In the Spirit of Bastiat

by Don Boudreaux on September 28, 2009

in Trade

My brilliant young colleague Bryan Caplan, in this post over at EconLog, offers intuitively compelling alternatives for several economic arguments that are too often presented counterintuitively — and in doing so, Bryan very nicely summarizes the point I sought to make in this post.

Here’s Bryan:

Counterintuitive claim: Free trade makes countries richer, even if the other countries have big advantages like cheaper labor or more advanced technology.

Intuitive version:  We’d be better off if other countries gave us stuff for free.  Isn’t “really cheap” the next-best thing?

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{ 60 comments }

kingstu September 28, 2009 at 10:01 pm

Counterintuitive claim: People like other people’s money (Ag Subsidies, Social Security, and Medicare).

Intuitive version: We’d be better off if people didn’t like other people’s money so much.

Gil September 29, 2009 at 5:59 am

Or should the solution be going on to the gold standard to create a ceiling on how much money is in circulation?

Anonymous September 29, 2009 at 10:16 pm

The amount of money in circulation isn’t relevant. Redistributing wealth from producers to friends of the Fed (aka monetary policy) is very relevant.

Gil September 30, 2009 at 11:07 am

Isn’t that the point? A proper gold standard limits the amount of the money to how much gold is held in reserve and the onus to print more money is to get more gold first.

Anonymous September 30, 2009 at 4:33 pm

Sure. I’m just alluding to (1) the same could be accomplished by the Fed simply choosing never to intervene in the monetary supply; and (2) even a gold standard per se doesn’t necessarily preclude fractional reserve banking from growing the money supply.

It’s the act of a central bank raising the ceiling of a fiat money supply, whatever the ceiling may be, that constitutes a confiscatory redistribution of wealth to the central bank.

Bret September 28, 2009 at 10:08 pm

For sure, we’d be better off if other countries (or any entity) gave us stuff for free or “really cheap” FOREVER.

If not FOREVER, then it’s less clear that the resulting dependency is really worth it.

Anonymous September 29, 2009 at 10:19 pm

Is a country better off engaging in bilateral free trade, or in unilateral free trade with a subsidizing nation?

A third choice–a relative lack of free trade on both sides–is clearly the worst option of the three.

Doug Ransom September 28, 2009 at 10:10 pm

It is amazing how many don’t get this. They are worried about “unfair competition” form people who work where labour is cheaper, or the labour and environmental standards are different.

In the US “stimulus” bill, there is a buy US. A better approach might have been “Buy foreign” and require a 10% subsidy from countries willing to participate – then you have a foreign govt. paying for your stimulus.

Gil September 29, 2009 at 1:14 am

Or: “Slavery is good as it keeps labour cheap!”

Therefore: “Slavery is good as it means more money to be reinvested for greater wealth and innovation instead of being wasted on wages and frivolities!”

Surfisto September 29, 2009 at 2:41 am

I have not read much on Slavery and productivity. Do you have any good sources. What I have read is that slaves face few or no incentives and this makes them less prodctive and so much less productive that it is better to pay them.

MWG September 29, 2009 at 4:22 am

Gil knows slave labor is not very productive, as it has been discussed on this blog a number of times. He’s simply setting up and knocking down straw men to make himself feel smart.

Gil September 29, 2009 at 5:58 am

Are Chinese labourers receiving correct wages or are their wages forced artificially low by the Chinese Government? If so, then the Chinese labourers are slaves.

dsylexic September 29, 2009 at 8:13 am

they are getting fabulous wages compared to what their forefathers were being paid. nobody is perfect,some wages may be low because of extreme information assymetry.that doesnt become slavery.chinese workers are free to go back to their villages and lead a life of idyllic rusticity. that they choose to live amongst 15 flatmates in a hellhole outside of shanghai doesnt mean that the govt is forcing them to do that.the workers are there because they prefer it to worse conditions in ruraltopia

Anonymous September 29, 2009 at 3:01 pm

What exactly are “correct wages”?

