Hamming It Up

by Don Boudreaux on May 31, 2013

in Myths and Fallacies, Seen and Unseen, Trade

Here’s a letter to a correspondent; his name is used with his kind permission:

Mr. Terry Coleman

Dear Mr. Coleman:

You ask how I can “sit idle” while the Chinese buy Virginia-based Smithfield ham.  “American capital,” you insist, “goes to China, lowering our capital [stock].”  You challenge me to defend “this scary trend.”

Meeting your challenge is easy.  There’s much to say, but I limit myself to two points.

First, the stock of capital isn’t fixed.  Consider that the American sellers of Smithfield might well use the proceeds of the sale to launch or to expand other businesses.  It’s simply untrue that sales of this sort “necessarily cut our ownership stake in our own economy.”

Second, if Uncle Sam erects obstacles to foreign purchases of U.S.-based companies, the expected return to starting and developing businesses in the U.S. falls.  The reason is that such government intervention lops off a large chunk of potential future buyers for such companies.  Mr. Smith starts his company today hoping, no doubt, to own and operate it for a while.  But he knows that if his circumstances change – say, he gets ill, old, or disinterested – he might want to sell his firm.  By obstructing foreigners from entering the market of potential future buyers of U.S.-based firms, government would reduce the expected future sales price of Mr. Smith’s company – an effect that, through capital-market operations, would reduce the value of that company even today.

Government restrictions on foreign purchases of American companies would make it more difficult for Mr. Smith and other American entrepreneurs – including those who are never destined to sell their companies to foreigners – to start firms today.  It is, therefore, intervention of the sort that you favor – and not the foreign purchases that so worry you – that would permanently shrink the size of America’s (and Americans’) capital stock.

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

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