But the modern economic system is composed of a number of different countries, each of which trades with each of the others. There is no reason to expect that one country’s balance of payments with any other individual country will be in equilibrium.
DBx: Indisputably so.
I explain to my econ-principles students that whenever they encounter anyone complaining about (or celebrating) a bilateral trade deficit or surplus – complaining about, for example, the so-called “U.S. trade deficit with China” or “China’s trade surplus with America” – they should conclude immediately and without qualification that the person who is complaining (or celebrating) either doesn’t know a darn thing about the economics of trade or is trying to bamboozle the audience with nonsense.
As Haberler says, there is simply no reason in our world of more than two countries whose residents participate in global commerce to expect that any pair of them will import to each other exactly (or even close to) the same value that they export to each other.
Talk of bilateral trade deficits is the economic equivalent of claims that the earth is flat and sits atop a stack of turtles all the way down, of cancer being curable only with magic crystals, or of the planet Mars literally being inhabited by little green creatures with antennae. If the president of the United States actually expressed a belief in such things, he or she would immediately be revealed as an ignoramus unfit to work as a substitute kindergarten teacher, and much less to exercise enormous power over hundreds of millions of people.
And yet today Trump and members of his administration – as well as too many other Washington grandees, both Republican and Democrat – routinely complain of the U.S. trade deficit with China.
If the 18 signatories really are asking only that taxes be raised (as they put it) “on us” – that is, on those signatories only – the letter is pointless given that nothing prevents any of them from writing checks to the government of whatever size they choose. But if – despite their “on us,” and as is actually the case – the plea is that taxes be raised on the many very rich people who did not sign the letter, then the letter is deceptive. It is, in this case, actually a plea for government to raise taxes not just on the small number of signatories but also on a much larger number of non-signatories. Yet what’s headline-making in that?!
Compared to the impression of self-sacrificing generosity conveyed by the headline “Tax us more,” far less newsworthy is a plea for government to raise taxes on other people to compel them to join in paying for one’s pet causes.
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
The fact is, however, that the trade deficit has nothing to do with unfair trade and everything to do with the world’s confidence in the U.S. economy. If anything, annual trade deficits mean the United States is winning hundreds of billions of dollars in net inflows of foreign investment every year. Inward investment – rather than export growth – is the real prize of international competition and it tends to reward good policies.
Sen. Bernie Sanders doesn’t propose to retire all student debt with money raised from Wall Street; he proposes to retire this debt with money taken from Wall Street.
An entrepreneur raises money when she entices venture capitalists voluntarily to risk their own money to back her business plan. A business raises money when it motivates investors voluntarily to buy its shares issued in an IPO. A development officer raises money when he persuades generous souls voluntarily to contribute funds to an institution or cause that the generous souls support. Government, in contrast, doesn’t raise money; it takes money.
Unlike people who actually raise money, Sanders doesn’t have to creatively present those with money with a win-win proposal. No. Like a thug well-armed, he simply and uncreatively – and with a motivation utterly primitive – seizes other people’s money.
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
Some good sense runs through Robert Samuelson’s plea for better ECON 101 textbooks (“It’s time we tear up our economics textbooks and start over,” June 24). But he misses a deeper problem that infects too much economics instruction – namely, the pretense that the economy is a relatively simple mechanism the performance of which can be improved by economists in the same way that the performance of a machine is improved by engineers.
Too few of today’s economics texts are infused with Adam Smith’s understanding that the economy is an emergent and dynamic order that was not, and could not possibly be, designed – and, hence, that cannot possibly be successfully engineered.
Also, and contrary to the impression conveyed by too many economics texts, the economy is not a device or an organization with a purpose. It is, instead, the result of the multitude of interactions of hundreds of millions of diverse individual entities – persons, households, firms, and governments – each pursuing its own purposes. The fact that the results of this spontaneous order can be described in ways – such as “U.S. GDP” or “the economic growth rate” – that give it the appearance of being a unitary thing with its own purpose does not turn this apparition into reality.
Competent intro-economics professors keep their aspirations modest. In my case, these are two. The first is to impress upon my students the full weight of the fact that the economy is an inconceivably complex order of interactions that cannot possibly be engineered. The second is to inspire students always to ask questions that too often go unasked – questions such as “From where will the resources come to provide that service?” “Why should Sam’s assessment of Sally’s choices be regarded more highly than Sally’s own assessment?” “What consequences beyond the obvious ones might result from that government action?” And, most importantly of all, “As compared to what?”
Students who successfully complete any well-taught economics course do not have their egos inflated with delusions that they can advise Leviathan to engineer improvements in society. Quite the opposite. But these students do emerge with the too-rare humility that marks those who understand that the best service they can offer is to ask penetrating and pertinent questions that are asked by almost no others.
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
Yet while understanding the ethics of sincere protectionists is easy, for any sensible person to understand their economic arguments is quite a challenge. To enter the mind of a sincere protectionist is to step, like Alice, through the looking-glass. Up becomes down. Light becomes dark. Yes becomes no. More becomes less. Less becomes more. Everything is backwards, twisted, bizarro, and ultimately incomprehensible.
Sincere protectionists are in Wonderland.
Whenever a person of good sense explores the sincere-protectionists’ Wonderland, that person soon gets a headache. If he or she continues that exploration for too long without a break, severe nausea sets in. The Wonderland of sincere protectionists is truly a crackpot unreality.
