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The following letter began life as a comment here at the Cafe, but it grew up into a full-fledged open letter to a Cafe patron who most of you will recognize.
Dr. George Balella
Dr. Balella:
Disagreeing [2] with my open letter to Barack Obama [3] in which I insist that the benefits of trade are the gains it generates for consumers and not whatever enhanced sales, payments, and profits it generates for producers, you comment at my blog that “the Wealth of Nations is based on what they produce not what they consume.”
You miss the point. Of course it’s true that production must increase if consumption is to increase. I know not a single advocate of free trade who has ever denied this all-too-obvious fact. But production, although of undeniable importance, is merely the means. The end of trade – indeed, the end of all economic activity – is consumption.
To test how confident you are that Adam Smith [4] (in whose tradition I follow) was wrong – to probe just how convinced you are that people’s wealth really “is based on what they produce [and] not on what they consume” – I ask you two questions. First, who is wealthier: slaves or their masters? If you are correct about Smith being wrong, then you must answer “slaves,” for slaves produce much and consume little while their masters produce little and consume much. Second, do workers grow wealthier over time if their productivity increases but their pay does not? If you are correct about Smith being wrong, then you must answer “yes,” for according to your express objection to my letter, wealth is based on what people produce and “not what they consume.”
Because I’m confident that you understand that masters are wealthier than slaves, and that workers whose pay remains stagnant as their productivity rises do not grow wealthier, then you understand that the ultimate purpose of all economic activity is consumption and not production. I encourage you now to apply this understanding consistently.
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
….
Dr. Balella’s comment suffers from several other problems, but I focus above only on the core and most glaring one.