a detailed journey of South American countries through their own self-reliance failures about forty years ago.  Argentina defaulted twice.  Ecuador’s inflation was so high that they dollarized.  Chile was the shining example of economic growth, because they invited Milton Friedman to consult with them on free-market principles.  As I’m recording this in September, 2021, Peru has just elected a Socialist, and seems to be following the Cuban economic Road to Serfdom, as Frederick von Hayek would call it.  Yes, that guy. 

India closed off to trade during the same time period.  Mahatma Ghandi wanted a self-sufficient nation.  That makes a nation poorer.

Trading Increases Wealth

In Wealth, Poverty & Politics, Thomas Sowell explains why the European settlers in America were economically and technologically advanced over the Iroquois tribe they encountered in the new world.

The British had been able to navigate across the Atlantic, by using the compass invented in China, doing mathematical calculations with a numbering system from India, steering with rudders invented in China, writing on paper invented in China using letters created by the Romans, and ultimately prevailing in combat using gunpowder, also invented in China 

Don Beadreaux is an economist at George Mason University in Virginia.  He points out that the United States is one large free-trade nation from sea to shining sea.  And that’s why we’re rich.  We are a republic, with individual states making their own independent economic decisions.  The result of those 50 economic experiments is reported in Arthur Laffer’s book, The Wealth of States.  He easily categorizes relatively free states as more prosperous than relatively constrained states.  But, my sophomores at Dallas Baptist University could make that prediction without reading his very good book. 

I will close with another quote from the Wall Street Journal article about the Chinese economy.  

While the politics of his pivot to the state may make sense internally, if Chinese growth begins to stall Mr. Xi may discover he had the underlying economics very wrong.

It’s not “if growth stalls.”  It will.  I’ve often mentioned to my sophomores at DBU,  “When you draw supply and demand curves,  it makes no difference who’s holding the marker.  It could be Joe Biden or Janet Yellen or Jerome Powell.  It could be Xi Jinping or Dave Arnott.  The curves go the same way.”  You can change economic policy, but you can’t change economic law.

 

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