An Economy Is Not a Business

by Don Boudreaux on June 30, 2016

in Myths and Fallacies, Trade

Mr. Charlie Naumov

Mr. Naumov:

Good to hear from you again.

You ask why I’m “comfortable ignoring Donald Trump’s business expertise” when I criticize his “resistance to trade.”

A business person’s success at making money no more implies that he or she has a scientific understanding of economics than does a rock-star’s success at making music imply that he or she has a scientific understanding of acoustics.  Economics and business are simply not the same thing.  And an economy is emphatically is not a business.

A business is an organization for production and sales; it is designed and managed to yield profit.  The yielding of the profit is the business’s rationale.  And while managing his firm to yield maximum profit is the ultimate goal of the business person as a business person, the ultimate goal of the business person as a human being is not to maximize the value of what he produces and sells over the value of what he purchases and consumes.  (Any business person who lives in this way is a genuine miser.  His personal standard of living is as low as it can possibly be, consistent with his continuing to survive and operate his business profitably.)  As a human being, the business person’s ultimate goal is, as economists say, to maximize his utility.  Put more sensibly, it is to lead as full and as fulfilling a life as possible – a process that requires that the business person consume, as a human being, goods and services.

To be expert at business, therefore, is to be expert at only one part of the range of human activities that make up an economy.  A person succeeds in business only if he manages (as we say colloquially) to make money.  So the businessman’s attention as a businessman is to make as much money as possible; it is to maximize profits; it is to have as much money roll in to his firm and as little money as possible roll out of his firm, all in the quest to accumulate profits as great as possible.

But what’s the point of making money – of maximizing profits?  Ultimately it is to enhance the businessman’s ability to consume.  The successful businessman withdraws from his business the profits he earns and spends them (or leaves them to be spent by his heirs and designees) on consumption goods and services.  Yet consumption itself does not require special expertise (or at least it doesn’t require the kind of expertise that yields business profits).  Personal (or familial) consumption is no part of the business.

Because the ultimate goal of economic activity is consumption – because to fully comprehend the function and the ‘purpose’ of an economy requires an appreciation of the reality that consumption is the ultimate point of economic activity – expertise at business not only is not expertise at comprehending the economy, it too often blinds business people to the economy’s ultimate rationale.

Trump, like many a business person, judges an economy as he judges his business: he asks ‘By how much are our production and sales expanding relative to our purchases?’  This question is the wrong one to ask about an economy, whose performance should be judged only by how much ordinary people’s ability to consume improves over time (rather than by how much the economy’s sales grow relative to its purchases).  So when Trump sees Americans buy imports, he sees money flow out of what he mistakenly imagines to be America, Inc.  Thinking of the American economy as being one gargantuan business, Trump mistakenly sees imports as costs that drain this ‘business’ of resources rather than as goods and services made possible because the economy is successfully fulfilling its ultimate purpose – namely, to improve people’s standard of living by giving them ever-greater access to goods and services for consumption.

…..

I am painfully aware of my inability to make myself sufficiently clear on this point.  And the differences between a business and an economy are more numerous than I’ve suggested above.  But this letter is already too long.  I end simply by saying that if the American economy really were run as if it were a business the goal of which is to maximize monetary profits, then every American man, woman, and child would live like a pauper because any consumption beyond what is necessary to keep the American people fully productive as workers and as business people would reduce the ‘profits’ of America, Inc.  Were the American economy really run as the logic of people such as Trump implies that it should be run, all Americans would impoverish themselves as they enrich non-Americans with all of the goods and services that we export to them – exports for which we refuse to accept any imports in exchange.  Our profits – measured as our “trade surplus” – would be enormous; we’d have lots of money.  Our well-being would be minimal; we’d have almost no goods and services for our consumption.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030

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… is from pages 162-163 of the late Stanley Lebergott’s great 1984 book, The Americans: An Economic Record (footnote deleted; citation added):

“Tradition states that the first person who tried to produce an artificial wind were, by some, regarded as impiously invading the domain of Providence” [said Leo Rogin in 1931].  True, it was “unnatural.”  But so were a thousand technical changes, all introduced because human beings wished to do away with disagreeable chores – they hated to dig ditches with a shovel, empty privies, wash clothes by hand in freezing river water, pound corn in a wooden dish to make meal.  Technical change eventually substituted more agreeable techniques to achieve these tasks.  It also reduced the sheer effort required for a thousand different tasks.  Technology has proved to be the only way in which society can get something for nothing, that is, more goods and services without more human effort or real resources.

