Download Autarky and Isolationism

Morgan Stanley
The Skyline Group
7175 N Pima Canyon Drive
Tucson AZ 85718
520-878-2007
August 1, 2016
Autarky and Isolationism
It may be pleasant to think that a country can be economically self-sufficient and exist
without imports or exports, a system called autarky, but this thought is unrealistic. In the
modern world where the benefits of differentiation in sourcing and manufacturing have
produced an economic web of interdependency, this is especially true. Trade, the exchange
of goods and services that one produces with goods and services that others produce, is the
basis of human civilization. It may seem simplistic, but many economic and sociological
studies claim that all trade is beneficial regardless of what is traded and what is received. 1
David Ricardo (1772-1823) is credited with being the first to describe the ‘Law of
Diminishing Returns’ in 1815 when he criticized the so-called ‘Corn Laws’ that forbade the
importation into England of food grown elsewhere in an attempt to support local prices
and prevent cheaper food from the continent from competing with less efficient British
farmers. 2
Ricardo is also known for his ‘Theory of Comparative Advantage’ that posits that
specialization and trade can result in in increased total output and lower costs.
He said that nations should export not only what they have an absolute cost advantage in
producing, but to export anything where they have only a comparative advantage as well. 2
What this means is that farmers who produce wheat should not lobby Congress to put
tariffs on foreign wheat to increase the price to American consumers, or maintain artificial
price supports for U.S. produced sugar and milk to keep prices high, while keeping nonU.S. producers out of the market with trade restrictions and import duties.
According to Ricardo, as well as most modern economists, this sort of protectionist antifree trade behavior has multiple consequences, all of which are bad.
 It increases consumer prices and the cost of living which reduces individual
disposable income.
CRC #1558344
 This shrinks the economy as the consumer must choose which products to buy and
which to forego.
 The money supply and the velocity of money may also be reduced which in turn lowers
government revenues (taxes) and can produce a recession as supported prices stay high,
but since discretionary purchases are foregone it is harder for new products or ideas to
be funded.
 Economic stagnation or persistent slow growth, are then likely to occur.
The ultimate result can be a European styled, high-cost, growth-less economy where the
state puts money to work inefficiently and those with assets to invest, send those assets
elsewhere where there is more opportunity.
Recently, this has been to our benefit as we still, probably, have the largest economy with
the least restrictive trade policies. These investments from foreign sources who continue to
seek better returns, contribute in a positive manner to both our liquidity and our low
interest rates. I expect this will continue since, in my opinion, this is still the locale with
most attractive investments.
Please call to discuss strategies that are designed to take advantage of these monetary flows
that would suit your personal objectives.
Sincerely,
James P Dretler
Senior Vice President, Wealth Management
Portfolio Management Director
Financial Advisor
1 Matt Ridley, “The Rational Optimist, How Prosperity Evolves”, HarperCollins Publishers, New York, N.Y. 2010
2 Economic Insights, The Federal Reserve Bank of Dallas, Volume 9, Number 2, “David Ricardo, Theory of Free International Trade”
The views expressed herein are those of the author and do not necessarily reflect the views of Morgan Stanley Wealth Management or its affiliates.
All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the
purchase or sale of any security. Past performance is no guarantee of future results.
Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness.
S&P 500 Index is an unmanaged, market value-weighted index of 500 stocks generally representative of the broad stock market.
Dow Jones Industrial Average is a price-weighted index of the 30 “blue-chip” stocks and serves as a measure of the U.S. market, covering such
diverse industries as financial services, technology, retail, entertainment and consumer goods.
NASDAQ Composite Index is a market-value-weighted index of all NASDAQ domestic and non-U.S. based common stocks listed on NASDAQ
stock market.
CRC #1558344
An investment cannot be made directly in a market index.
Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to,
(i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic
events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence,
technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary
distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.
Equity securities may fluctuate in response to news on companies, industries, market conditions and the general economic environment. Companies
cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice.
Morgan Stanley Smith Barney LLC is not implying an affiliation, sponsorship, endorsement with/of the third party or that any monitoring is being
done by Morgan Stanley of any information contained within the web site. Morgan Stanley is not responsible for the information contained on the
third party web site or the use of or inability to use such site. Nor do we guarantee their accuracy and completeness.
Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances
from an independent tax advisor.
The securities/instruments discussed in this material may not be suitable for all investors. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Morgan Stanley Wealth Management recommends that investors
independently evaluate specific investments and strategies, and encourages investors to seek the advice of a financial advisor.
CRC #1558344