Common Senselessness

by Don Boudreaux on October 15, 2011

in Balance of Payments, Myths and Fallacies, Trade

Here’s another letter to The Nation:

Thomas Geoghegan writes that “Of course no country should run a trade deficit. That’s common sense” (“What Would Keynes Do?” Sept. 27).

Let’s translate the first sentence into terms more revealing: “Of course no country should ever have a net inflow of capital.”

Appending “That’s common sense” to this translation of Mr. Geoghegan’s sentence seems, well, to contradict common sense.

Thundering against trade deficits is a shoddy and easy means of rousing the economically illiterate to support destructive protectionist policies.  But such histrionics remain very bad economics.

Sincerely,
Donald J. Boudreaux

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AMB October 15, 2011 at 1:30 pm

Correct me if I’m wrong, but to have no country run a “trade deficit” is also impossible. It seems to me to be a basic graph problem. Nodes (nations) each share two edges, one outbound and one inbound. Basic graph theory tells us that the sum of outbound degree of all nodes must equal the sum of inbound degree of all nodes.

In other words, if one country runs a “trade surplus” then one or more other countries must also run a “trade deficit”.

Therefore, it’s impossible for all countries to follow the “common sense” course.

Of course, there is one edge case here every country can avoid a trade deficit: when no international trade occurs at all, thus ensuring that outbound and inbound edges are 0 for all countries.

So it seems that the logical result of Geoghegan’s “common sense” is an end to international trade.

Caveat: I am not an economist. If my graph theory analogy is flawed, please do correct me.

jjoxman October 15, 2011 at 2:36 pm

You are correct. All trade deficits/surpluses net to zero when one considers the world as a whole.

vikingvista October 15, 2011 at 2:45 pm

I suppose the tradedeficitistas imagine some sort of international “balance” whereby small short-lived deficits and surpluses rapidly alternate on different cycles for each country.

It’s just not interesting to ponder their imaginings because it is all such hogwash.

Craig October 15, 2011 at 7:12 pm

“I suppose the tradedeficitistas imagine some sort of international “balance” whereby small short-lived deficits and surpluses rapidly alternate on different cycles for each country.”

Don’t know that I’m a “tradedeficitista”, but during the several decades when the classical gold standard was in place, small, short-lived deficits and surpluses did rapidly alternate on different cycles for each country. Now, that was only for countries who honestly followed the gold standard, that is, who didn’t inflate their currencies above the amount backed by gold.

But it worked. The trade deficit is not some mysterious phenomenon which causes investment dollars to flow when goods don’t. It’s the result of inflationary monetary policy that raises the price of goods and labor above those of countries that don’t inflate or that inflate less. Germany and Japan do not run trade surpluses because the Germans and Japanese consumers are more virtuous than ours.

kyle8 October 15, 2011 at 8:49 pm

huh? trade deficits are mostly a fiction, but given the accepted definition of a trade deficit, it is only partly effected by monetary policy.

China can increase it’s share of world trade by stealing from it’s own citizens by debasing it’s currency. But none of that would do any good if it did not already possess a comparative advantage in trade items.

Doc Merlin October 16, 2011 at 1:43 am

I agree. US overregulation has contributed more to the trade deficit than has China’s monetary policy. It handed over a comparative advantage to them that previously they did not have.

vikingvista October 16, 2011 at 4:36 pm

Craig,

I’m not disputing your historical claims, just the claims that the trade deficit is a manipulatable tool to address, or even observational evidence to support claims of, dire economic circumstances.

vidyohs October 15, 2011 at 2:57 pm

Sir, you don’t understand. We have uberwise looney leftist that have the knowledge, experience, and wisdom to centrally plan and mandate business so that there will be no trade surplus and no trade deficit.

Only balanced trade will be allowed. And, they know how to do it, just have faith, just have faith.

Krishnan October 15, 2011 at 4:26 pm

And when one group elected to do it fails – it is because THAT group did not know how to do it – Just elect a new group of elites who really, really know how to balance trade and grow the economy and create wealth – it will work, just trust them – growth and prosperity through self sufficiency and fair trade

T Rich October 16, 2011 at 8:00 pm

Lather, rinse, repeat!

Dan J October 16, 2011 at 10:21 pm

“We are who we have been waiting for”
“… To fundamentally transform the economy….”
“…. To redistribute the wealth…”

Life is pretty good in America. Hard times and good times. Choices made and not made. Who is to blame? Joe America, Jane America….. Meet the mirror.

During the height of the boom, there was unemployed and/or those who were ‘poor’. What’s the excuse? Self-inflicted for most.

Govt cannot make full employment, eliminate ‘hunger’, wipe out homelessness, etc.,….. It is not possible. There is no perfect society amongst imperfect humans. As free of a Free exchange
Possible with little to no restrictions has brought about thee most prosperity.

DarrenM October 16, 2011 at 11:50 pm

I believe someone once said, “The poor will always be with us.”

Invisible Backhand October 15, 2011 at 1:48 pm

But we want capital inflows to decline, which will drive the trade and dollar deficits down, which will make interest rates rise.

jjoxman October 15, 2011 at 2:36 pm

Capital inflows are demand for capital. That makes interest rates increase. The first sentence seems to be largely nonsense.

Don Boudreaux October 15, 2011 at 2:51 pm

Capital inflows are investments – in this setting, foreigners saving and investing their dollars rather than spending those dollars. Real interest rates thus are pushed down, not up.

vidyohs October 15, 2011 at 3:04 pm

Excuse me, I am confused again. On my street things have value.

Goods have a value, and we all accept currency as having value.

Therefore, is it not true that when I swap $100 with someone in China for a Toaster worth $100, don’t we, by definition of an even swap, have balanced trade. Give a hoot what I do with my toaster and what the Chinese person does with the currency.

It seems to me that employment, jobs, are a different subject entirely.