I’ve one minor quibble with an otherwise important and beautifully stated point: another way – a way in addition to technology – that allows society to “get something for nothing” is specialization and trade.  As Deirdre McCloskey persuasively argues, market-tested technological innovation is by far the greatest proximate driver of modern high standards of living.  Specialization and trade cannot directly account for the huge and steady increase in our living standards over the past few centuries.  But specialization and trade can directly account for some of this improvement.

If I can produce bananas at a lower cost than you can produce bananas, and if you can produce fish at a lower cost than I can produce fish, then even without any change in technology, if I specialize at producing bananas and you specialize at producing fish, total output expands.  Each of us becomes able to consume more than each of us can produce, with no one anywhere made worse off by our improved fortunes.  (Furthermore, specialization and trade, being essential for the promotion of innovation, indirectly accounts for a huge amount of the improvement in our standard of living.)

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In this short video, Johan Norberg explains the environmental dangers of too many proposals to reduce greenhouse-gas emissions.  (By the way, for you fans of taking action based on the “precautionary principle,” even if you believe that the chances are only very small that government-imposed environmental regulations will lead to a cataclysmic fall in economic prosperity and, in turn, a consequent increase in quite lethal environmental hazards, your logic dictates that you call for an immediate end to government-imposed environmental regulations.)

The worst environmental disaster is the absence of capitalism.

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… is from page 205 of William Easterly’s 2013 book, The Tyranny of Experts (original emphasis):

The nationalist obsession also blinds us to positive effects of migration on global development.  When a Haitian moves from a place where she earns little to a place where she earns much more, she has increased global GDP.  Why should we care only about national development and not about global development?

Even a hyper-nationalist (that is, one who puts absolutely no value on the welfare of foreigners) can accept the relevance of Bill’s point – assuming that that hyper-nationalist understands economics.  Such an American hyper-nationalist would understand the fact that more immigrants into the United States over time increases the economic welfare of Americans.  (This hyper-nationalist, by the way, would understand also that free trade has the same happy effect on Americans’ economic welfare.)  He understands this economic reality because he knows that a larger labor supply means greater (and, hence, more productive) specialization and a greater supply of human creativity.  Such creativity, in a free society, is the key input into entrepreneurial innovation.

This economically knowledgeable American hyper-nationalist would further understand that any change in resource allocation – including the allocation of labor – that reduces the costs borne by American firms of producing goods and services contributes to the long-run growth of the American economy.  If a Haitian can produce an hour’s amount of lawn-mowing at half the cost of an American, the American loses his job mowing lawns.  The lower-cost input (the Haitian) replaces the higher-cost input (the American) while the amount of lawn-mowing supplied to American homeowners and businesses increases.  It increases because, with the price of lawn mowing now lower, Americans purchase more of it.

The American’s wage to mow lawns is twice that of the Haitian’s because the opportunity cost of the American’s time spent mowing lawns is twice that of the Haitian’s.  If, by the way, the American’s lawn-mowing wage was significantly higher than this American’s opportunity cost of mowing lawns, then not only were some other Americans unnecessarily suffering by paying excessively high prices to have their lawns mowed, but also the the total economic output in America – which the hyper-nationalist American presumably cares about – was lower than it would have been had the American’s wage reflected his opportunity cost of mowing lawns.

When the American loses his lawn-mowing job, he is freed up to produce what he would otherwise have produced, but didn’t, when he was occupied mowing lawns.  Not only do we Americans get more lawn mowing as a result of the Haitian’s immigration to the U.S., we get also whatever additional goods or services are now produced by the American who formerly was employed mowing lawns.

