This is a gross misrepresentation of my views. No where at all have I ever said or implied that we are not gaining from international trade. Why else does Humphreys think I wrote numerous articles over the years defending free trade against its critics? What I have said is that monetary mismanagement and tax policies can destroy a country's comparative advantage and distort the pattern of trade, a fact that the classical economists fully understood. It was Ricardo who stated:

A new tax too may destroy the comparative advantage which a country before possessed in the manufacture of a particular commodity; or the effects of war may so raise the freight and insurance on its conveyance, that it can no longer enter into competition with the home manufacture of the country to which it was before exported. (David Ricardo, Principles of Political Economy and Taxation, Penguin Books, 1971, p. 269).

Ricardo was really restating what Henry Thornton had laid out some 15 years earlier. (Henry Thornton played a prominent part in the bullion controversy and made a significant contributions to monetary theory). In 1797 England suspended gold payments, allowing banks to print their own notes which led to inflation and distortions in the pattern of international trade. This was made clear by the following quote from Thornton:

It is obvious, that, in proportion as goods are rendered dear in Great Britain, the foreigner becomes unwilling to buy them, the commodities of other countries which come into competition with our's obtaining a preference in the foreign market; and, therefore, that in consequence of a diminution of orders from abroad, our exports will be diminished.... But not only will our exports lessen in the case supposed; our imports also will increase: for the high British price of goods will tempt foreign commodities to come in nearly in the same degree in which it will discourage British articles from going out. (Henry Thornton, An Enquiry into the Nature and Effects of the Paper Credit of Great Britain, (1802), London: George Allen and Unwin, 1939, p. 198).

I make no apologies for being greatly influenced by Ricardo and Thornton in this matter. Both Humphreys and Professor Sinclair Davidson (who should know better) sneer at my reference to the gold standard with respect to the theory of free trade. Davidson goes so far as to make the outrageous assertion that my "Schumpeter reference" does not support my argument. Really? Schumpeter was absolutely emphatic on this point, as the following quote makes perfectly clear:

In the first place, the 'classical' writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign exchange rates within specie points and impose and 'automatic' link between national price levels and interest rates. (Emphasis added). (Joseph Schumpeter, The History of Economic Analysis, Oxford University Press, 1994, p. 732).

Schumpeter's historical observation forms the very basis of my own views. So how in heavens name can Davidson conclude otherwise and still keep a straight face? Now Schumpeter's reference to "specie points" is an important one. As every economist knows — or should — all goods have export and import points. The difference between these points is determined largely by transport costs. The effect of an overvalued exchange rate for a country is to destroy that cost difference and hence wipe out that country's comparative advantage.

We can conclude from this line of thinking that those domestically produced goods for home consumption that could be internationally traded will now face foreign competition. (For a detailed analysis of this process see Gottfried Haberler's classic The Theory of Free Trade, William Hodge and Company LTD, 1950). The net result is that the importing country becomes excessively oriented to domestic production. It should be clear by now that there is nothing heretical in what I am saying. Samuel Brittan (the Financial Times leading economics commentator since 1966 and an honorary Fellow of Jesus College, Cambridge) made exactly the same point 37 years ago:

[i]f an imbalance is allowed to persist too long, a deficit country acquires an excessively home-based industrial and commercial structure while the surplus country becomes excessively export-oriented... This makes adjustment needlessly painful and difficult when it does come, and there is the risk of high transitional unemployment while resources are being transferred. Shop assistants in Britain cannot be transferred overnight to engineering establishments which do not yet exist while Volkswagen workers cannot move straight away into the German social services. These very facts themselves provide ammunition for those who oppose parity changes, and the eventual adjustments are all the more sudden and severe when at last they come. (Cited in A. James Meigs’ Money Matters: Economics, Markets and Politics, Harper & Row, 1972, pp. 350-352).

When Brittan wrote fixed exchanged rates were the order of the day. The collapse of the Bretton Woods agreement led to a regime of floating exchange rates. According to theory the exchange rate crises and financial imbalances that brought the Bretton Woods agreement undone (actually it was inflation that destroyed the agreement) could not occur if exchange rates were adjusted by supply and demand. Enter John Humphrey who states that I am contradicting myself because in his opinion an inflationary policy is incompatible with an over-valued exchange rate. He argues that

The only way for the reserve bank to drive up the exchange rate with a floating currency is for them to run a contractionary monetary policy. That is the opposite of inflationary monetary policy. So Gerry is simultaneously complaining that the reserve bank is printing too much money and they aren’t printing enough money. The only consistent theme is that Gerry is complaining.