Perhaps no one has thought of employing a lot of American workers to hand craft the currency using quill pens.

And furthermore, why in a world the looney left insists be fair and balanced, do the looney lefties insist that the USA maintain what they call a trade surplus which in their minds gives the USA, and its workers, an advantage? Isn’t that hypocrisy?

I think so.

Bastiat Smith October 15, 2011 at 8:13 pm

The capital account is not the inflow of stuff in exchange for dollars. I made this mistake at first also. The capital account is simply measuring a different type of ‘stuff’. The current account doesn’t measure all stuff, like working capital. We like to say that the two accounts, together, measure all stuff. But I’m not sure about that.

If we exported consumer goods instead, we’d have a capital account deficit, even though we’d have a current account surplus of the same magnitude.

vidyohs October 15, 2011 at 9:56 pm

Mr. Smith,

You mistake me, I am not up to the level of thinking about capital accounts or current accounts, I am just a very simple guy in general and think in straightforward simple terms.

If I have in my hot little hand $100 currency (a thing accorded measurable value in the world of trade) and you have a toaster valued at $100 in your hand, we both have $100 of value. If we swap and you get my currency and I take your toaster, is there a trade deficit between us?

I don’t see one. We both walk away from that market with $100 of value, no winner and no loser, just straightforward trade. In that good honest trade, were is the deficit, where is the surplus?

If that is true twixt thee and me, then it must also be true if I do the same deal with a Chinese.

vikingvista October 16, 2011 at 3:13 am

Vid,

You’re right. “Trade deficit” is a horrible and misleading term. There is nothing deficient in any voluntary trade. If anyone can be said to be deficient, you might think it’s the receiver of money, who has yet to acquire the goods/services for which he traded. But like I say, even then he did it voluntarily and therefore got precisely what he wanted.

vidyohs October 16, 2011 at 9:21 am

VV

In my simple view the receiver of the currency has the commonly recognized and accepted value, that currency may not go boom, or putt putt putt, but it has the value of things that go boom and putt putt putt, making the receiver of currency as well off in the world of trade as if he had actually received something that goes boom or putt putt putt.

I am on the same page with you as to the purity of voluntary action, I tip my cup of coffee and sip to you in salute.

jjoxman October 15, 2011 at 3:08 pm

I was thinking only of FDI, not including the purchase of Treasuries & securities. My mistake.

Don Boudreaux October 15, 2011 at 3:11 pm

FDI (just like DDI) puts upward pressure on the prices of inputs, but not on interest rates.

jjoxman October 15, 2011 at 3:37 pm

That sounds odd to me. Is the assumption that the investment uses funds already in place? For FDI, I can accept that, but not really for DDI.

Maybe I’m the one making the assumption, and I’m thinking that the investment cannot be fully internally funded. If it can be, that I fully accept your statement and stand corrected. And that’s probably the case for FDI in general.

But with DDI, investments are often internally and externally funded. Don’t the external funding needs represent demand for loanable funds?

I know I’m bringing in more factors, but your last response confused me.

Don Boudreaux October 15, 2011 at 4:04 pm

Just recognize that a greater willingness to save reflects a fall in time preference: people generally don’t put as high a premium on consuming today (as compared to consuming tomorrow) as they did before time preference fell.

This greater willingness to save puts downward pressure on real interest rates, thus prompting more investment.

jjoxman October 15, 2011 at 4:35 pm

Alright, I see where you’re coming from now. Makes total sense.

Appreciate your patient explanation.

muirgeo October 16, 2011 at 7:47 pm

Capital inflows are not investments… they are changes in owership.

Invisible Backhand October 15, 2011 at 2:53 pm

I plagiarized it from a very reputable source.

vikingvista October 15, 2011 at 2:39 pm

*You* may want capital inflows to decline, but the rest of us want economic growth.

Invisible Backhand October 15, 2011 at 2:57 pm

Would you rather have growth like the USA’s or growth like China’s?

vikingvista October 15, 2011 at 3:39 pm

The point is, I want growth, which is to say that I want people to be able to freely trade in their own individual interests. Whether the cumulative result of such free trade is a trade deficit or trade surplus, makes no difference to me, since it is growth. I don’t *want* any particular trade balance, since such a want necessarily conflicts with wanting growth. Get it?

Invisible Backhand October 15, 2011 at 5:27 pm

Would you rather have growth like the USA’s or growth like China’s?

vikingvista October 15, 2011 at 8:54 pm

I’m glad you can use “growth” in a sentence. Now if you’d learn to grasp a point, you’d realize that I’m telling you growth is not a result of forcing any kind of balance of payments. On the contrary, it is the result of leaving people alone–or more to the point, the extent to which you leave people alone. Circumstances and populations are different, which is why the economic characteristics of growth, including BoP differ. But those observations are neither good nor bad. Merely observations, best left alone–which is the only pro growth policy for any population.

Invisible Backhand October 15, 2011 at 10:22 pm

“The bulging American trade deficit means that rising consumer demand is flowing to suppliers overseas rather than fueling growth at home. The American economy is too weak to carry this load. The recent trade data led economists to slash growth estimates for this year.”

http://www.nytimes.com/2010/08/16/opinion/16mon1.html

SheetWise October 16, 2011 at 3:51 am

I think there’s a cultural divide. If you’ve been taught all of your life that you can pick up a turd by the clean end — at some point, you begin to believe it.

Invisible Backhand October 16, 2011 at 11:50 am

More the streetwise versus the chumps. If you’ve been taught that what’s good for your corporate masters is good for everybody but it’s always you that gets screwed — at some point you if you still believe that, you’re a chump.

Methinks1776 October 16, 2011 at 11:53 am

Oh no!!!! The escape of aggregate demand!! Next we’ll have to stem the flow of America’s greatest resource – it’s people.