MWG September 29, 2009 at 5:46 pm

I think this is really quite insulting to Africans who were enslaved in the Americas and Jews who where forced into slave labor under the Nazi war machine. There are definitely cases where Chinese working in factories have been mistreated, even that does not make them slaves. Just as the average American is far better off in terms of standards of living in the last 30 years, so too is the average Chinese worker.

Anonymous September 29, 2009 at 10:23 pm

One Nobel-winning economist…

“…showed that the established opinion that slavery was an ineffective, unprofitable and pre-capitalist organisation was incorrect. The institution did not fall to pieces due to its economic weakness but collapsed because of political decisions. He showed that the system, in spite of its inhumanity, had been economically efficient.”

http://nobelprize.org/nobel_prizes/economics/laureates/1993/press.html

Anonymous September 29, 2009 at 10:25 pm

Man is the measure of all things. Slaveholders certainly were better off with slavery–but it came at the expense of others, not least of which was the slaves.

Anonymous September 29, 2009 at 3:15 am

Who is “we”? You’re only addressing the consumer’s side of this story – not the producer’s side. And since all producers are consumers too, glossing over who you mean by “we” introduces a big blindspot into this argument if producers go out of business as a result of trade. In the technological development example from the other post you have the same problem – because whoever sells the teleportation device is going to be able to reap the producer surplus lost by the people he puts out of business. In trade, the argument isn’t so straightforward or intuitive as in these examples.

I’m not making a case for protectionism. I just think that as misguided as protectionists are, they’re not so stupid that they think that low prices are bad. We fail to address the protectionists’ core argument if we only do it from the consumer’s side of things – if we only make a “well cheap goods are a good thing so of course it’s good” argument.

Anonymous September 29, 2009 at 9:16 pm

Does trade with a lower priced producer necessarily drive resources from a higher priced producer along a developmental trajectory that necessarily raises the consumption of both the more competitive and the less competitive resources? That’s the theory, but it’s not obvious to me. This trade may raise someone’s consumption, but it isn’t necessarily the consumption of either the more competitive or the less competitive factors.

If I rob certain producers of their produce and sell the stolen goods at a discount, consumers who are not these producers might thank me for the discounts, but don’t I harm everyone producing the goods I’ve stolen?

Anonymous September 29, 2009 at 11:16 pm

Ask Uncle Tony Soprano what he thinks about that. Somehow I don’t think he’s having any trouble sleeping over the overall harm he’s doing to the New Jersey economy.

Tom of the Missouri September 29, 2009 at 4:13 am

I have always been an advocate of unrestricted free trade , thought I understood the inherent advantages all around, and always enjoyed my subsidized french wines, etc., but this discussion (especially Bret’s point) made me wonder about one example where low prices (i.e., practically free) seemed to be quite bad for the recipients. I have always read about how as a result of our stupid agricultural policies left over from the 30′s where we had grain support prices and other market distorting mechanisms which allowed us to donate the resulting “surplus” grain to Africa. The result apparently filled empty stomachs for awhile, but at the same time was disastrous to their fledgling attempts at agriculture and in some cases destroying their whole agricultural infrastructure, since it did not pay to farm when you could eat for free on the U.S. aid. In other words like in the old saying: “Give em a fish and see some temporary comfort, but teach them to fish and watch them thrive in the long run.” This seems a clear case where subsidized cheap foreign goods at the expense of overseas suppliers was in fact bad for the recipient country. Anyone got any thoughts on this? Am I missing something? If it is true this is bad, isn’t it the same argument our steel and tire manufacturers are making today? if not what is the difference? i love cheap tires btw. Is it maybe true that at least at a subsistence level, maybe protectionism of some native “industry” does make a little sense?

Anonymous September 29, 2009 at 11:15 pm

Also you have to consider that America is uniquely blessed with fertile land. The 3rd world is not.

John Dewey September 30, 2009 at 12:28 pm

How do you define “the 3rd world”, Arrowsmith?

What difference does it make if a nation is blessed with fertile land?