As is par for the course with Humphreys, he has completely misconstrued my argument. He would be absolutely right if the world were on a gold standard. But this is not the nineteenth century and we live in a world of constantly changing money stocks, a situation that is guaranteed to create severe monetary disorders, one of which we are now having to suffer. In such a world a loose monetary policy can go hand-in-hand with an over-valued currency. In other words, ours becomes a world of undervalued and overvalued currencies in a continuous state of flux and thus the tacit assumption that monetary policy cannot cause distortions because exchange rates are flexible does not hold. As was pointed out 70 years ago

The real issue, then, is not between the gold standard and free paper currency, and not between fixed parities and flexible exchanges, but between international monetary stability and monetary chaos leading to the adoption of exchange controls and ultimately to milderor more developed forms of state socialism. If "flexible exchanges" are to be associated with a long-run exchange stability (alternative to exchange chaos), then the same type of mechanisms for re-establishing equilibrium must be allowed to work as in the case of the gold standard. (Michael A. Heilperin, International Monetary Economics, Longman's, Green and Co., 1939, p. 170)

In fact, if the system worked as smoothly as Davidson and Humphreys assume then not only would there not be any exchange rate crises but currency speculators like Soros could not have become fabulously rich by shorting currencies as he did with the British pound in 1992. That overvalued currencies are indeed compatible with floating exchange rates was confirmed by the Currency Monitor:

...New Zealand also has the most overvalued currency. The British Pound and the Canadian and Australian Dollars remain overvalued currencies. On the other end of the spectrum, the Japanese Yen continues as the most undervalued currency followed by the Swiss Franc and the Swedish Krona. (Currency Monitor, October 2005).

During the 1990s some, 20 years after the US ditched fixed exchange rates for flexible ones, it was being argued by a number of economists economy that the country's dollar. Ironically enough I find myself agreeing with John Quiggin on this particular point where he claimed:

The US dollar was massively overvalued for most of the 1990s, causing great harm to the traded goods sector, particularly manufacturing. Manufacturing employment fell steadily during the last years of the boom, crashed during the recession and has continued to decline during the subsequent recovery. A striking manifestation of overvaluation is the fact that the US now spends twice as much on manufacturing imports as it earns for manufacturing exports (the disparity is probably greater for Australia, but we’ve never been a significant exporter of manufactures, unlike the US).

Of course, in the opinion of Davidson and Humphreys it is possible that Quiggin is not only ignorant about how exchange rates work but that he also does not understand the law of comparative advantage. Be that as it may, on this point I find myself in total agreement with him, despite our major differences with respect to other aspects of economic theory. Even during the Reagan administration some economists warned that the dollar was overvalued. Hans Sennholz for one expressed the view that foreign investment was driving up the dollar which caused

American goods prices to rise in international markets and American firms to become non-competitive. In other words, the inflow of foreign capital leads to an overvalued dollar, which leads to more imports of foreign goods and to what is commonly called, balance-of-trade deficits. The imports, in turn, keep the price inflation low but also hamper American competitiveness, depressing competing industries and causing the loss of jobs in those industries. (Deficits Do Matter, Hans F. Sennholz, The Freeman, December 1986, Vol. 36 No. 12).

In the 1990s and the early part of the Bush administration Jerry Jasinowski, then-president of the National Association of Manufacturers, continually warned that an overvalued dollar was damaging American manufacturing. (Foxnews.com, O'Neill: U.S. Economy Has Regained Its Footing, 1 May 2002). Brad De Long opined that it was an overvalued dollar that led to "the destruction of midwestern export industry". (Dole's Forty Percent Solution, 1996). More recently William Rees-Mogg commented:

The world's currencies are out of joint. The US dollar is overvalued; the Chinese yuan is badly undervalued. These false valuations have distorted the values of all other currencies, including the yen, the euro and the pound. (Dollar-yuan balancing act, William Rees-Mogg, The Australian, 21 October 2003),

And early this year Julian Callow, Barclays Capital top economist, raised the red flag on the problems that overvalued currencies cause by drawing attention to the fact that — in his opinion — an the overvalued euro had "hollowed out" Europe's manufacturing base. According to Callow:

