… admires Smith’s prudence in saving, applauds Smith’s gumption in entrepreneurially channeling those savings into the construction and operation of a factory in the protectionist’s home country, and celebrates the economic opportunities that this factory gives to those who work in it, but who – upon learning that Smith lives, not in Buffalo (as the protectionist originally thought), but in Toronto – execrates Smith’s prudence in saving, warns of mysterious dangers of Smith’s gumption in entrepreneurially channeling those savings into the construction and operation of a factory in the protectionist’s home country, and utterly fails to notice the economic opportunities that this factory gives to those who work in it.

(Note that in neither case does the protectionist pay any attention to the benefits of Smith’s factory to consumers.  Protectionists care only for producers.  Protectionists notice consumers only insofar as consumers are folk who, because they stubbornly insist on spending their money in ways that consumers judge to improve their welfare – consumers’ welfare – rather in ways that promote the welfare of the subset of existing producers who are the focus of protectionists’ concerns and affections, must be taxed, blocked, bridled, or otherwise prevented by the state from spending their money in ways that protectionists find disagreeable.)

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Pictured here is a banner ad that ran across the top of my Cafe Hayek page earlier this morning.  

(And here’s the page that I got when I clicked on the ad.)

Note the sales pitch for this boot-merchant in the banner ad: “Designed in America, Made in Italy.”

What a splendid example of globalization!

American producers cooperate with Italian producers to their mutual advantage.  The availability of workers in Italy actually to stitch materials together into boots raises the productivity of boot designers in America; the creativity and effort of boot designers in America raises the productivity of the workers in Italy who actually construct the boots.  (Productivity, do note, is properly reckoned as value-added.)  In other words, these American workers and Italian workers complement each other, each making the other more productive of value – and each, thus, helping the other’s wages to rise.

Also, this greater productivity that is promoted by the opportunity for these specialized workers on different continents to cooperate together in a process of production also benefits consumers.  After all, it’s only because the final product – the boots – are valued by consumers that the efforts of these workers at producing boots has any value.  And the greater the value that consumers attach to the boots – expressed in consumers’ willingness to spend their own money purchasing the boots – the more productive is this cooperation of American and Italian workers and, hence, the higher will be the pay of these workers.

This last point is worth more emphasis.  The availability of skilled Italian boot-makers raises the productivity – and, hence, raises the pay – of Americans who work at designing footwear.  Presumably the Italian boot-makers are the best such workers in the world, all things considered, for constructing the kinds of boots that these American boot-designers design.  (If these Italians weren’t, then this boot-making company would move the boot-construction phase of the production process to where it would be done better, whether that be in some other place in Italy, some other place outside of both Italy and the United States, or some place within the United States).  By producing more boots per day than could be produced by workers anywhere else, these Italian boot-makers increase the number of customers for the design-work of American boot designers.

Likewise, presumably the American designers are the best ones, all things considered, for these Italian boot-makers to work with.  Were this claim untrue, the Italian boot-makers would have incentives to work with boot designers other than these American ones.  These American designs for boots, therefore, increase the number of customers for the boot-construction efforts of the Italian workers by making the final product – the constructed boots – more attractive to consumers.

Let me repeat: the “off-shoring” from America of boot construction (in this case to Italy) raises the wages of American workers, and the “off-shoring” from Italy of boot designing (in this case to America) raises the wages of Italian workers.  If the government of either country had obstructed this “off-shoring,” it would have lowered the wages of some of its workers as well as reduced its GDP and, most significantly, reduced the average standard of living of its citizens.

Protectionists protest.  “Americans can assemble boots just as well as can Italians!”  The economist answers: “Obviously not, for the boot-making company didn’t off-shore the task of constructing the boots to Italy on a whim or because its CEO enjoys visits to Italy.  It choose to have the boots constructed in Italy because that’s where most value is added at the lowest possible cost.”  (A similar protectionist protest and economist response would occur in Italy regarding the off-shoring from that country of the task of designing boots to America.)

Protectionists, however, are a stubborn lot.  Such logic often eludes them.  Protectionists persist: “Americans as a whole would be better off if we both designed and constructed the boots!”

The economist sighs.  Although the protectionists fancy themselves to have discovered a brilliant new truth – a devastating argument against free trade – the economist has heard it before, countless times.  So he takes a deep breath and another sip of strong coffee (Italian roast?) and replies: “To actually construct the boots in America requires workers and other resources.  These workers and other resources in the U.S. must therefore be diverted from whatever else they are doing, or would otherwise do, if they are going to construct boots.”  (Pause for yet another sip of coffee, that the economist notes in the silence of his thoughts is from beans grown in Guatemala.)  “If a tariff or other government-imposed trade barrier is required to create the artificial conditions necessary to prompt workers in America to move from their other tasks into boot-construction, it is almost certainly the case that these artificial conditions are prompting these American workers – and some other resources – to move from jobs at which they are more productive and useful to their fellow human beings, and into jobs at which they are less productive and useful to their fellow human beings.”

Pause for a third sip of coffee, at the end of which the economist notices is taken from a mug made in China.