Lock ‘em in good. Point the guns inward. It’s the only way to succeed

Invisible Backhand October 16, 2011 at 1:02 pm

Hitting the bottle early today or never stopped last night?

vikingvista October 16, 2011 at 4:41 pm

IB,

Your quote is exactly what I’m disputing. It’s implicit economic assumptions are flawed. Whether these mistaken ideas are in your own words or someone else’s makes them no less flawed.

SheetWise October 16, 2011 at 5:15 pm

“If you’ve been taught that what’s good for your corporate masters is good for everybody but it’s always you that gets screwed — at some point you if you still believe that, you’re a chump.”

No. You’ve chosen not to be a corporate master. Big difference.

Emil October 15, 2011 at 4:23 pm

The law of diminishing returns is indeed a difficult concept to grasp

Jason October 15, 2011 at 6:36 pm

Does China even have economic growth? Sure, the government reports 10%, but if that’s increasingly from building empty cities funded through taxation of savings (via high inflation and low interest rates for savers), is that growth or a massive destruction of wealth?

Even if their GDP reports were accurate, China is very poor relative to the US and therefore comparing the two growth rates isn’t as illuminating as it might seem.

Krishnan October 15, 2011 at 8:14 pm

Re: Jason – I suspect anything the Chinese Government tells the world.

We cannot simply compare “growth rates” – a backward economy that starts growing rapidly at even 15% is not the same as a highly developed, highly innovative economy that may be struggling for a whole host of reasons … (even if this 15% is real and not made up). There are those that are fascinated by the central, authoritarian control in China that has given us many cheap things to buy and yes even improved the lives of millions (in China and elsewhere). It is not possible to develop an economy by central planning no matter what some elites in the US may think – using China as an example. You cannot create a growing, innovating economy where the people live under a constant threat of overwhelming force by a few tyrants who control everything – and yea, it does remind me of what the current EPA is attempting to do – at least till the realities of the 2012 election came along.

kyle8 October 15, 2011 at 8:58 pm

China has had some pretty good growth rates even if you discount the official number. But that is not too astounding since they started at nothing.

It is quite natural to see huge growth rates in the early stages of industrialization. But it always slows down.

In fact I suspect that China’s growth will soon come crashing down for a variety of reasons. When that happens there will be turmoil and the possibility of some changes in their political system.

vikingvista October 15, 2011 at 9:05 pm

It is a government, so of course it lies.

But plenty of eye witnesses can testify to standards of living among a great many urban Chinese that was utterly nonexistent 3-4 decades ago. And of course we all know trade with China has exploded, and trade, to the extend it is free, is wealth producing.

Sam Grove October 16, 2011 at 12:57 am

Would you rather have a bubble or steady, sure growth?

DarrenM October 16, 2011 at 11:56 pm

But we want capital inflows to decline, which will drive the trade and dollar deficits down, which will make interest rates rise.

What is a “dollar deficit”? Is this another term for “weaker dollar”?

vidyohs October 15, 2011 at 4:43 pm

I don’t care who you are or what your belief, this is funny.

http://thehayride.com/2011/08/the-donkey-whisperer/

brotio October 17, 2011 at 9:26 pm

LMAO!

Andy October 15, 2011 at 6:05 pm

How accurate is Geoghegan’s reading of Keynes? Not that it really matters too much. It seems like he’s adding his own pet projects, but I’ll admit I’ve never read The General Theory.

Invisible Backhand October 15, 2011 at 6:34 pm

He’s a a labor lawyer and not an economist, but that’s at the heart about what’s wrong with DB’s point. DB always trumpets the advantages of trade for everybody, never the disadvantages for anybody.

“Yes, the economic gains from trade outweigh the losses, but the winners rarely write checks to the losers. And the losers often lose badly. What consolation is it to a Maine shoe worker that trade with Vietnam will make the country as a whole richer? He’s poorer and probably always will be. I’ve gotten those emails too.”

Charles Wheelan

http://www.amazon.com/Naked-Economics-Undressing-Dismal-Science/dp/0393324869

tkwelge October 15, 2011 at 10:39 pm

But this system of creative destruction has largely benefited the poorest in the world over the last 200 years. Before that period, the life of the poor never really improved, even over the course of centuries. We’re much better off having been through this creative destruction.

Invisible Backhand October 15, 2011 at 11:27 pm

Taking credit for science, technology and the industrial revolution? Does creative destruction cure male pattern baldness also?

Sam Grove October 16, 2011 at 12:59 am

All the science and technology required for development is available to North Korea, yet NK remains mired in a no-growth economy, widespread hunger and poverty.

Explain.

dsylexic October 16, 2011 at 1:24 am

wtf? ofcourse,it does in many cases.do you think restricting new medicines into your country so that wigmakers can thrive is the cure to MPB.

dsylexic October 16, 2011 at 1:28 am

there is no consolation to the Maine shoe worker.why should there be?should he get a special treatment just because he was born in Maine? stupid socialists dont understand that beyond one’s family,one needs the price system to tell what is of value and what is not.there is NO reason for the oregonian to subsidize a maine shoemaker? is it your case that there is? if there is,i’d like you to subsidize all of them WITH your own money.
speaking of shoemakers from Maine,i am pretty sure New Balance makes its shoes ONLY in the US and in Maine ,that too (or somewhere in new england). so people and companies who can offer value will still find customers.
so ask your Maine shoemaker to join New Balance if wants to continue making american shoes.

Black Sheep October 16, 2011 at 9:56 am

Yes, and the automobile hurt the horseshoe industry. Change is unavoidable. Competition drives innovation in nature and society. Trench warfare, meet the tank. Tank, meet the anti-tank missile. Maybe the shoemaker revises the business model and targets a different consumer niche. This is how successful small businesses still thrive even when competing against the big box marts. Perhaps the poor shoemaker in Maine won’t be making shoes anymore, but it doesn’t mean there is just nothing to do. Find what they can do better and/or cheaper than the competition.