It takes time for currency effects to feed through. The damage was concealed during the global boom but the collapse in demand has exposed the vulnerabilities. We going to see a prolonged period of de-industrialisation. (Europe's industrial base may never recover from crisis, Ambrose Evans-Pritchard, Telegraph, 13 February 2009)

Callow's observation was taken up again by Ambrose Evans-Pritchard who stated that

The high euro is hollowing out Europe's core industries. With a lag, this will be reflected in a slow rebuilding of America's industrial base. Note how EADS-Airbus is building plants in America. (The G20 has lost the plot, Ambrose Evans-Pritchard, Telegraph, 2 April 2009),

The fact that a number of economists and media commentators think along the same lines as I do on this issue doesn't make me right. It does, however, show, irrespective of Humphreys' efforts to the contrary, that I am not alone in my opinions. Moreover, it surely casts severe doubts on Davidson and Humphreys' dogmatic view that "the real reason that Australia’s manufacturing is in relative decline is that the comparative advantage of different nations is changing". Refusing to discuss this issue is to invite greater interventionism by the state, which is already being suggested in the form of "industry policy".

What also needs to be discussed but never is in Australia (the situation does not appear much better abroad) is the detrimental impact of a central bank's inflationary policy of monetary expansion has on a country's capital structure. As Haberler pointed out so long ago:

... the process of inflation always leaves behind it permanent or at least comparatively long-run changes in the volume of trade and in the structure of industry. The impact effect is a change in the direction of demand. At he points where the extra money first comes into circulation purchasing-power expands; elsewhere it remains for a time unchanged.... successive waves of [monetary] expansions then prices and foreign exchange rates may remain for sometime out of equilibrium with each other. (Gottfried Haberler, The Theory of Free Trade, William Hodge and Company LTD, 1950, p. 54-55).

Some comments on Humphreys' modus operandi:

Humphreys' thuggish approach to those who have the temerity to challenge him is to viciously malign the messenger in the hope that this will discredit him. This is the tactic of a nasty little schoolyard bully, not a mature adult.

He began by calling me a hater even though he could not provide a shred evidence to support his vindictive assertion. Thinking he was giving me the coup de grâce he further stated that I called myself "Australia's only Austrian economist". I did no such thing. The site from which he obtained that information was responsible for that claim, not I. It should have been obvious — even to him — that I would never have made such a ridiculous and easily refuted statement. This was followed by the comment that I mock real economists by saying they are "self-appointed". This is an outrageous lie. I have never done any such thing. What I have done — and still do — is mock those who present themselves as the sole representatives of free market thought in Australia.

I was then accused of not being trained in economics and of not knowing basic economics. Now he is treading on treacherous ground. I did A level economics in England and then went on to do first year economics at Birmingham University. I changed to economic history because it was clear to me that the economics they were teaching was wrong, particularly the Keynesian dogma. The irony is that my rejection of the economics being taught was based on Austrian thinking even though at that time I had never even heard of the Austrian school.

With respect to calling myself a professional economist I have been scrupulously honest. On the basis of my economic writings Alex Robson, an associate of Humphreys, rang me several years ago to ask me as an economist to sign his economists' petition against the myth of man-made global warming. I told him I could not do so because I did not have an economics degree. He was somewhat surprised. In addition, Dr Frank Shostak (a former professor of economics who taught econometrics) calls me "one of the best economists he has ever known". Yet Humphreys insists — despite all the evidence to the contrary — that I am ignorant of basic economics. I am quite sure that readers would much prefer Dr Shostak's assessment of my economic ability over Humphreys. In addition, there is my own body of work to which readers can refer and on which they can form their own opinions.

Robson would be the first to agree that one does not need to have a degree in economics to become a decent economics commentator any more than one needs to go to art school to be a brilliant artist or have a mathematics degree to be a brilliant mathematician. There is nothing unusual in this. For instance, most people do not know that Keynes did not have an economics degree. Then there is the case of David Friedman who lectures at Santa Clara University and proudly boasts: "I am an academic economist who teaches at a law school and has never taken a course for credit in either field".

