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Costs Are Not Benefits; Reducing Costs Is Not Harmful

Commenting on this post, rickweber says:

I think I understand Paul Craig Roberts’ argument that free-trade may hurt one nation in the short-run (if they are significantly different).

My take on P.C. Roberts’s concern is not simply that free trade can lead to short-run losses for a rich nation but, rather, that free trade will lead to impoverishment over the long-run.  (About five years ago he predicted somewhere that unless the U.S. protects its workers from low-wage foreign workers, the U.S. would be a third-world country in twenty years.)

A more germane point is that no one has ever denied that changes in trading patterns can, and do, reduce the incomes of some persons.  (As I often point out, the popularity of the Atkins diet hurt some bakers and brewers, just as it helped some butchers.)  To go from this rather banal fact to P.C. Roberts’s conclusion that trade with a significantly poorer country will harm a rich nation, though, is quite a leap.

And how does one measure “hurt a nation”?  The fact that some domestic-workers’ wages fall, or that some domestic-firms lose market share, cannot be the relevant test because, again, those things are the regular and unavoidable consequences of market economies guided ultimately by consumer sovereignty.  Trade across international borders plays no special role in causing such things.

So the phrase “hurt one nation,” to have intellectual and policy traction, must be read to imply something worse — say, a sustained decline in a country’s real per-capita income, or a sustained decline in the ability of ordinary citizens of that country to consume.

But on this more meaningful reading of “hurt one nation,” P.C. Roberts is clearly mistaken.  How can a nation be hurt in this way if it gains greater access to lower-cost inputs?

Suppose, for example, that a genius invents a low-cost machine (much like the one in Star Trek) that can safely and comfortably transport human beings from point A to point B — from our home to the local supermarket, or from our home to Tahiti — instantaneously and for only pennies per transport.  This machine is soon sold for $1.99 and becomes, say, an app on a cell-phone or is clipped on to one’s belt.

The great majority of Americans who now work in the transportation and travel industries would lose their jobs.  The demand for automobiles would plummet, as would the demand for airplanes and for airline services.  Even the demand for hotels and motels would fall dramatically, as many business travelers would just beam themselves back home for the night rather than sleep in a far-away, strange bed.

But would America be made poorer by this marvelous invention?  Of course not.  We’d be made materially much richer.

The low-cost availability of a device that does away with our need to spend lots of time and resources building cars, flying airplanes, and staffing hotels is not fundamentally different than is the low-cost availability of whatever goods and services become newly available to us as a result of freer trade.