Winfred October 15, 2011 at 7:16 pm

“Let’s translate the first sentence into terms more revealing: “Of course no country should ever have a net inflow of capital.””

I see the Right Wing of Ministry of Information, here, pretty much does little more than equivocate the vocabulary, obviously for lack of any, in the party of the ideologically lobotomized, to make a point with factual premise.

Speaking of reason…..

My offer to debate any of you rhetorically impotent psychotic stupids (i.e. right wingers) remains open.

On the off chance that one of you pathetic half-wits thinks he or she is up to it, If you’re interested, I’ll be happy to explain how normal/sane people discuss things reasonably, as you’re clearly going to need a crash course in reason.

robert_o October 15, 2011 at 7:56 pm

Your ignorance of even basic economics is telling. Please, do yourself a favor and pick a textbook on the topic. For international trade, I recommend Pop Internationalism by Paul Krugman.

Automatic October 15, 2011 at 8:17 pm

Winfred,

If you have anything substantive to offer to all of us half-wits, then by all means share it. I’m sure we’ll all be riveted. In the mean time, please understand that name calling and bravado are not good substitutes for knowledge, and that most of us are not willing to accept “proof by intimidation” as a valid rhetorical device.

kyle8 October 15, 2011 at 9:03 pm

well since you have not yet demonstrated anything remotely normal or sane then I think I will decline. Stew in your own ideologically induced ignorance. Maybe one day you will grow up.

Sam Grove October 16, 2011 at 12:09 am

When you quit pooping in public.

JoshINHB October 15, 2011 at 8:37 pm

Let’s translate the first sentence into terms more revealing: “Of course no country should ever have a net inflow of capital.”

If a net inflow of capital is inversely proportional to a country’s trade deficit, then how do you explain the enormous capital investment, that transformed China during the past twenty years, coincident with that country’s mercantile trade surpluses?

John Dewey October 16, 2011 at 6:02 am

“Net inflow of capital” tells one nothing at all about the total amount of capital investment of a nation.

First, any calculation of capital movements across borders completely ignores internal investment. A large part of China’s investment came from Chinese sources, and had nothing to do with the nation’s capital account inflows or outflows.

Second, the “net” part of that expression indicates the difference between the capital inflows and the capital outflows. China as a whole could have both massive capital inflows ands massive capital outflows. Some Chinese businesses have benefitted from direct foriegn investment at exactly the same time that the Chinese government has built up its sovereign debt purchases.

Finally, China did not have mercantilist trade surpluses with every nation. I believe China has had fairly large trade deficits with Japan, Australia, South Korea, and Taiwan over the past 15 years.

Don Boudreaux October 16, 2011 at 7:44 am

Yep. Well said.

JoshINHB October 16, 2011 at 10:10 am

A large part of China’s investment came from Chinese sources, and had nothing to do with the nation’s capital account inflows or outflows.

So China bootstrapped itself from a third world basket case to the second largest economy in a generation?

Even Friedman wouldn’t make such an absurd claim.

Second, the “net” part of that expression indicates the difference between the capital inflows and the capital outflows.

Your are hand waving away the meaning of net.

Finally, China did not have mercantilist trade surpluses with every nation. I believe China has had fairly large trade deficits with Japan, Australia, South Korea, and Taiwan over the past 15 years.

Figure 11.5 in this report refutes your claim vis a vis Japan.
http://www.stat.go.jp/english/data/handbook/c11cont.htm

China’s trade deficit with ROK has been approx 1/10th of their surplus with the US and their deficit with Australia has been approx 1/1,000th of their surpluses with the US.

“Fairly larger” is an absurd characterization.

John Dewey October 16, 2011 at 8:00 pm

JoshINHB: “So China bootstrapped itself from a third world basket case to the second largest economy in a generation?”

I did not make that claim, but there is some truth to it. I do not believe, though, that China was “a third world basket case” 20 years ago.

Both the Chinese government and Chinese corporations have invested the equivalent of hundreds of billions of dollars annually in capital goods over the past 25 years. But understand that creating a capital asset can be accomplished by employing labor as well as machinery. And China has lots and lots of labor.

I certainly did not claim that all the investment in capital goods was funded by the Chinese themselves. Hong Kong, Japan, and Singapore, among other nations, have been investing many billions directly in China over the past 15 years. I believe the amount of foreign direct investment in China in 2008 was the equivalent of $92 billion dollars, according to the U.S.-China Business Council.

John Dewey October 16, 2011 at 8:11 pm

>em>JoshINHB: “Your are hand waving away the meaning of net.”

I am handing waving nothing, but I admit to not understanding what you are trying to argue with that statement.

Your question:

“how do you explain the enormous capital investment, that transformed China during the past twenty years, coincident with that country’s mercantile trade surpluses?”

has been answered.

I explained how Chinese corporations can attract massive net inflows of capital investment while the government of China can simultaneously purchase massive amounts of U.S. treasuries. The capital investment in China does occur despite the fact that the “net” capital flow from China is outward.

JoshINHB October 16, 2011 at 10:29 pm

Yes, that is obviously what has happened.

And it is directly counter to Don’s original sarcastic assertion that “Of course no country should ever have a net inflow of capital.” as a consequence of running a current account deficit.

Martin Brock October 15, 2011 at 8:48 pm

If “capital” describes a means of production, I can’t call the purchase of a Treasury security by someone outside of the U.S. an “inflow of capital”, even if the label is consistent with standard usage. Buying entitlement to tax revenue is not investment. Rent seeking is not investment.

The purchase of Treasury securities during the last decade did not increase productivity in the U.S., and the purchase of mortgage backed securities with an implicit government guarantee created a lot of malinvestment in the last decade. The effect of any “net inflow of capital” corresponding to a trade deficit depends upon what we’re calling “capital”.

kyle8 October 15, 2011 at 9:05 pm

You do make a valid point but it is not a valid argument against trade, it is an argument against overspending by the government.