It seems that I did more economics at university than did Friedman. In any case, if Humphreys is serious about this issue why did he approvingly quote Viscount Monckon in support of his proposals for a destructive carbon tax"? Monckton is neither a scientist nor a "trained' economist. It seems that our Mr Humphreys is really being two-faced on this issue. Moreover, in his open letter to the New Zealand Government Monckton drew attention to my work in which I used Austrian capital theory to explain the destructive effects that a carbon tax would have on living standards. I really don't think any more needs to be said on this issue.

Humphreys accuses me of spending "a lot of time attacking other free-market writers as ignorant, arrogant, selfish, incompetent, dishonest, cowardly and a 'bloody disgrace'". I do not remember actually calling any of our free marketeers cowardly or dishonest. If he can think of a single case of me doing so, he should let me know. I'll be only to happy to defend myself. As for my opinion of them as being arrogant, selfish, incompetent, and a bloody disgrace, I stand by it.

The way in which our self-appointed defenders of the free market promoted free labour markets was indeed a "bloody disgrace". They deliberately ignored historical data that would have greatly strengthened their case. To top it off they completely stuffed up wage rate determination and the nature of productivity. Not only was I eventually proved right on productivity and unemployment — despite their views to the contrary — John Stone recently confirmed that I was indeed correct, though I still don't know what took him so long. In any case, my record speaks for itself.

Readers need only read Labour Market Wars to compare my treatment of labour market reform with the incompetent and fallacious way Humphreys' highly qualified heroes dealt with the matter. Unfortunately things are not getting any better. Des Moore — a former deputy head of the Treasury and a major proponent of labour market reform — once again amply demonstrated our rightwing's dreadful ignorance of economic history and the history of economic thought in a talk he recently gave to a Liberal Party branch. (How America and Australia's central banks badly damaged manufacturing)

Humphreys problem is that he is still seething over the fact that I destroyed his ridiculous case for a carbon tax* in which he claims a "no regrets" policy and that "tax cuts" can offset the disastrous loss of capital thereby making a carbon tax costless: a physical impossibility. It's interesting to note that in his comments to the Senate Economics Legislation Committee Alan Moran of the Institute of Public Affairs made basically the same case as I did in my criticism of Humphreys' paper when he said:

If we wipe out coal as a possible use, for Australia, even if coal is worth as little as $10 a tonne, it is a sacrifice of $760 billion wealth, if you like, just from coal and compounding that we would have wealth shedding from shale oil and gas and various other things.

An ETS would not only stifle current business operations but would virtually eliminate new investment in power generation as well as other energy intensive processing. Leakage would be inevitable despite of the energy intensive allowances which are in place... Basically in order to achieve the stabilisation of carbon, it means you have to wipe out coal.

In other words, a carbon tax destroys capital and lowers living standards. Perhaps Humphreys should get stuck into Moran. While he is at it, he might tell us why Greg Lindsay — who runs the Centre for Independent Studies — is promoting such a destructive tax and why he needs Humphreys to run interference for him.

Humphreys was his usual distasteful and dishonest self. But how do we account for Sinclair Davidson's accusation that I am stabbing people in the back. I am completely upfront. I do not use a pseudonym and I always give those I criticise full right of reply, something that John Quiggin publically admits. When the late Bob Santamaria was attacking free markets and free trade I was the only one who continually challenged him. Not Sinclair Davidson, Des Moore, Ray Evans, John Stone, etc., just me — they were nowhere to be found. And I did not use kid gloves either. Santamaria's manly response was to say: "I don't mind Gerry Jackson. At least he comes at you from the front". Yet Davidson accuses me of stabbing people in the back.

Finally we have the plaintive Chris Berg whining that I did not treat his and Davidson's paper on manufacturing fairly. I stand by everything I wrote: Compare Thumping the Table: Key Questions for the Labor Party's 'Industry Policy' with my Is monetary policy destroying the country's manufacturing base?. The manly thing to do, Mr Berg, is to complain to me and not go scurrying off to some obscure website. If you and Davidson have any complaints I am perfectly prepared to discus the matter face-to-face over a friendly mug of coffee. So how about it?

*Why the Centre for Independent Studies should come clean on its support for the destructive carbon tax

Why is the Centre for Independent Studies supporting the destructive carbon tax?  

Why a carbon tax would hit living standards  

Carbon taxes versus living standards  

The real costs of the greens' carbon tax  

Economic growth is the only way to raise living standards and conserve resources  

Gerard Jackson is Brookesnews' economics editor

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