Monday, September 5, 2011

Down with the USD

In "An Inquiry into the Nature and Causes of the Wealth of Nations", the metaphor of the "invisible hand", (Book IV, Chapter II), was not the general purpose endorsement of free markets commonly supposed but only part of a commentary on the advantages of home trade over foreign trade. It was particularly pointed out that merchant/manufacturers hired local labor as an side effect of their reluctance to let the substance of their investment be far out of their sight. This was the "invisible hand" that worked to the unintended benefit of domestic workers -- and that commentary was within a broader argument against artificial barriers to the importation of foreign goods.

Rather than throw out the "
Wealth of Nations" anti-mercantilist arguments, economists and policy makers are looking for new, more or less natural, advantages for domestic production to substitute for the costs and risks in the transportation and communication technologies that did the job in Smith's day. For a time, including most of the 20th century, US manufacturing had the advantages of a better educated, more honest and reliable workforce and a more extensive and better quality infrastructure than potential competitors. These advantages have faded as other countries developed. It is hard to see where any new advantage can come from. One good prospect lies in losing the status of the US dollar as the world's reserve currency. It causes our currency to be overvalued, making imports cheap and penalizing exports. We should probably be assisting, not resisting, efforts already in progress by others to find replacements for the USD

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