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More on Why Milton Friedman Was Not Naive about Trade

Here’s a letter to the Wall Street Journal:

Bill Bishop writes that the late Milton Friedman, in supporting unilateral free trade, was unaware that foreigners who export to America can “buy U.S. capital stock – companies and land” (Letters, April 3).  Mr. Bishop then concludes that “If this persisted long enough, Americans would wind up owning very little of the country’s production and the profits going abroad.”

First, because the ability of foreigners to use their export earnings to invest abroad is learned of by students in freshmen economics classes, it’s ludicrous to suggest that this possibility was unknown to a Nobel laureate economist.

Second, the reason that the possibility of inward foreign investment did not deter Friedman from calling on the U.S. government to adopt a policy of unilateral free trade is that he understood that such investment helps rather than harms us – and that the freer is trade, the more such investment we receive.

Contrary to Mr. Bishop’s implicit assumption, the amount of capital in the U.S. isn’t fixed.  Foreigners can acquire more of it without Americans losing any of it.  Indeed, because foreign investment in the U.S. often complements Americans’ own investments here – and because, by creating more capital on our shores, foreign investment in the U.S. makes American workers more productive – America’s consistent trade deficits over the past four decades have corresponded with a steady increase in the net worth of U.S. households and nonprofit organizations as these trade deficits have led to more foreign investment in the U.S.  Today, the real net worth of U.S. households and nonprofits is at an all-time high, and about 250 percent higher than it was in 1977* – the year that the U.S. began consistently to run trade deficits.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

* The data in this graph are in nominal dollars.  I adjusted them for inflation with this calculator – a calculator that, using the CPI, likely overstates inflation and, hence, understates the growth in real net worth.