If the government did not crowd out investment then more of those returning dollars would go into private sector investments.

Don Boudreaux October 16, 2011 at 7:45 am

Yep.

Martin Brock October 16, 2011 at 9:55 am

You’re right. I don’t argue against trade; however, rent seeking takes many forms. I begin with Treasury securities, because they’re the most obvious, least deniable example of statutory rents imposed regardless of any comparative advantage, and the volume of Treasury sales alone is very significant.

Without voluminous rent seeking opportunities, a mercantalist state must accept the risks of genuine investment to maintain a persistent trade deficit, but genuine investment does not guarantee profit. A trading partner, mercantalist or otherwise, can’t have any trade deficit it wants indefinitely by investing in a trading partner’s productivity rather than consuming its produce.

Genuine investment might increase productivity in the trading partner until the partner produces goods attractive enough to the investors to narrow the deficit, or investors might suffer losses on their investments, or structural trade deficits might persist while mercantalist fortunes gradually decline relative to the fortunes of trading partners benefiting from subsidies.

In any case, without the rent seeking opportunities, I expect the mercantalism to be counterproductive, and I expect the mercantialist states ultimately to realize this fact and to alter their policies; however, voluminous rent seeking opportunities do exist, so a theoretical assumption behind this expectation is false.

We can’t persuade people to oppose trade barriers with arguments presuming falsehoods. Proponents of tit-for-tat, retaliatory trade barriers counter that perfectly free trade is an academic exercise at best. In the real world, trade is not perfectly free, not remotely. Countless domestic restraints of trade interact with countless foreign restraints of trade. In this context, the optimal policy prescribed by some academic pondering a libertarian utopia is simply irrelevant.

If most people practice turn-the-other-cheek, the practice is a good policy for me as well. I avoid self-destructive conflict this way, and the cost is low, because I rarely encounter someone pursuing another policy.

On the other hand, if most people pursue slap-without-a-credible-threat-of-counter-slap, my turn-the-other-cheek policy gets me slapped a lot.

This argument applied to global trade seems unsound to for various reasons that we can discuss, but people persuaded by the argument are not deterred by people simply ignoring the argument. Furthemore, freer trade without diminished rent seeking opportunities could be worse than the status quo, so advocates of freer trade undermine themselves by advocating one in isolation from the other.

Martin Brock October 16, 2011 at 10:33 am

And when the U.S. increases trade with mercantalist partners and simultaneously increases rent seeking opportunities, a more productive outcome seems very unlikely. I rather expect this trade to create malinvestment in the U.S. while increasing the obligation of U.S. subjects to pay rents to the mercantalists.

Of course, common Chinese subjects are not the mercantalists in China. The uncommon Chinese statesmen ruling common Chinese subjects are. These statesmen have more in common with Dubya and Barack than with their subjects, and Dubya and Barack have more in common with Chinese statesmen than with you and me.

The meaningful “Us vs. Them” is not the U.S. vs. China. It is the subjects of statesmen vs. the statesmen. A global superstate practically exists already. The more we accept the fiction of international rivalry, the more we are pawns in a simple game that statesmen understood long ago and now simply exploit to their advantage. Just look at the Orwellian “Global War on Terror”. It’s not a war between states at all.

vidyohs October 15, 2011 at 10:02 pm

“If “capital” describes a means of production,”

I don’t see any way that capital could be called a means of production, or describe a means of production.

kyle8 October 15, 2011 at 10:05 pm

I think he meant a factor of production.

Martin Brock October 16, 2011 at 10:44 am

“Factor of production” is fine, but I agree with vidyohs. What we routinely call “capital” is not a factor of production. “Capital” sometimes describes a factor of production. Sometimes not. I’m not even sure that most nominal “capital” is truly a factor of production, as opposed to an entitlement to statutory, monopoly rents, anymore. In reality, nominal “capitalists” love statutory rents and continually lobby for more.

jpm October 15, 2011 at 9:01 pm

toggle sarcasm Why it’s because the Chinese are all progressives that they are so successful. It can’t be because of trade, because we all know there is a winner and there is a loser in all transactions. Because China sent us so much stuff, they continuously got screwed. Fortunately, communism is such a superior model, China was able to overcome those massive trading losses.

muirgeo October 15, 2011 at 9:40 pm

Your blog is quickly losing all relevance to the backdrop of global events. As unmanaged globalization and markets have failed people around the world are coming to the streets in massive shows of rejection of the failed ideas promoted here. Your voice will be more and more drowned out by the voices of reality and pragmatism. Reality is taking its wolfish turn and I only hope our leaders and their welathy overlords get out in front of this and address the issues that need to be addressed.

kyle8 October 15, 2011 at 10:06 pm

A small crowd of ignorant and self absorbed young idiots is not a massive rejection of ideas.

muirgeo October 16, 2011 at 5:59 am

A small crowd??? Kyle you ignorant person… its the whole damn world telling you that you’re wrong… and still you talk down to them like some pathetic elitist.

The Other Tim October 15, 2011 at 10:31 pm

I already knew you support mob rule, but I wasn’t aware it extended into the marketplace of ideas. Tell us, how would a rejection of free trade by masses of economic illiterates negate comparative advantage? Can we extend this new power of the mob to more practical purposes? Perhaps we could get a mass of people together to circle a power plant and unbelieve entropy away. Free energy!

muirgeo October 16, 2011 at 6:01 am

Tim it is YOU who is the economic illiterate with the reality aversion. Reality is going to the streets.

The Other Tim October 16, 2011 at 4:05 pm

It’s one thing to suggest your fringe theory ought to displace the mainstream, and it’s quite another to suggest that it already has. To suggest someone is economically illiterate for holding to the economic mainstream is delusional.