“By artificially diverting workers and other resources into stitching together boots in America,” the economist continues, “Uncle Sam, first, reduces the productivity of American boot designers; their pay over time will fall.  Second, Uncle Sam’s actions result in Americans on the whole producing less total output – measured in value – than otherwise.  Third, other workers in the U.S. – we cannot practically identify them, but we know that they exist – lose their current jobs because Americans must reduce their spending and investing elsewhere in order to pay the now-higher prices for boots and because Italians and other non-Americans, as a result of Uncle Sam’s trade restrictions, spend and invest less in the United States.  Fourth, consumers are harmed.  They get fewer or worse-quality boots and pay higher prices for them.”

The protectionists – or, at any rate, the bulk of protectionists – don’t follow.  They see only the additional jobs of boot-stitchers in America, the artificially higher wages of these boot-stitchers, and the artificially higher revenues of boot-stitching factories in America.  From what they see, they leap confidently to the conclusion that Americans on the whole are enriched by government policies that prevent the off-shoring of boot-stitching.  They think themselves to be brilliant.  They do not realize that they are instead blind.

….

One final remark: the above-pictured banner ad is further evidence of the important and happy truth that today “Made in USA” (or “Made in You-name-the-country”) labels are meaningless.  Most goods – and more and more services – are “Made on Earth.”

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A scene in Somerset Maugham’s Of Human Bondage sparked the idea for my June 2003 Freeman column – which is below the fold.

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Quotation of the Day…

by Don Boudreaux on February 18, 2018

in Myths and Fallacies, Philosophy of Freedom

… is from page 283 of the 1992 Liberty Fund collection of some of William Graham Sumner’s best essays, On Liberty, Society, and Politics (Roger C. Bannister, ed.); specifically, this quotation is from Sumner’s brilliant 1898 essay “The Conquest of the United States by Spain“:

The thirst for glory is an epidemic which robs people of their judgment, seduces their vanity, cheats them of their interests, and corrupts their consciences.

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Mercantilist Myths Never Die

by Don Boudreaux on February 17, 2018

in Balance of Payments, Myths and Fallacies, Trade

Gary Morgan, a loyal Cafe Hayek patron, suggests that I reprise this ten-year-plus-old post:

Paul Krugman circa 1996 understood the point of this letter (below) that I sent yesterday to the New York Times.  Paul Krugman circa 2007 apparently doesn’t:

Opposed to free trade, David Raines asks “How can it be good for workers to be subjected to competition from low-wage countries?” (Letters, December 27).  This question reveals a common misunderstanding.

Worker compensation in America is high because American workers are made highly productive by the great amounts of capital they work with.  (And by the way, America is rich in capital, in part, because she consistently runs capital-account surpluses – i.e., “trade deficits.”)  Where wages are low, it is because workers in those places have little capital to work with and, therefore, are not very productive.

G.M. and Toyota continue to sell cars even though bicycles – a competing means of transportation, but one far less productive than cars – fetch much lower prices.  For the same reason, with free trade American workers will continue to sell their labor for high wages even though many workers abroad fetch much lower wages.

Sincerely,
Donald J. Boudreaux

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Bonus Quotation of the Day…

by Don Boudreaux on February 17, 2018

in Trade

… is from page 86 of my great teacher Leland Yeager’s remarkable 1954 monograph, Free Trade: America’s Opportunity (original emphasis):

Free Traders should speak out bluntly.  They should argue not for lower tariffs, not for reciprocal trade agreements, not for freer trade, but for Free Trade — the complete end to government interference with imports and exports.

DBx: Note that Leland’s counsel is not that that free-trade advocates should be unwilling to accept imperfect political compromises – such as those in reciprocal trade agreements – that make trade freer if not as free as it ought ideally be.  Leland’s counsel here is that in making the intellectual and moral case for free trade there is no reason to trim; there is no reason – no economic reason and no ethical reason – to grant any intellectual or ethical ground to protectionists.  The ideal that we should always strive for, without apology, is complete free trade, adopted unilaterally by each country – but if not adopted by all or even by any other country, adopted at least by our country.

There is simply no good reason in economics or in ethics to give intellectual credence to state interference with individuals’ peaceful commerce with others merely because the others are citizens or denizens of a different political jurisdiction.  Indeed, there is every good reason to oppose – vigorously and without apology – the officiousness, pretense, ignorance, and cronyism of those who wish to restrict trade.

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A Protectionist is Someone Who…

by Don Boudreaux on February 17, 2018

in Crony Capitalism, Trade

… believes that producers are entitled to forcibly prevent their neighbors from peacefully doing business with merchants whose only distinction is that the producers have concluded that the offending merchants live too far distant from the producers’ neighbors.

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Vincent Geloso ponders the wage gap.

Writing in the Wall Street Journal, Amy Wax defends civility, civil debate, open-mindedness, and enlightenment values.  A slice:

Furthermore, the charge that a statement is “code” for something else, or a “dog whistle” of some kind—we frequently hear this charge leveled, even against people who are stating demonstrable facts—is unanswerable. It is like accusing a speaker of causing emotional injury or feelings of marginalization. Using this kind of language, which students have learned to do all too well, is intended to bring discussion and debate to a stop—to silence speech deemed unacceptable.

