Money is a way to trade ownership, it isn't primary. The issue is allocating resources.
Just as for a private individual, money is real, for a nation, foreign exchange is real. You can only earn as much as others are interested in paying for the goods and services you create - it's a hard limit, not in your power to increase.
Sometimes they will sell on credit,expecting to be paid back. Sometimes they will sell on credit when no reasonable person would expect to be paid back in full. Sometimes, they have high fixed costs and low uhit costs. It costs them very little to ship you their excess production, but they don''t want to give it away to people who will resell it to their other customers. So charge full price to the paupers but don't actually collect -- unless they do something shady, and then call in the debts and stop selling to them.
It can be a soft limit. It isn't in your power to increase it, but it is in your creditors' power to increase it. When something looks like a free lunch it probably isn't; you don't know who will pay for it or when or what they will pay.
You are talking about autarky. In theory this is worse than allowing free trade.
Ricardo's theory of comparative advantage is correct.
When stated precisely, the theory is correct.When stated poetically, with the conditions relaxed, it is "surprisingly resilient". That is, in practice it is more often kind of correct than reasonable economists would expect.
Other things being equal, we have a higher standard of living when we are part of a larger economy.
Yes, and other things are hardly ever equal.
Here's one of the ways it breaks down: When two individuals make a deal, they both think they are better off or the one who thought he was worse off would back out of the deal. So to the extent they can look out for themselves they will both be better off. And it kind of makes sense that the sum total of a million agreements where each participant thinks he's better off will be better for everybody than only half a million agreements.
BUT when individuals make agreements for other people, they may do things that they think are good for themselves which might not be as good for the people they represent. We see that all the time in representative democracies. We see it in corporations -- corporate presidents make decisions which are better for themselves than for stockholders. And they make decisions which are better for the members of their Board of Directors than for minority stockholders, and decisions which are better for individual members of the BOD than for the corporations they represent. Purchasing directors make some decisions which are better for themselves personally than for their corporations. And so on. It isn''t 100% that people try to take care of themselves first and their corporations second, but it's enough that corporations put in extensive and expensive safeguards to reduce it. And one of those safeguards is that people who have responsible positions are paid so well that they have a strong incentive not to get caught stealing smaller amounts. Bank employees who get $10 million salaries and $20 million bonuses are in that category. They could easily get paid millions of dollars by customers or competitors for making stupid decisions which would hurt their business and enrich others. So the boss bribes them not to.
So, a US businessman and a Taiwanese businessman make a billion dollar deal. Will it benefit them personally? Probably. Will it benefit their companies? Maybe.Will it benefit their employees? Perhaps.Will it benefit their nations? Who knows? It's hard to guess that sort of thing. The easiest approach is for the president of General Motors to think "What's good for me is good for GM, and what's good for General Motors is good for the USA, and what's good for the USA is good for the world." That reduces the complexity of the problem somewhat.
So autarky for the sake of autarky, or mercantilism for the sake of mercantilism, can indeed lead to bad results, as mainstream economists are fond of pointing out.
It can. It's obvious that many kinds of cooperation are better than no cooperation at all. Complete autarky is clearly not the best result for everybody.
The thing is, though, other things are not equal. When a country spends more foreign exchange than it earns - well, that's like living by charging your credit cards to each other. It is not sustainable. So what happens is that central banks raise interest rates, constricting the economy and throwing people out of work.
In theory, the exchange rate will fall. Your money becomes less valuable, other people's money is more valuable. Their products become more expensive to you, yours become cheaper. So you then sell more to them and they sell less to you, and the balance is restored.
When exchange rates are determined by a free market, currency speculators sometimes try to manipulate the rates hoping to make big profits. In theory they cannot win, but in practice they try often enough to somewhat disrupt trade. When exchange rates are manipulated by governments then prices are more stable but speculators still try to win when they think the governments are making bad decisions and we get occasional big sharp dislocations.
Currently China and some other nations manipulate US currency exchanges. In theory this will cost them in the long run. In practice they can do it and we can't stop them and it distorts our ecoomy something fierce.
That leads to wasted productive capacity. So the better response that I advocate is: control expenditures of foreign exchange directly, so that they do not exceed income. When that control is achieved, the domestic economy does not need to be depressed - it can always remain stimulated. Of course it will be preferable to have more exports, so that more imports are possible.
I can sort of imagine that. Say, whenever a US citizen or corporation acquires foreign currency they would b required to exchange it for dollars at a government exchange. And whenever they want foreign currency to import something, they would go to the same exchange. The prices for each currency would be determined by the buyers and sellers, and the rate would be whatever cleared. So if you want to buy something from Japan and the price of yen is too high, you see that what you want just costs too much so you call off the deal, and so imports and exports have to balance. it sounds good -- in theory. It sounds a whole lot like what we already have that is working as well as it works now.
Sam points out one of the problems, though his analysis as usual includes an emotional bias. When you buy and sell you aren't limited to buying and selling products. You can sell assets too. If your income doesn't meet your expenses, you can sell your home.You can sell your land. If you own a corporation you can sell that. You can sell your tools. (And rent them back when you get work.) You can sell the rights to any future inventions you might make. You can sell a kidney, or a cornea. You don't have to stop living beyond your means until you have nothing left that anybody wants to buy. And so, the USA doesn't export as many dollars' worth of stuff as we import, and foreigners take out the difference in ownership of US companies etc. And this can be interpreted as business as usual. "Hey, they want to invest in us. If we sell them as much stuff as they sell us, where will they get the money to invest?"
And looking at it unemotionally, what's wrong with that? Similarly, when Americans buy stock in foreign companies that are more profitable than US companies -- that makes our foreign exchange problem worse, but isn't it the right thing for them to do? Invest wherever the profits are highest, and you make the most money. And getting capital out of dollars and into sounder currencies is also good, right? If you make enough money, then if things get bad in the USA you can go somewhere better. And it's all good. Remember, whenever you make voluntary deals, you're better off and the other guy is better off, so the USA will be better off and the whole world on average will be better off. It never fails, right?