James N October 15, 2011 at 10:37 pm

“As unmanaged globalization and markets have failed people around the world are coming to the streets in massive shows of rejection of the failed ideas promoted here.” Unmanaged in what way? Failed people how?

“Reality is taking its wolfish turn and I only hope our leaders and their welathy overlords get out in front of this and address the issues that need to be addressed.” And what pray tell are those?

kyle8 October 15, 2011 at 10:40 pm

And what pray tell are those?

He means the issue of self important left wing asswhipes pretending to be socially conscious.

muirgeo October 16, 2011 at 9:19 am

James N wrote,

” And what pray tell are those?”

The same as in 1776… the people are not being represented by their governments. International corporations and finance are setting policy to benifit the few over the rest.

Deny this if you want but its a fact and the people have a legitimate complaint. They understand that they’ve been ripped off and the global econmy destroyed by global bankters. Their demands are reasonable. Most people tolerate all sorts of inequality but the greedy have no limits.

This…. as i’ve said before, will notgo away with out major poliicy change by our leaders who are owned by extreme wealth. If they do not come to their senses they will be the ones responsible for the mayhem that follows.

James N October 16, 2011 at 10:30 am

“The same as in 1776… the people are not being represented by their governments. International corporations and finance are setting policy to benifit the few over the rest.”

The first part is right, but the second part is wrong. Corporations and finance are not setting any policies, they are ALL being done through the force of government. The same entity that you continually argue should have more power to “manage” markets.

Herein lies what is probably the greatest impediment to us solving the problems we face. The fact of the matter is that government policies, not big business are responsible for our dire consequences. Whether by the hand of excessive taxation, regulatory nightmares, the actions of the Federal Reserve and the obvious corruption of numerous politicians, the problems of our society will almost always trace back to government.

In the most simple terms, no “greedy” businessman can make you do anything against your will, that ability is left to the State and only them. So why do the uninformed masses, (muirgeo) buy the argument that big business and corporations are the problem?

One, because politicians and a complicit media are very good at portraying those that serve in government as benevolent and the businessman as only advancing his own self-interest. Never mind that each and every one of us act in accordance with the same mantra, including our self-serving politicians.
Two, profit has become so demonized in society, that the economically-challenged among us (muirgeo) have no idea its importance in creating all the amazing products and services that impact our lives. It represents the ultimate reason why entrepreneurs and businessman get out of bed every morning in a “self-serving” attempt to please their fellow man and earn their business. Their voluntary business, I might add.
Finally, blaming businessmen is a convenient excuse for individuals who aren’t interested in actually spending the time required to learn about the inner working of economics, politics and public policy (muirgeo).

Granted, big business is a partner in a number of issues that impact our country, under the auspicious connection known as “crony capitalism”. An economic system where the marketplace is substantially shaped by a cozy relationship among government, big business and big labor. Under crony capitalism, government bestows a variety of privileges that are simply unattainable in the free market, including import restrictions, bailouts, subsidies and loan guarantees. But, everyone of these “favors” have their roots in government. And before you start in about the bribes offered by businessmen to gain these privileges, remember, if politicians weren’t in the business of granting favors, every single issue mentioned would be moot. Again, only politicians have the legal authority to enact policy to the determent of the general populace.

DarrenM October 17, 2011 at 12:17 am

Corporations and finance are not setting any policies, they are ALL being done through the force of government.

I believe the operating premise is that “corporations and finance” effectively ‘own’ government. What I find odd is that bankers would destroy the global economy on which their success is based, at least on purpose. It seems a little self-destructive. I would expect the other international lords of finance would be very pissed off an have those bankers executed on the spot. So, I’m not sure what the problem is.

Ken October 17, 2011 at 12:22 am

muirgeo,

the people are not being represented by their governments

And yet your solution to everything is to give ever more power to the government. It’s like you have some sort of disconnect when it comes to cause and effect.

Regards,
Ken

tkwelge October 15, 2011 at 10:41 pm

Clearly there is a dearth of government in the world today. Wait a minute… it seems like there is MORE THAN EVER.

muirgeo October 16, 2011 at 9:21 am

Yes and everywhere it submits to extreme wealth and not the needs oof society and its people.

Methinks1776 October 16, 2011 at 9:39 am

I agree with one word in sentence of drivel: “oof”.

Sam Grove October 16, 2011 at 12:36 pm

You hate man who offers money but love man who points gun at people.

When man with money buys man with gun, you fail to see that man with gun is your obstacle to freedom, not man with money.

You can ignore man with money but not man with gun.

You think man with gun will protect you from man with money, so you want more men with guns ignoring history that men with guns always serve men with money.

You solution is more men with guns and illusion of power over men with guns through vote, but men with guns need men with money, so will ALWAYS serve them.

Game of democracy is illusion of power to the people.

It may be true “that you can’t fool all the people all the time”, but apparently you can fool enough of them to run a large country.

Will and Ariel Durant.

Evidence? Look how media covers Republican primary. Look how media steadfastly ignores Ron Paul campaign.
Ron Paul and Gary Johnson are the libertarian GOP candidates and the word is down that they are not to be given coverage.

Who has decided this?
Men with money who own men with guns.
This scenario upends your charge that men with money want libertarian society.

They do not.

But you are one of the fooled that supports those that are owned by the men with money.

Sam Grove October 16, 2011 at 4:10 pm

To muirgeo, of course.

Methinks1776 October 16, 2011 at 4:12 pm

oof!

Sam Grove October 16, 2011 at 12:11 am

And you’ve been irrelevant all along.

muirgeo October 16, 2011 at 9:22 am

Sure Sam….watch and see how irrelevent I/ we’ve been… watch and see buddy.

Jeff S. October 16, 2011 at 6:54 pm

Look at George, puffing out his chest as he warns us of the coming revolution.

muirgeo October 16, 2011 at 8:55 pm

And how do you think this will play out?

