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An Economy Is Not a Business

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Mr. Charlie Naumov

Mr. Naumov:

Good to hear from you again.

You ask why I’m “comfortable ignoring Donald Trump’s business expertise” when I criticize his “resistance to trade.”

A business person’s success at making money no more implies that he or she has a scientific understanding of economics than does a rock-star’s success at making music imply that he or she has a scientific understanding of acoustics.  Economics and business are simply not the same thing.  And an economy is emphatically not a business.

A business is an organization for production and sales; it is designed and managed to yield profit.  The yielding of the profit is the business’s rationale.  And while managing his firm to yield maximum profit is the ultimate goal of the business person as a business person, the ultimate goal of the business person as a human being is not to maximize the value of what he produces and sells over the value of what he purchases and consumes.  (Any business person who lives in this way is a genuine miser.  His personal standard of living is as low as it can possibly be, consistent with his continuing to survive and operate his business profitably.)  As a human being, the business person’s ultimate goal is, as economists say, to maximize his utility.  Put more sensibly, it is to lead as full and as fulfilling a life as possible – a process that requires that the business person consume, as a human being, goods and services.

To be expert at business, therefore, is to be expert at only one part of the range of human activities that make up an economy.  A person succeeds in business only if he manages (as we say colloquially) to make money.  So the businessman’s attention as a businessman is to make as much money as possible; it is to maximize profits; it is to have as much money roll in to his firm and as little money as possible roll out of his firm, all in the quest to accumulate profits as great as possible.

But what’s the point of making money – of maximizing profits?  Ultimately it is to enhance the businessman’s ability to consume.  The successful businessman withdraws from his business the profits he earns and spends them (or leaves them to be spent by his heirs and designees) on consumption goods and services.  Yet consumption itself does not require special expertise (or at least it doesn’t require the kind of expertise that yields business profits).  Personal (or familial) consumption is no part of the business.

Because the ultimate goal of economic activity is consumption – because to fully comprehend the function and the ‘purpose’ of an economy requires an appreciation of the reality that consumption is the ultimate point of economic activity – expertise at business not only is not expertise at comprehending the economy, it too often blinds business people to the economy’s ultimate rationale.

Trump, like many a business person, judges an economy as he judges his business: he asks ‘By how much are our production and sales expanding relative to our purchases?’  This question is the wrong one to ask about an economy, whose performance should be judged only by how much ordinary people’s ability to consume improves over time (rather than by how much the economy’s sales grow relative to its purchases).  So when Trump sees Americans buy imports, he sees money flow out of what he mistakenly imagines to be America, Inc.  Thinking of the American economy as being one gargantuan business, Trump mistakenly sees imports as costs that drain this ‘business’ of resources rather than as goods and services made possible because the economy is successfully fulfilling its ultimate purpose – namely, to improve people’s standard of living by giving them ever-greater access to goods and services for consumption.

…..

I am painfully aware of my inability to make myself sufficiently clear on this point.  And the differences between a business and an economy are more numerous than I’ve suggested above.  But this letter is already too long.  I end simply by saying that if the American economy really were run as if it were a business the goal of which is to maximize monetary profits, then every American man, woman, and child would live like a pauper because any consumption beyond what is necessary to keep the American people fully productive as workers and as business people would reduce the ‘profits’ of America, Inc.  Were the American economy really run as the logic of people such as Trump implies that it should be run, all Americans would impoverish themselves as they enrich non-Americans with all of the goods and services that we export to them – exports for which we refuse to accept any imports in exchange.  Our profits – measured as our “trade surplus” – would be enormous; we’d have lots of money.  Our well-being would be minimal; we’d have almost no goods and services for our consumption.

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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