Richard Ebeling exposes some of the damage unleashed by minimum wages.

Mark Perry extends some of my trade analogies.

Hooray for the Imminent End of Polio.”

Keli’i Ikina highlights some of the absurdity of the Jones Act.

Jacob Levy rightly insists that words matter.  (HT David Levey)  A slice:

Politics is persuasion as well as coercion. Immediate policy outcomes mainly have to do with coercion: who is taxed, regulated, expropriated, imprisoned, deported, conscripted, what wars are fought, who is kept out of the country by force of arms. This can’t be neglected, of course. The early theorists of “deliberative democracy” in the 1990s seemed to overestimate the importance of speech in politics, imagining a world in which high-minded parliamentary debate on the floor of the legislature regularly changes lawmakers’ minds and supersedes partisan positions, or in which voters engage in jury-like deliberations forever, never reaching a vote or the coercion that follows. But many others underestimate the importance and power of political speech, often under cover of seeming hard-headed and practical.

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My column in the May 2003 Freeman is devoted to explaining that each individual in modern society benefits from the on-going use of an amount of knowledge that is not possessed by him or her – and more: an amount of knowledge that cannot possibly even begin to be possessed by any single mind or begin to be comprehended by a congress of Einsteins equipped with 23rd-century computer technology. My column is below the fold.

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… is from page 413 of the late University of Washington economist Paul Heyne‘s insightful 2000 paper “The Morality of Labor Unions,” as this paper is reprinted in the 2008 collection of Heyne’s writings, “Are Economists Basically Immoral?” and Other Essays on Economics, Ethics, and Religion (Geoffrey Brennan and A.M.C. Waterman, eds.) (original emphasis):

The implications of the economist’s perspective become clearer when we ask what this perspective denies or rules out.  To begin with, it denies that employers will want to hire a specific number of employees, the number they “need” to run the operation, regardless of what they must pay to obtain them.  It suggests, on the contrary, that the size and nature of the operation will itself depend in part on the cost of obtaining workers.  Thus, fast-food outlets, for example, do not require any specific number of employees.  If a very high wage must be paid to obtain competent personnel, fast-food outlets will be open only at the busiest hours, customers will wait longer for service, and there will be fewer outlets in operation.

DBx: This quotation is vintage Paul Heyne: a great deal of economic insight, clearly expressed, packed into a small space.  Among the most relevant implications of the above is a warning about empirical tests of minimum-wage hikes.  Tests done today – 80 years since the enactment in the United States of the Fair Labor Standards Act – on the reaction of employers today to hikes in the minimum wage will fail to pick up major impacts of the minimum wage on employment.  The very existence of minimum-wage legislation, along with the expectation that its real value will be raised from time to time, affects what Paul above calls “the size and nature” of firms that hire low-skilled workers.

Compared to a world without a minimum wage (and one with no expectation of a minimum wage being imposed), the number, size, and nature of such firms will already have largely adjusted to the existence of minimum wages.  Fewer employers of low-skilled workers will exist.  Firms that would otherwise have employed lots of low-skilled workers will instead be designed to operate with fewer such workers and with more capital – that is, with machines and other techniques of production that substitute for low-skilled workers.  Also, terms of employment – both formal and informal – will have adjusted over time to account for the existence of minimum wages.

A word on this latter point about terms of employment adjusting to minimum wages.  It’s often noted by good economists and other sensible people that among the ways that employers of low-skilled workers can adjust to a hike in the minimum wage is to reduce the fringe benefits, formal and informal, they pay to low-skilled employees.  (To the extent that this adjustment takes place, the loss of jobs – or of work hours – is reduced.)  I myself often make this point about fringe benefits.  But minimum-wage fans frequently retort by saying something like “But low-skilled workers don’t get many fringe benefits!”

One valid reply to this retort is to note that fringe benefits come in many forms.  Employer leniency with workers making personal phone calls while on the job is just one among innumerable possible sorts of fringe benefits.  But another reply is to explain that whatever the amount and type of fringe benefits paid today to low-skilled workers, that amount and type have long-ago been modified by the existence of minimum wages.  An observation, for example, that very few low-skilled workers today receive employer contributions to pension plans is an observation of a fact that is explained, at least in part – and perhaps in large part – by the existence of minimum wages.  Already required to a pay to some workers hourly wages made artificially high by government diktat – and reasonably expecting that another diktat will soon be issued that raises the minimum wage – employers who might otherwise have competed for low-skilled workers by offering contributions to workers’ pensions instead offer fewer or even no such contributions.

The following is, in one sense, an empirical question: Compared to the percentage paid now, what percentage of compensation for workers who currently earn hourly wages of (say) $12 per hour or less would have been paid in the form of formal fringe benefits had there never been a minimum wage?  I’m confident that the answer is “more than is currently paid in this form.”  But it is impossible to discover an empirically valid specific number such “17 percent more.”

….

(Perhaps the absence of a minimum wage might have resulted in the empty lot pictured above not being empty.  We can see the empty lot.  It’s much more difficult to ‘see’ what might have been, but which in reality certainly is not, there.)

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