All of “America” is not blessed with fertile land. That’s why citizens of West Virginia might consume grain produced in Kansas. Presumaby those citizens of West Virginia have some good or service they can provide to other consumers.

If fertile land is not a requirement for a good life in West Virginia or parts of Utah or parts of New Hampshire, why should lack of fertile land hold back the citizens of those third world countries?

My guess is that lack of basic freedoms and lack of property rights, not lack of any natural resource, is what keeps people mired in poverty.

Anonymous September 29, 2009 at 5:39 am

i think most reasonable people get the fact that free trade in goods and services increases wealth (production possibilities) on a net basis.

what we need is a study that explains how long the displaced workers adjust.if a vast majority of them do move on and find better paying jobs (thru increased productivity -not thru govt subsidy),then in the longer run (say 3-4 years -the time taken to get a college education),the short term adjustment makes everyone better off. protectionists have NO case at all. some bleeding hearts do have a case. are there any papers/studies that show how affected workers adjust?.

Anonymous September 29, 2009 at 11:15 pm

How is a laid-off 50 year old manufacturing worker supposed to transition to a new knowledge-based economy? I never really got that. Of course you mean he should engage in a race-to-the-bottom hunt for a Wal-Mart job.

John Dewey September 30, 2009 at 12:10 pm

Do you really think that 50 year old humans cannot learn new skills? I’ve known many people that age who have started new careers.

I think you underestimate the ability of the average blue collar worker to adapt.

Not sure what is meant by “knowledge-based economy”. For all of my lifetime (58 years), the nation has employed more people in the service sector than in the manufacturing sector. Most of the service sector jobs are relatively easy to learn.

Perhaps you overestimate the complexity of most jobs to which factory workers might turn.

Manufactruring, of course, is stronger than ever in the U.S. AT leastm it was immediately prior to this recession. Manufacturing output in the U.S. will rise to record levels very soon after this recession has ended.

Anonymous September 30, 2009 at 2:12 pm

Manufacturing output is strong, but manufacturing jobs are disappearing forever. The result of outsourcing and automation.

Also what % of 50-year old laid off factory workers do you think can realistically can be retrained for a professional job that pays more then $50K+/year? Come on, you know and i know they are headed straight for Wal Mart or permanently on the dole.

John Dewey September 30, 2009 at 3:29 pm

No, you and I definitely do not know that. you may believe that is true, but I know better.

IMO, every single one of the laid off factory workers can be retrained and employed as skilled labor. Whether that skilled labor position pays $50K or $25K depends on supply and demand.

simon... September 29, 2009 at 12:53 pm

I believe there is a noticeable exception to this. There are multiple accounts of US food aid (free food) destroying Somali agriculture. If free always good?

dsylexic September 29, 2009 at 1:40 pm

it is not any different from any of the other cases (overpaid tire factory workers or s/w engineers).india restricts agriculture import from eurozone on the grounds of 70% of indian farmers being unable to compete with heavily subsidised eurozone farmers. this is a false choice. the poor farmers have no other choice than to stick to farming at low productivity rates. the low productivity is further worsened by throwing good money after bad investments – encouraging more subsistence farming -by the indian govt providing further subsidies to indian farmers(most of it eaten away by corrupt bureaucrats).people could get out of subsistence farming if they had a chance to buy cheaper food even if it is from US

Anonymous September 29, 2009 at 10:44 pm

Somalia has other very severe political problems which limit the opportunity for Somalian farmers to find productive work. If and when they are relieved of those problems, it will be an advantage for them to be able to spend productive efforts on something other than agriculture.

The real problem with agriculture is that you and I have been buying food for the whole world through our ag subsidies. The beneficiaries have been other countries and US farmers, at taxpayers’ expense.

Anonymous September 29, 2009 at 11:19 pm

Yup. What Somalia really needs is domestic stability, strong rule of law, and respect for contract and property rights. If they had that they wouldn’t need our food aid.