Randy October 16, 2011 at 4:36 am

Muirgeo,
Their shouting will make them hoarse, but it will never make them rich. I’m actually delighted by these throngs of angry socialists, because after they finish blowing off steam they will have to return to their homes, and once there, exhausted, they will begin to really think.

muirgeo October 16, 2011 at 9:24 am

They don’t want to be rich Randy… they want a decent job and a chance to be rich. You really are a people hater. Everyone wants a handout but you.

Emil October 16, 2011 at 10:28 am

you mean every american right?

muirgeo October 16, 2011 at 5:56 am

I love how when individuals interact through (fixed) markets they are always right and their choices should be respected. When they go to the streets to protest what are clearly fixed markets you suddenly couldn’t care less about their individualism and their choices… now they are mobs of irrationality.

You like all oppressors and their cronies of the past will be swept away by your ignorance and lack of understanding of what’s happening in the real world. The real world is telling you what I’ve been telling you here for years. Your ideas of liberty and economic freedom and your denials of reality will will fail in the real world and ultimately make us all more miserable until the elite class you support recognizes the reality you’ve created/support and chosen to ignore. At some point reality becomes impossible to ignore.

Silly ongoings like this post telling the ignorant people to sit down and shut up because the professor is telling you trade is good for you will be of decreasing significance drowned out by the reality of HOW WRONG the professor is.

Emil October 16, 2011 at 10:30 am

” love how when individuals interact through (fixed) markets they are always right and their choices should be respected. When they go to the streets to protest what are clearly fixed markets you suddenly couldn’t care less about their individualism and their choices… now they are mobs of irrationality.”

Well, in one of the two cases they actually have to pay for what they want, in the other they are making wish lists and sending the bill to someone else.

tdp October 15, 2011 at 11:40 pm

Someone needs to explain the following to politicians, pundits, and the American people as a whole:

1) Attacking foreign products and restricting trade raises prices and lowers quality. This is bad for everyone, especially poor people.
2) When you spend more on certain products because of tariffs, people have less money to spend on other products, putting people who make those products out of work.
3) When you import something for cheap and then sell it at a higher price here, you have spent x dollars on something that you can sell for 2x dollars, and have thus added wealth to the economy.
4) Between any arrangement of countries, every country will have a comparative advantage over another country in producing something. If every country produces what it has a comparative advantage in, the maximum number of things are produced, meaning that after trade, everybody has more of everything than they started with.
5) Beyond basic economics that show free trade to benefit everybody, there is an exorbitant amount of evidence showing the benefits of free trade for all involved.
-Yet again, I will plug Johan Norberg’s book In Defense of Global
Capitalism. It is chock full of examples of how free trade has done
more than anything else to eliminate poverty, suffering, inequality,
and political repression in the developing world.
– For every item made in China, the US nets 55% of the profit
-The US spends only 2% of its GDP on Chinese goods, and only
11% of its manufactured products come from China (by $ value)
-Only 3% of jobs lost in the US are due to free trade. The rest are
due to increases in productivity that render workers redundant or
domestic competition.
6) When someone does lose their job to economic competition, the capital used when they were employed can be freed up to employ them in some more gainful manner. Therefore, when government does not get in the way, people who become unemployed will soon find job opportunities in new areas.

Finally, someone needs to tell Al Sharpton and all the other Occupiers/Leftist wackjobs that the policies they are clamoring for make unemployment worse, economic downturn worse, and hurt poor people and the middle class worse while restricting the economy so that only people who already have substantial amounts of money have the resources necessary to profit.

When everyone from Obama to Romney to the Sheeple who Occupy Wall Street or jump up and down slobbering at Glenn Beck rallies and comprise a frighteningly large proportion of the country is espousing policies that will disembowel the American economy and plunge us into bankruptcy and total impotence at home and abroad, I tremble for the fate of this country.

tdp October 15, 2011 at 11:45 pm

I’m writing in Gary Johnson on my 2012 ballot. When I am old enough, if the country is still around and not beyond repair by then, I will run for President and fully and clearly outline, explain, and defend my policies from Day 1 in an effort to convince as many people as possible to support my policies. I will also be sure to kick so much ass in debates that all the other candidates become exposed for the fools they are. It will be a suicide mission and I will not win, but at least in the centuries afterward, people will say “Hey, we should have listened to that guy.”

DarrenM October 17, 2011 at 12:24 am

“Hey, we should have listened to that guy.”

The important thing is to be able to say, “I told you so.” :)

Jim October 16, 2011 at 10:20 am

Here’s a suggestion to have done with this silly argument once and for all.

Use California to test trade deficits, since it has been managed by Progressives for decades. Encourage them to become self-sufficient within their own state since their unemployment is soaring.

Further, have Obama spend as much of his DOE and transportation pool there as he likes at the expense of other states.

Better yet, since LA contains most of the poor in California, declare it a self-sufficiency zone. The government can monitor trade and develop the area as they have been attempting to do for decades. But now, let’s get serious.

We will monitor expenditures, jobs, productivity, and declare success or failure after 10 years. I dare ya to make it work, and submit that the experiment will end long before the time is up.

Vishnu October 16, 2011 at 10:38 am

now i have to ask at this point, so a country lets take the most popular example and say china trades with the us and the us has a current account deficit due to the increase of chinese imports, ok and following this the chinese for the sake of simplicity in the argument invest whatever they have earned from the us and purchases us govt bonds. so even though there is a capital account surplus, does the us govt not pay interest to the chinese on account of the fact that they posses us govt bonds and will this int payment not result in the taxpayers dollar not being spent on other activities of the govt which may be productive?

Methinks1776 October 16, 2011 at 11:09 am

Vishnu, it is difficult to imagine government spending on anything that may be understood to be “productive”.

