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The Scourge of Economic Nationalism, Again

Posted By Don Boudreaux On July 19, 2011 @ 9:23 am In Myths and Fallacies,The Economy,Trade | Comments Disabled

EconLog’s David Henderson discusses further his e-mail exchange with Ian Fletcher [1] – a fine discussion that gives me an opportunity to discuss further the confusions that a focus on ‘national economies’ injects into economic thinking.

Fletcher understands the importance of savings.  But the confusions that gush forth from the wide-open nationalist spigot in his brain drowns this understanding.

(Note: in what follows I presume – likely unrealistically – that Fletcher understands just why savings is important and that opportunities to save and invest are not fixed.)

To build (say) a productive new factory requires that some resources be diverted from satistying consumption desires today and used instead to builid the factory and to equip it (and, of course, to train workers) so that greater amounts of output will be available tomorrow to satisfy greater consumption desires tomorrow.

Consider three people: Jones, Smith, and Williams.  Each works and earns his or her separate income.  We can all agree that the greater the portion of the total income earned by these three people that is saved and profitably invested, the fewer will be the consumption desires that these three people, considered as a group, satisfy today, but the greater will be the consumption desires that these three peope, taken as a group, satisfy tomorrow.

We can should all agree also that there is no objective (hence, no objectively determinable) correct amount of savings and investment – either for each of these three people considered individually or for the three considered as a group.  One’s time preference is a subjective preference just as is one’s apple preference or one’s preference for having a pet dog.

We can should also agree that for each individual (say, Jones), he or she is very likely made better off the higher are the amounts saved and wisely invested by the other two considered as a group (in this example, Smith and Williams).  Higher savings means more capital investment and, hence, more total output and, hence also, more competition that drives real prices downward).  So even if Jones saves nothing, he is very likely made better off the greater is the savings of other people.

We can should agree that, just as Smith would increase his own material prosperity by working harder and longer, he would thereby also very likely increase the material prosperity of Jones and Williams.  Again, more total output (a ‘bigger pie’) and lower prices brought about by the competition to sell this greater output.

We can should agree that, even though Jones and Williams benefit the harder and longer Smith works (and, hence, suffer the lazier and less Smith works), Jones and Williams have no legally or morally enforceable claim on Smith’s work effort – meaning, Smith is and ought to be free to work as hard and as much, or as lazily and as little, as he chooses.  (Ditto, of course, for Jones and Williams.)

We can should agree that, what’s true for work effort is true for savings.  Even though Jones and Williams would benefit more the more Smith saves and wisely invests, Jones and Williams are neither legally nor morally justified in forcing Smith to save and invest more.  (Ditto, of course, for Smith with respect to Jones and Williams.)

Now suppose that Williams increases his savings and uses these saved resources to build a factory in town.  Jones and Smith very likely benefit even if they don’t save more or otherwise change their behavior (see above).

Questions for Fletcher and other protectionists: What does it matter if Williams is a resident of the town in which the factory is built?  Are the potential benefits enjoyed by Jones and Smith as a consequence of Williams’s increased saving and investment less if Williams lives not in the town where the factory is built (and where Jones and Smith reside) but lives instead in an adjoining town?  What if Williams lives on the other side of the country?  What if Williams lives in a different country?

If saving is good for Americans, the nationality or place of residence of the savers whose saved resources are invested in the American economy is irrelevant.  If saving is good for Americans, then given Americans’ saving rate, savings invested in the American economy by non-Americans are a blessing – a blessing that is bigger the greater is the amount of this foreign savings and investment in the American economy.

Yes, we Americans would be even wealthier materially if we Americans saved even more – wealthier materially both as a product of many or all of us having larger financial portfolios, and as a product of the economy of which we are a part having an even greater volume of total output.  But for this very reason we Americans are made wealthier also when foreigners save more and invest their savings here, regardless of how much or how little Americans save and invest.

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[1] EconLog’s David Henderson discusses further his e-mail exchange with Ian Fletcher: http://econlog.econlib.org/archives/2011/07/debate_with_ian.html

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