Anonymous September 29, 2009 at 11:23 pm

Hahhahahahahha!!!!! Like that’s ever going to happen. Keep up the comedy routine!

Anonymous September 30, 2009 at 2:17 am

There are African countries that feed themselves. We’re not talking about a particularly high standard.

John Dewey September 30, 2009 at 2:17 pm

“Like that’s ever going to happen”

You must be very young. Anyone who’s been around a while – or who bothers to read history books – has seen economic miracles.

Anonymous September 29, 2009 at 8:40 pm

“Makes countries richer” is collectivist. Countries aren’t rich or poor. Individuals are rich or poor. Here’s another theory.The effect of cheap labor depends upon the reason the labor is cheap. If labor is cheap because it lacks productivity enhancing capital, like paved roads, high technology and training, then trading with the poorer laborers while they develop these advantages can benefit richer laborers who already have them, or different laborers with different mixes of these advantages benefit from trade perpetually.The richer laborers are not costlier in this scenario. They are more productive.But if labor is cheap because less free laborers may not demand wages that freer labor demands, regardless of productivity enhancing advantages, then competition with the less free labor prevents freer labor from demanding the same exchange for their produce. Other consumers then may demand it, and these consumers may be the same statesmen forcibly suppressing the demands of the less free laborers or their allies in a freer trading partner.The less free labor surrenders the value of its produce at the point of a gun, and the freer labor effectively does the same unless and until it finds another mode of production adding similar value without competition from the less free labor. But why should the free labor always lead in this process? Why isn’t freer labor always competing with less free labor continually adopting new, productivity enhancing technology?

Why don’t rentier states continually seize the value of rising productivity, and why can’t a large rentier state effectively impose its rents across a border with a smaller, freer nation by offering the fruits of its less free labor in trade?

Forget the first question. Rentier states do continually seize the value of rising productivity, through taxation for example. We already know that, so only the second question is germane.

Gil September 30, 2009 at 6:17 am

Well it depends what you include as ‘labour’ M. Brock. However low-skilled labour in the West isn’t expensive because it’s more productive than a non-Western labourer rather the Western labourer has an artificial monopoly either through unions (not so much nowadays) but mostly through restrictions on immigration.

Anonymous September 30, 2009 at 8:15 am

Agreed. Given the scale of illegal immigration, immigration restrictions are clearly an artificial restraint of trade.I take the argument above seriously, but at the same time, I assume that immigration from China would be much greater without this restraint of trade, so our bilateral deficit is to some extent a proxy for this restricted immigration. Chinese “invest” here only because they may not move here. If they could move here, they would still be investing here, but they’d be doing it more directly, and the investment wouldn’t appear in the current account deficit.But how much do Chinese individuals really invest here and how much of the “investment” is the purchase of entitlement to U.S. tax revenue, either by individuals or by the Chinese state (or Chinese monetary authorities)? Apparently, most of the deficit reflects the accumulation of entitlement to tax revenue, which is not what I call “investment” at all and need not benefit Chinese individuals or U.S. individuals as much as it benefits their states.In other words, if Chinese people could move here, they would really be investing here. As it is, they aren’t really investing here. The “investment” is only a con game conducted by our statesmen. They might really invest here without moving here too, but I don’t know how much that’s happening.When statesmen pursue a mercantilist trade policy, by manipulating exchange rates for example, they effectively seize the produce of their own people and sell it at a discount across borders. Conventionally, this policy works to the detriment of their own people, but the policy doesn’t therefore work to the benefit of common people on the other side of the border.The comparative advantage argument is not a defense of mercantilism from the perspective of free trading nations. Comparative advantage doesn’t imply that mercantilism helps common factors in the free trading nation. The argument is often used this way, but I don’t think it works this way.

thordeer September 30, 2009 at 1:59 pm

On balance trade makes us immensely better off–absolutely. But I am always impressed by how this site never mentions the plight of those whose livelihood–including jobs, housing, health of their city/community–is destroyed by this free stuff from abroad. What if your entire investment portfolio–human capital, pension, housing–is wiped out by imports in your industry?