Yes, yes, yes: the above process takes time.  It causes displacement of workers, which is often painful to the workers who are displaced.  But just as there is nothing unique about international trade in causing economic churn, there is nothing unique about immigration in causing economic churn.  Put differently, if you believe that protecting the American from losing his job mowing lawns is a sufficient reason to restrict immigration, then you must also believe that protecting the American from losing his job mowing lawns is a sufficient reason to outlaw American homeowners from choosing to spend more of their time mowing their own lawns rather than hiring workers to do the mowing.  Unless you’re willing to enforce this latter restriction and countless others akin to it, then you’ve no good economic reason to oppose immigration.

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My student Mark Lutter has a new blog – Free Cities Initiative – that will be excellent reading.  (Reason’s Brian Doherty has already bookmarked it.)

GMU Law professor Ilya Somin (with help from a thoughtful post by Jacob Levy) has here an excellent analysis of Brexit.

Unlike Ilya’s (and Jacob’s, and a handful of other people’s) commentary on Brexit, much of this commentary, as Nick Gillespie rightly complains, is trite.

In this short video, Deirdre McCloskey discusses some misunderstandings of capitalism.

J.R. Clark and Dwight Lee, in this new paper in the journal Public Choice (gated) use the theory of expressive voting to explain political dysfunction.

Steve Landsburg – sparked by what he correctly calls “the latest round of drivel from Donald Trump” – offers a clear and concise lesson on the basic economic case for free trade.

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Bonus Quotation of the Day…

by Don Boudreaux on June 28, 2016

in Myths and Fallacies

… is from page 143 of the final volume (2016) – Bourgeois Equality – of Deirdre McCloskey’s ingenious trilogy on the essence and role of bourgeois values in modern life (original emphasis):

To correct “market imperfections” (few of which have been shown to be very large) by calling in the regulatory state is to assume that the state’s intervention is cheaper than the “imperfection.”  Often it is not, and in any case one would not want simply to assume that the state performs its regulations well….

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Join Us

by Don Boudreaux on June 28, 2016

in Immigration, Trade

This Thursday (June 30th), from 6:00 to 7:30pm, the Mercatus Center will host a reception to formally launch its new Program on the American Economy and Globalization (PAEG [pronounced “page”]).  The reception will be at Mercatus’s Arlington, Virginia, headquarters.

My long-time friend and colleague in doing battle with the forces of mercantilism, nativism, and cronyism, Dan Griswold joins me in running this Program.  (Dan will do most of the work, but I’ll share the credit with him equally!)

This Program starts none too soon, given the flaming idiocies about trade and immigration spewing forth madly from Donald Trump’s maw.  (Just a few minutes ago, Trump called for “American economic independence.”  Trump’s pronouncements are seriously stupid – and scary – stuff.)  Of course, the Democrats aren’t excellent on trade, either.

I’ll say more about our new Program in the days, weeks, and months ahead.  In the meantime, if you will be in the Potomac swamp this Thursday evening and wish to be with friends of liberty, peace, and free trade, join us at our reception.  You can register here.

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Here’s a letter to WTOP Radio:

Apparently worried about a looming shortage of rental units in Montgomery County, MD, some government officials there propose legislation to require, among other things, that all landlords offer two-year lease renewals (“Montgomery Co. to consider bill on security for renters,” June 27).

This legislation is counterproductive.  Because nothing now prohibits two-year lease renewals – and because landlords prefer the security of longer leases to the uncertainty of shorter leases – a landlord who offers a tenant a lease renewal only for less than two years obviously does so for a reason.  The most likely reason is that the tenant’s reliability, while not unquestionably poor, is not sufficiently strong to justify a two-year lease renewal.  Another reason that landlords might reject two-year lease renewals is that they believe the chances are high that market rental rates will rise significantly within the next two years.

