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Warren’s 'Economic Patriotism' Is Neither Economic Nor Patriotic

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If one didn’t know better, he or she might suspect Liz Warren’s advisors are trolling her.

Just released on her sleep-inducing Twitter feed is a brief video pushing an “economic plan” that, without a hint of irony, she’s calling “Economic Patriotism” (this is also typically known as fascism when put into practice by government diktat), and in it, within the first fifteen seconds, she commits one of the most egregious errors anyone discussing economics could ever make.

She tells us about two “evil” American companies that aren’t creating their products mostly in the US, and the second "malefactor" she cites is the “maker of the famous Number Two pencil.” She doesn’t specify what company that is, and since Manta lists 154 US companies making pencils, one can only guess, but that’s not what’s important.

What’s important – very, VERY important -- is that the Number Two wood PENCIL is the most fundamentally iconic item in economics. It’s been used for more than sixty years to stress the decentralized nature of the free market and the importance of international trade to give all consumers – retail, wholesale, and manufacturers who buy raw materials to make their finished goods – the best buy and leave them money to invest, spend, or save, thus expanding the market and bettering lives and employment even more.

The PENCIL is iconic because in 1958, Leonard Read -- the founder of the first free market educational institution in the US, the legendary Foundation for Economic Education – published an essay entitled, “I, Pencil”, and it became an instant classic in the annals of economics and peace.

It’s so important, so iconic an image in free market economics, that Senator Warren’s reference to the pencil in conjunction with her “economic plan” makes one wonder if her advisors were secretly trying to make her look the fool, or she’s just very adept at doing that herself.

“I, Pencil” is a Thor’s-Hammer of economic reality, in which Mr. Read successfully distills to a few pages Adam Smith’s concept of the “Invisible Hand”, from his 1776 magnum opus, “The Wealth of Nations”, while also expanding on Smith’s empirically verifiable thesis.

In it. Mr. Read anthropomorphizes the pencil, and allows it to explain something most people take for granted, how even what appears to be the most rudimentary of tools, a simple pencil, is so complex, no one person likely would be able to make one in a year. Its small number of components are derived from all over the world – the graphite from the Sri-Lanka, the “rubber” eraser from a complex mixture of rubber, rapeseed oil extract from Indonesia, and sulfur chloride. As the pencil runs through each component, the reader begins to realize that each of those components also requires technology, tools, and resources to derive and make ready. For example:

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow—animal fats chemically reacted with sulfuric acid. After passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850 degrees Fahrenheit. To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

And the crowning glory of all this, noted Read, is that not one worker creating each of the sub-components needs to be in contact with the others, or even aware of them. Each provider of his or her product or labor does so, to paraphrase Adam Smith, to his or her own advantage, for his or her own profit, because a price system – based on freedom of contract and private property – allows consumers to determine what they value, how much of it, and where, and those prices, say, for pencils, rather than sticks in mud, tell others there’s a demand. Prices inspire manufacturers to contact suppliers of each of the pencil components, and each of those suppliers are inspired to purchase the components they need to make them, and so on, all the way to a native of Indonesia who may never speak English, never meet the engineer using the pencil containing the fruits of some of that natives labor.

Each plays his part without a central authority commanding it. Each has his own profit in mind.

The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work.

And it is what’s left of that freedom, the liberty of each person to buy or sell as he or she sees fit, that would be destroyed.

According to Warren:

The truth is these ‘American companies’ have only one real loyalty, and that’s to their shareholders, a third of whom are foreign investors.”

Which is perfectly fine. In fact, it’s great! Foreign investment brings US dollars spent overseas back to US companies in the form of investments which, in turn, allow those companies to pay shareholders, to invest in R and D, to hire (and even hire Americans – SHOCK!), and build towards making more for less.

But, playing on populist fears of “outsourcing”, she goes on:

If they can close up an American factory and ship jobs overseas to save a nickel, that is exactly what they’ll do.

And Senator Warren’s flaming dislike of this option for manufacturers has prompted her to propose:

I call it ‘Economic Patriotism’.  We’ll create a new federal agency, the Department of Economic Development… and this new agency will have a single mission: defend and create American jobs. And we’ll direct the new agency to use aggressive new tools… We’ll use them to boost American workers…

And since, in the same video she derides tax breaks for companies, you can bet she plans on increasing corporate taxes, especially on those using imported goods or utilizing outsourcing to make their goods cheaper and more competitive.

What Warren doesn’t seem to understand is that outsourcing can be good. In fact, one of the most fundamental axioms of economics, the division of labor, shows us that we are ALL outsourcers. We divide our labor, do what we do or like best, trade our surplus (or the cash representing that surplus) to others, and get some of their surplus in exchange. Prices tell us how best to save and maximize our lives.

Without being outsourcers, we would have to make everything we use each by ourselves, and that is one of the fundamental lessons of Read’s “I, Pencil”. By restricting foreign trade, or punishing businesses for getting better deals overseas, Warren is doing precisely the same thing as punishing one of us for hiring a guy from another town or state to fix his or her car, rather than fixing it himself, punishing a New Yorker for buying California berries in December, rather than using a hothouse to grow more expensive, inferior berries in winter.

It’s about getting more for less, which allows us to have money leftover with which to create new jobs. It’s how economies grow, and it’s precisely what Warren does not understand. At all.

She also doesn’t seem to understand freedom, and so I will close by honoring Mr. Read, whose foundation published my first essay on economics more than twenty years ago, and whose thousands of intellectual scions carry his torch today. As The Pencil, he tells us:

If you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. For, if one is aware that these know-hows will naturally, yes, automatically, arrange themselves into creative and productive patterns in response to human necessity and demand— that is, in the absence of governmental or any other coercive master-minding—then one will possess an absolutely essential ingredient for freedom: a faith in free people. Freedom is impossible without this faith.

Amen.

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