What such an exploration of the sincere-protectionists’ Wonderland first reveals, of course, are its most obvious contradictions. And no protectionist claim is more obviously contradictory than this: residents of the home country will have more goods and services to buy, and all at lower prices, the fewer are the goods and services offered for sale in the home country by foreigners.
A variation on this incredible specimen of illogic is the protectionists’ conviction that importing goods and services is the price people pay to secure the privilege of exporting goods and services. Equally perverse is protectionists’ fear of trade deficits, for to fear trade deficits is to fear foreigners’ willingness to increase the amount of capital invested in your country. Such a fear is akin, say, to the citizens of Anytown, USA, fearing the building in Anytown of a new factory that will employ workers and produce valuable goods to be made available for sale in Anytown.
And let’s not forget this lulu of ludicrousness: protectionists’ certitude that the victims of government X’s molestation of its citizens with import tariffs and export subsidies are not the citizens of country X but, rather, the citizens of country Y who – the ludicrousness escalates – can be sheltered from this alleged molestation only if they are molested in like fashion by their own government.
Steve Hanke explains that Trump is clueless about trade. (I pick one small nit with Steve’s excellent essay: when a country runs a trade deficit, the accompanying excess of domestic investment over domestic savings really is not a “defect,” although that is the term that is conventionally used. The term “deficit” suggests a shortfall. But the “deficit” in “trade deficit” is not a shortfall. Because the amount of capital in the world, or in any country, isn’t fixed, the excess of domestic investment over domestic savings can be – and in the U.S. is to a large extent – simply the net amount of additional investment that foreigners choose in make in the domestic economy.)
… is from page 295 of my late Nobel-laureate colleague Jim Buchanan’s 1976 paper “The Justice of Natural Liberty,” as it is reprinted in volume 1 of The Collected Works of James M. Buchanan: The Logical Foundations of Constitutional Liberty (1999); this paper originally appeared in the January 1976 issue of the Journal of Legal Studies (footnote deleted):
A. L. Macfie makes the distinction between what he calls the Scottish method, characteristic of Adam Smith’s approach to problems of social policy, and the scientific or analytical method which is more familiar to modern social scientists. In the former, the center of attention lay in the society as observed, rather than in the idealized version of that society considered as an abstraction.
DBx: Adam Smith did social science correctly. He had no illusions that either human beings as individuals, or the economies and societies to which human actions give rise, are plastic to be molded at will by the state, by intellectuals, or even by history.
Yes, the state matters. And ideas matter. And history matters. And as Deirdre McCloskey reminds us (because our devotion to Science prompts us to forget), the ways we talk – the words and phrases we use – matter. But there is nevertheless at bottom an unchanging human nature that accounts for more than banal realities such as that flapping our arms does not allow us to fly.
We humans are not perfectible according to any of the standards of perfection endorsed, if usually only implicitly, by the typical professor, politician, pundit, or preacher. At least as importantly, we humans are not science projects. Nor is society a science project. And nor is society an organization that has either some goals the achievement of which can be better assured with skillful social engineering, or some destiny to which it is being led by history or by “great” men or women or classes.
Adam Smith understood these basic truths about human beings and about society. It is an understanding that fosters humility, but one that also opens the eyes of those who have it to the wonders of emergent economic and social orders.
The worst market failure is the market’s poor public relations. By far.
The market is far too quiet and modest about its countless brilliant achievements. The market routinely brings forth astonishing innovations that benefit billions, yet most of these innovations go unnoticed by most people. Worse, when pointed out, each one of these achievements is likely to be regarded by intellectuals with contempt and sometimes even with scorn.
Very few of the genuine achievements of markets – routine achievements such as shaving a few cents (meaning, a few real resources) off of the cost of producing lumber or laundry detergent; expanding breakfast-cereal and deodorant options available to consumers; arranging affordable and safe intercontinental jet travel; not merely building but making widely available better mousetraps and MacBooks and Marvel Comics movies – are celebrated. These achievements, though, occur with remarkable regularity. Throughout each day each of us consumes the fruits of these achievements. Our lives are improved by them. But we don’t notice them. We instead complain that Uber uses peak-load pricing and that Jeff Bezos has multiple times more money than me.
It’s nuts.
The market needs much better public relations. What’s with so many people believing that the likes of Elizabeth Warren or Bernie Sanders or Donald Trump are so much more intelligent, informed, and enlightened than are each of the millions of ordinary men and women who each day use their talents to sustain and improve the modern world?
If you doubt me, look at this video about the sheer genius – genius fueled by the profit motive – that has gone into the creation of the modern aluminum can. (I thank my son, Thomas, for alerting me to this video.)
But the modern economic system is composed of a number of different countries, each of which trades with each of the others. There is no reason to expect that one country’s balance of payments with any other individual country will be in equilibrium.
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he fact is, however, that the trade deficit has nothing to do with unfair trade and everything to do with the world’s confidence in the U.S. economy. If anything, annual trade deficits mean the United States is winning hundreds of billions of dollars in net inflows of foreign investment every year. Inward investment – rather than export growth – is the real prize of international competition and it tends to reward good policies.
A. L. Macfie makes the distinction between what he calls the Scottish method, characteristic of Adam Smith’s approach to problems of social policy, and the scientific or analytical method which is more familiar to modern social scientists. In the former, the center of attention lay in the society as observed, rather than in the idealized version of that society considered as an abstraction.