Whatever the reason landlords sometimes refuse to offer two-year lease renewals, requiring landlords to offer such renewals raises their costs of supplying rental units.  Over time, the result will be fewer and more pricey rental units than otherwise.  Tenants will be harmed rather than helped.  Worse, this harm will fall disproportionately on young and low-income tenants.  Because these tenants pose the highest risks to landlords when their leases are renewed for two years, it is these tenants who will suffer disproportionately greater difficulty in finding rental units to begin with.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercator Center
George Mason University
Fairfax, VA  22030

……

Typical politicians: rather than spend their own time and money to increase the supply of some good they believe to be in short supply, they order other people to do so.  And these pols don’t understand that such orders, by discouraging these other people from participating in the market, over time reduce the supply.

Also, if you read the WTOP report in the above link, you’ll encounter this passage that contains a quotation from the idiot politician who is pushing this legislation:

As for the bill’s prospects: “I’m optimistic,” [Marc] Elrich said. “It doesn’t take a bite out of landlords.”

Behold, Cafe patrons, the typical politician displaying his typical powers of analysis!  This Marc Elrich person, if we are to believe that he believes what he mutters, believes that some contract terms that are (1) valuable to some tenants but (2) not offered by landlords to those tenants, (3) nevertheless cost landlords nothing when landlords are forced to offer those contract terms to all tenants.

…..

There might well be – indeed probably is – a special-interest-group maneuver going on behind the scenes here, but, regardless, such legislation will harm low-income tenants.

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Quotation of the Day…

by Don Boudreaux on June 28, 2016

in Myths and Fallacies

… is from pages 261-262 of Anthony de Jasay’s remarkable 1998 book, The State (original emphasis; footnotes deleted):

Since economic policy causes prices and factor incomes to be other than what they would be in a policyless capitalist state, and since it may in any case be inherently impossible to “know” the ultimate incidence of the total set of directives, incentives, prohibitions, taxes, tariffs, etc. in force, a subject need not be stupid to be mistaken about where the churning around him really leaves him.

It is in the state’s interest to foster systematic error.  The more people think they are gainers and the fewer who resent this, the cheaper it is – crudely speaking – to split society into two moderately unequal halves and secure the support of the preponderant half.

Government officials lie systematically.  By this claim I do not refer to the well-known exaggerations, lies, half-truths, and cover-ups routinely issued by campaigning politicians; these falsehoods are so common and commonly recognized that they are the subject of jokes.  Indeed, these falsehoods are so common that their very frequency serves in the public mind as reason to excuse politicians’ commission of these falsehoods.

Instead, by the claim that government officials lie systematically I refer to the official lies that are widely regarded to be true.  These official lies range from maddening but only relatively mildly harmful ones (such as that subsidies dispensed by the likes of that great geyser of cronyism, the U.S. Export-Import Bank, strengthen the domestic economy) to cruel and lethal lies (such as that it’s noble and helpful to die “for your country” in whatever skirmishes, battles, or wars the current gaggle of state officials happens to involve “our” military in).

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In popular discourse, America is said to be more “pro-business” than is France.  When people use this term “pro-business” they typically have in mind some vague notion of a government policy made up of low-ish taxes and not a great deal of government regulation.  That is, “pro-business” is commonly used to mean a free, or free-ish, market.

But such language is mistaken.

A true free market is at its core pro-consumer.  In a genuinely free-market economy, businesses are valued only insofar as they serve consumers.  The performance of a genuinely free-market economy is assessed by how well it satisfies, over time, the demands of consumers spending their own money and not by how well it satisfies the demands of business owners and managers.

Obviously, because businesses are a useful – indeed, practically indispensable – means of abundantly satisfying consumers’ demands, government policies that obstruct the smooth operation of these means are undesirable.  But such policies that obstruct or discourage business operations are economically undesirable not because they harm businesses but, rather, because they harm consumers.

Anyway, for all of its faults, American culture and policy are actually much less pro-business than are the culture and policy of France.  If you’re really looking for a government that is deeply pro-business – one that regards the protection of existing businesses as a worthy end in and of itself – one that forcibly transfers resources from taxpayers, consumers, and other non-businesses in order to promote the material interests of existing businesses – look at France.  You’ll find there what you seek.  In France you’ll find one of the most business-friendly policy regimes on the face of the earth.  (HT Chris Meisenzahl)

Pity the French.

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