John Dewey September 30, 2009 at 2:13 pm

thordeer: “What if your entire investment portfolio–human capital, pension, housing–is wiped out by imports in your industry?”

My first thoughts were:

Why would anyone allow themselves to be so dependent on the success of a single industry? If one did become so dependent on one industry for investment and for wages, why would that person be so foolish as to not put aside something in case of disaster?

Americans have been adapting to changes in fortunes of industries and places of employment for at least 150 years. Whether it be automation or changing fashions or imports or natural catastrophe, Americans have proven they are resilient.

Why should today be any different, thordeer?

Of course, the prudent man will never see his entire human portfolio wiped out by imports in his industry.

Anonymous September 30, 2009 at 2:16 pm

Agreed, never put all eggs in one basket. However, the rate at which imports are killing native industries is staggering. We won’t have any manufacturing left at this rate.

John Dewey September 30, 2009 at 3:27 pm

You really need to research U.S. manufacturing statistics, Arrowsmith. You would find that, prior to this temporary recession, U.S. manufacturing output was at an all time high in 2005, then again in 2006, and then again in 2007. In other words, Arrowsmith, U.S. manufacturing is very much alive and well.

Anonymous September 30, 2009 at 3:43 pm

I didn’t dispute the output statistics. What isn’t disputable is that manufacturing jobs keep disappearing. In this recession alone we’ve lost several million manufacturing jobs – gone forever.

Gil September 29, 2009 at 12:01 pm

* face palm! *

I’m sure it’ll be no time in which you’ll be railing over how the hapless fat-arse American tellytubby is a ‘tax slave’ to the fat cats in Washington.

Anonymous September 29, 2009 at 9:02 pm

Is a skilled Chinese worker speaking passable English free to borrow the cost of a plane ticket to the U.S., move here, take a position paying five times as much, repay the cost of the plane ticket in a few months and buy one of our empty condos, all for himself, before the price drops another ten percent?

Maybe he is. Is he?

If he lacks this liberty, why should I assume that he has every other liberty imaginable? Why do you assume it?

Anonymous September 29, 2009 at 10:33 pm

It has been my observation that many are and do. A few that I’ve talked to actively seek ways to extend their visas indefinitely–having no desire to return to China. I wish I understood the Chinese internal politics that causes their autocratic government to allow some to live in the US.

Anonymous September 29, 2009 at 10:34 pm

It is impossible, given the tremendous Chinese productivity, that a significant percentage of them are prison labor–a reason some Americans give for boycotting Chinese goods.

John Dewey September 30, 2009 at 2:20 pm

MWG, I agree. It is sad to see the word “slave” be used so casually.

Anonymous September 29, 2009 at 11:53 pm

I work with several myself, just down the hall in fact, but China’s population is over four times the U.S. population, on a less developed territory of similar size, so the number could be much larger. It’s a matter of degree, not “are they free?”, but “how free are they?”

My coworkers in the IT business are often targets of offshoring, and some feel insecure in the profession for this reason, but ironically, some of them also oppose H1b visas and similar programs. I try to explain that allowing every Chinese computer programmer and database administrator to migrate to the U.S. is in our best interests, but I can’t make them understand.

We’ll compete with them regardless, and we’re better off organizing our labor synergistically with theirs, within a more tightly integrated but still competitive market, than having entire industries drawn out of the U.S. by laborers who are not free to compete as they would if they could. Only the international labor arbitrageurs benefit from these restrictions.

Basically, I can work more nearly with them, even “above” them in some administrative hierarchy, or more nearly against them. That’s the choice. There is no choice between competing or not competing with them.

Anonymous September 30, 2009 at 3:42 pm

Oh that’s just lovely. Taking a 50-year old manufacturing worker who’s been making $40/hour and telling him that at best he can make $12.50/hour now. I bet you’re a professional that makes 6-figures. How would you feel to have such a downgrade in life?

