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Continuing Correspondence with Ian Fletcher

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Mr. Ian Fletcher
Coalition for a Prosperous America
700 12th St., NW
Washington, DC  20005

Dear Mr. Fletcher:

Many thanks for your replies to my e-mail of yesterday [2].

You write in your first e-mail that a U.S. trade deficit “is merely the transfer of existing American investments to foreign ownership to compensate foreigners for shipping us more stuff than we ship them.  And because ownership of assets is transferred, their net worth goes up and ours goes down: they are richer than they would have been, and we are poorer.  Furthermore, they will receive the future returns on those assets and we won’t.”  In a follow-up note you claim that when the Swedish furniture retailer Ikea builds a store in America “Swedish, rather than American, investors *own* an Ikea store in the U.S., Swedish investors are richer, by the size of the investment, than they would have been, and American investors are correspondingly poorer.”

With respect, there are so many mistakes and misconceptions lurking in your replies that a response much longer than a routine e-mail note is required to address them all.  Yet although I* (and scholars far more knowledgeable and articulate than I am [3]) have written extensively on this issue, I welcome the opportunity, in coming days, to do so again, because a faulty understanding (such as yours) of the trade deficit fuels calls (such as yours) for protectionist policies whose adoption would make us less prosperous, less peaceful, and less free.

But I can’t resist here just one quick query: when my Virginia neighbor Mr. Jones opens a successful retail shop in Virginia, does his success make me poorer?  If not, why would my global neighbor Mr. Ikea’s opening a successful retail shop in Virginia make me poorer?

This letter, though, being already too long on a holiday weekend, I close simply with a quotation from Adam Smith’s Wealth of Nations – a quotation that proves nothing except that concerns such as yours are ancient, have proven again and again to be without merit, and have been addressed by serious economists since the launch of our discipline:

“There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavourable balance of trade.  After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favour and against their neighbours, it does not appear that any one nation in Europe has been in any respect impoverished by this cause.  Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system [i.e., mercantilism] would lead us to expect, have been enriched by it.”**

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

http://cafehayek.com/category/balance-of-payments [4]

** Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations [5] (Indianapolis: Liberty Fund, 1981 [1776]), Vol. 1, pp. 496-497.  This quotation appears in Book IV, Chapter  3 [6].