China’s demand for U.S. Treasurys puts downward pressure on the interest rate at which the U.S. government borrows, reducing the cost of government borrowing. In turn, because all other interest rates are based on the Treasury rate, your borrowing costs are also reduced by China’s willingness to lend to the United States government. It is clear that government will spend no matter what. China’s demand for U.S. sovereign debt just means we’ll go broke slower than Europe.

Martin Brock October 16, 2011 at 11:43 am

Fed easing also puts downward pressure on the interest rate at which the U.S. government borrows, thus increasing government borrowing and government spending, but increased government spending does not reduce the cost of government spending. Increased government spending increases the cost of government spending.

Maybe I can borrow at a low interest rate for some purpose (like a mortgage if I’m very credit worthy) engineered by statesmen, but I’m also competing with a growing state to buy factors of production, and my interest rate on these loans might not be falling. Borrowing costs for small businesses have not fallen with mortgage rates in the U.S. These costs have risen.

Treasury rates are nominally riskless, and the volume of Treasuries is huge and practically unlimited, and creditors are increasingly risk averse, for demographic reasons, so demand for low risk “investment” is rising.

China’s demand for U.S. sovereign debt means that we’ll go broke faster than we would otherwise. That borrowing rather than current taxation fuels growth in the state sector hardly matters. Europe is going broke sooner, because it leads the U.S. in a race to the bottom fueled by states growing faster than real factors of production.

Martin Brock October 16, 2011 at 11:24 am

Buying a U.S. Treasury security is not an investment in the U.S economy. We must reflexively make this point at every opportunity; otherwise, we accept a false premise that opponents of free enterprise will later exploit.

The interest due Chinese purchasers of Treasuries is hardly relevant. The real interest rate is negative anyway. The state’s expenditure of the proceeds of a Treasury sale is the problem. This expenditure diverts real means of production from more productive use.

By expanding the market for the state’s sale of entitlement to tax revenue, foreign trade can fuel the growth of the state, even when domestic forces pull in the opposite direction. This problem is particularly acute when global demand for rents is very great, and this demand is very great currently, because of the demographic transition.

The “baby boom” is nearing retirement, so boomers are trying to convert their growth investments into income investments. Most of us understand this phenomenon in the U.S., and the problem outside of the U.S. is worse. In Europe and Japan, the problem is far worse. The three European nations with the lowest total fertility rates are Greece, Spain and Italy. Ring a bell? Japan’s TFR is lower still.

Even in China, which has a relatively young population now, the problem is worse, because China’s relatively young population ages much more rapidly. The size of China’s labor force peaks in this decade. U.S. labor force growth continues to slow, but the labor force continues to grow, making stagnant employment growth ever more costly.

Don’s argument is based on a false choice, the fallacy of an excluded middle. He argues that a trading partner either consumes or invests, that a trade deficit only represents a preference for investment over consumption and that investment in the U.S. is just as beneficial to the U.S. as current consumption of U.S. goods.

But this argument excludes a very significant, third alternative. A trading partner may consume or invest or seek rents. Confusing investment with rent seeking is incredible, because the former is productive while the latter is destructive. If rent seeking was insignificant compared with investment, Don’s argument might be reasonable regardless of the rent seeking, but rent seeking is not insignificant. It is quantifiably very significant.

I’m not a Cassandra, but we can’t understand a problem by ignoring it.

Sam Grove October 16, 2011 at 12:40 pm

Agreed.

Government as manager must be separated from the economy.

Money must be separated from government.

Martin Brock October 16, 2011 at 5:24 pm

Agreed. Let’s end the Fed, but let’s not make gold a statutory legal tender. Let free markets select standards of value.

Methinks1776 October 16, 2011 at 5:27 pm

Count me in.

vikingvista October 16, 2011 at 10:44 pm

Amen to that.

James N October 16, 2011 at 12:16 pm

” A trading partner may consume or invest or seek rents.” Why is that alternative only reserved for a trading partner? If the dollars never went overseas, but remained with a domestic producer, the problems associated with rent seeking are still prevalent. Why do you assume that it’s a bigger problem with a “trading partner”? It matters not a whit to me if the government, the only entity capable of granting the rent seeking, delivers it to a domestic or foreign producer. Sorry, but your attack on Don’s position is invalid.

Martin Brock October 16, 2011 at 2:15 pm

It isn’t reserved only for an international trading partner, and I never say it is.

Why do you assume that it’s a bigger problem with a “trading partner”?

An international trading partner is more remote from domestic capital markets, less well positioned to invest wisely and subject to greater risk, so I expect a foreign trading partner to be more risk averse and thus more interested in rent seeking, all else being equal.

Furthermore, we aren’t discussing international trading partners generally. We’re specifically discussing international trading partners subsidized by a mercantalist trade policy. A domestic trading partner is not in this category, unless the domestic state subsidizes his produce compared with other domestic producers.

If the state favors a particular domestic producer to increase his market, a producer more inclined than others to finance the state, do you not see the perils of this arrangement?

It matters not a whit to me …

It matters not to me either, but if the rent seekers abroad are more numerous and more eager to seek rents, surely this fact is relevant.

John Dewey October 17, 2011 at 11:33 am

Martin Brock,

Are you arguing that any foreign entity which buys U.S. Treasuries is “seeking rent”? How is a voluntary transaction – where one party lends money and the other pays interest on loan proceeds – “rent seeking”?

John Dewey October 17, 2011 at 11:56 am

Martin Brock: “Buying a U.S. Treasury security is not an investment in the U.S economy.”

From the perspective of the investor, purchasing a bond of any sort is an investment. It doesn’t matter what entity issues the bond, it is still an investment for the investor.

I guess we can argue all day about whether the use of government bonds to build infrastructure or to increase military capacity or to prevent an industry from failing is an economic investment. I think all three qualify as investment, even though hardly the most efficient use of investment.

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