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Quotation of the Day…

… is from pages 69-70 of the 1992 Liberty Fund edition of John Taylor‘s 1822 book, Tyranny Unmasked; much of this powerful and insightful work is devoted to challenging the arguments of a January 1821 report of the United States Congressional Committee of Manufactures calling for tariffs to help expand industry:

Unknown-2“The excess of exports over imports is the rate of profit” [say the mercantilists who are always obsessed with the so-called ‘balance of trade’].  However impossible it may be to ascertain this excess (since every calculation is deranged as soon as it is made by the perpetual fluctuations of commerce) it is not hard to discover the sophistry of the position itself.  Both exports and imports are property, of which money is the emblem.  Suppose trade was carried on by importing and exporting the emblem only of the things it represents.  Where would be the misfortune of importing regularly more money than we exported?  It would lie only in its exuberance, depreciation, and inutility, arising from the inhibition to exchange it for foreign commodities.  If there is any difference between trading in the emblem, or in the substance itself, it is in favour of the latter, because a surplus of the emblem would be less useful than a surplus of the substance.  The latter affords more comforts, excites more industry, and employs more shipping. The substance is also as reexportable as the shadow.

DBx: In other words, mercantilists think that that trade is good that, at any moment in time, brings to, and keeps within, the home country as much money (“the emblem”) as possible.  Free traders understand that that trade is good that brings to the home country, over time, as many real goods and services (“the substance”) as possible.

A business firm is correctly judged by how much money it earns – that is, its monetary profits.  If a business firm were a conscious being, it’s purpose would be to make as much money as possible.  But a business firm is not an end in itself.  A business firm is a means for its owners to enrich themselves.  The business firm furthers its owners’ goal by earning, for its owners, money.  But this money is of use – of value – to owners only because the owners can then exchange it for real goods and services for themselves and their households.  That is, while the ultimate goal of each business, as such, is to maximize over time the excess of its monetary inflows over its monetary outflows, these monetary profits are sought by business owners only because they can then be spent to buy real goods and services for personal consumption (considered broadly, including philanthropic uses).

Suppose that a business owner – let’s say, Donald Trump – is informed by god that all of Trump’s monetary wealth and all of the profits that Trump’s business will earn from here on in will be converted by god into Monopoly money.  The number of “dollars” of Monopoly money will be the same as the number of U.S. dollars that businessman Trump would have counted, as his own, prior to this intervention by the almighty.  The only change is that Trump’s net monetary worth is now all in Monopoly money.

Trump’s business continues to earn profits, but Trump receives these profits – billions of Monopoly dollars annually – only the the form of Monopoly dollars.

How wealthy would Mr. Trump be made by this bit of divine intervention?  He’d have lots of stuff called “money” or “dollars.”  But, of course, Trump could not exchange any of this money for any real goods or services.  He couldn’t use these “dollars” to buy a private jet, to buy other businesses, to buy foreign currencies, to attract gorgeous mistresses, to pay his child’s school tuition, or to buy clothing, shelter, or food.  This bit of divine intervention would, in fact, make Trump as destitute as a stray dog, despite his having on hand billions of pieces of money called “dollars.”

The lesson is that mercantilists, such as Trump, stop their analysis of reality in the middle of the story.  They don’t follow it to the end.  Mercantilists think that the story ends with businesses.  Because the goal of each business is to earn maximum net monetary income – because for each business a monetary outlay is justified only if and insofar as that outlay results in a larger monetary inflow – mercantilists mistakenly suppose that a nation’s trade should be judged by the same criterion.  Thus, mercantilists wrongly conclude that the people of a nation are made richer the greater the net amount of money they take in from abroad.  Mercantilists tolerate monetary outflows to foreigners only if and insofar as these outflows result in larger monetary inflows.  This misunderstanding is the chief reason why mercantilists believe a trade deficit to be bad and a trade surplus to be good.

But  mercantilists forget that, because each actual business is meant ultimately to enable its owners to increase their consumption of real goods and services, the ultimate goal of each business is achieved only if its owners actually spend their money on real goods and services.  This forgetfulness leads mercantilists to the false conclusion that a nation grows richer from trade only as it accumulates money from trade, and that any and all uses of money to acquire from foreigners real goods and services for consumption (rather than to further increase monetary inflows) make the nation poorer and are a sign of bad trade arrangements.

In short, whereas real people would be mighty – and rightly – upset to discover that all of their money mysteriously becomes Monopoly money when they try to spend it on imports, mercantilists would judge this situation to be ideal – ideal, that is, if the mercantilists could also then somehow convince the domestic population to continue to use their time, effort, and resources to produce goods for sale to foreigners.  “Work and export in exchange for oodles and bundles of Monopoly money!” is a difficult sell.



To recognize that the ultimate goal of trade – indeed, the ultimate goal of all economic activity – is to increase people’s consumption of real goods and services is not to deny that people can, and sometimes do, consume excessively – that is, consume today in a manner that causes one’s lifetime consumption opportunities to fall by such an amount that these people, when reflecting as rationally as is appropriate, will one day judge to be “too much.”  Sally the individual can be profligate and consume too much today.  So too can Sally and husband Steve as a household.  Indeed, so, too, can Sally, Steve, and most of their fellow countrymen and countrywomen.  This possibility, however, in no way makes the mercantilist misunderstanding identified above any less ‘mis’ or any less dangerous.