John Dewey September 30, 2009 at 4:39 pm

Arrowsmith: “In this recession alone we’ve lost several million manufacturing jobs”

That’s one statistic I have not seen. Can you provide a link to any data showing that “we’ve lost several million manufacturing jobs – gone forever”?

John Dewey September 30, 2009 at 4:55 pm

Arrowsmith: “the rate at which imports are killing native industries is staggering.”Arrowsmith: “In this recession alone we’ve lost several million manufacturing jobs – gone forever”Are you claiming that the manufacturing jobs lost in this recession were lost due to imports? Or have you shifted your argument and now blaming the global recession for the “killing of native industries”?I can understand how automating the job of a worker might eliminate an American job forever. I can understand how cheaper or more productive labor in China might eliminate an American job forever. I do not understand, though, how a recession would necessarily eliminate an American job forever.I’m curious, ArrowSmith. Had you been commenting about the state of our economy in the mid-20th century, would you have complained that grain combines had caused staggering loss of American farm jobs? After all, in 1900, nearly 40% of the U.S. workforce held agriculture jobs. A century later, only 3% did. How did our nation survive that staggering loss of jobs?

Anonymous September 30, 2009 at 5:03 pm

Maybe not millions, but definitely hundreds of thousands.

Anonymous September 30, 2009 at 5:03 pm

I think it has more to do with the fact that manufacturing jobs are considered prestigious and high self-esteem inducing. Whereas when a $40/hour union man is suddenly forced into a Wal Mart job it’s a huge blow to his self esteem.

John Dewey September 30, 2009 at 5:13 pm

What has happened, Arrowsmith, is that blue collar workers are now coming to grips with their real worth. Those who have retrained as radiology technicians or as truck drivers or as auto mechanics or as computer technicians have probably been able to maintain liveable earnings.

It’s really simple, Arrowsmith. American consumers decided they were no longer going to pay premiums for the goods produced by overpaid union factory workers. That battle was fought and the outcome decided 25 years ago. You may not have been around then, but retailers such as Walmart advertised heavily that they sold American made products. Bob Hope appeared on television every hour to plead with consumers to Buy American. Lee Iacocca pushed his American-made K-cars. And the American consumer ignored them all. The American consumer realized that he was better off paying less for a quality Toyota. He discovered that the toaster made in Taiwan for half what it cost to produce in Ohio was just as good.

So what has happened to the U.S. economy the past 25 years? Solid economic growth. Our nation’s production of both goods and services are much higher than 30 years ago. The boogeyman the unions tried to scare us with – inexpensive imports – didn’t hurt us at all.

Anonymous September 30, 2009 at 5:19 pm

I agree with everything you say – but the politics of it are another story. Just go over to any leftist blog and they will bitch & moan about the decline of unions and how that is proof of America’s moral decline.

John Dewey September 30, 2009 at 5:57 pm

Arrowsmith: “when a $40/hour union man is suddenly forced into a Wal Mart job”

First, I doubt that happens very much. Why would Walmart even bother to hire a man who thinks he is too good for the job offerred? Walmart generally rejects dozens of applicants for every person it hires.

Why would a person who earned $80K a year find himself without funds to tide him over until he was retrained?

Anonymous September 30, 2009 at 5:59 pm

Well, one would HOPE he would have saved money. But what if he had 5 kids and a big mortgage and medical bills and who knows what else? Think of the children!

John Dewey September 30, 2009 at 7:42 pm

Not sure what your point is. I think you started out pointing out that Professor Boudreaux and Professor Roberts never mention workers whose livelihood was destroyed by imports from abroad. But we seem to have deviated from that to referring to formerly high paid workers who:

- refuse to put money aside for difficult times;
- buy homes with large mortgages;
- have more kids than they can apparently support;
- have been inflicted with high medical bills; and
- have suffered a loss of self-esteem.

I’m not sure I understand why such people should be a concern to me or to the professors.

Anonymous September 30, 2009 at 7:45 pm

My point is that hypothetical man is a big part of the Democrat voting base.

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