… thinks that he makes an irrefutable point – and a point that refutes the case for free trade – when he insists that “real wealth is productive capacity; period.” But he’s deeply mistaken. The protectionist misses at least two vital facts.
The first fact that he misses is that real wealth is ultimately not productive capacity but, instead, the goods and services that that capacity churns out for people to consume. The people of a country that is stuffed from shore to shore with the mightiest productive capacity would be impoverished if none or only a minuscule fraction of that capacity is put to use.
The second fact that the protectionist misses is that in a world in which individuals (or families) are not literally self-sufficient – that is, in the modern real world – the productive capacity of any economic unit smaller than all humanity is found not only, indeed not mainly, in the physical volume of output that can be produced directly by that economic unit but, instead, by how many goods and services that physical volume of output can be exchanged for on the market with other economic units.
Suppose that Jones owns a ball-bearing factory. Jones’s wealth does not grow simply because the productive capacity of his ball-bearing factory increases. Jones himself personally has little, and likely no, use for ball-bearings. Even if Jones successfully increases the productive capacity of his ball-bearing factory to unprecedented heights, he’ll remain a pauper if no one wants to give him anything in exchange for his ball-bearings. Ditto if he either refuses to exchange, or is prevented from exchanging, his ball-bearings for goods and services produced by others. And what is true for Jones is true for any person, any family, any town, any region, any country.
Put in a slightly different way: because in a world in which individuals (or families) are not literally self-sufficient – that is, in the modern real world – the productive capacity of any economic unit depends upon what the outputs of that capacity can be exchanged for, trade restrictions reduce the productive capacity of the nation. Trade restrictions reduce the production capacity of the nation by reducing the amount of goods and services that the output of that capacity can be exchanged for.
The protectionist denies this conclusion. He does so for two reasons. First, he see only those factories, offices, and jobs lost in the home country because of trade; he is chronically blind to those factories, offices, and jobs that are created or expanded by trade.
Second, the protectionist overlooks the fact that the ultimate goal of economic activity is not production but consumption. Hence, he reckons productive capacity only by that which is produced in the home country rather than by the amount of goods and services for consumption that can be gotten in exchange for that which is produced in the home country.
Consider two hypothetical countries: Smilania and Factoria. In Smilania, each of its citizens daily receives from around the world enormous volumes of goods and services. To earn this bounty, all that any citizen of Smilania must do is to smile for one second each day into his or her computer camera – each such smile being so enormously enjoyed by foreigners that foreigners send to Smilania huge volumes of goods and services. In Smilania there are no factories or farms. The productive capacity of Smilania lies mostly in its residents’ computer connections and their willingness to smile for foreigners.
Factoria, in contrast to Smilania, is stuffed with highly productive factories. And these factories operate 24/7/365, churning out goods and services for the citizens of Factoria to consume. Yet the amount of goods and services that Factoria’s factories allow the citizens of Factoria to consume is only one-half of the amount of goods and services that the citizens of Smilania regularly consume.
Which country – Smilania or Factoria – has the greatest productive capacity? The protectionist answers Factoria. But of course the correct answer is Smilania. Among the many facts of reality that the protectionist does not grasp is that if the term “a country’s productive capacity” has an economically sensible meaning, that meaning is found in the amount of goods and services that the people of that country can command for their consumption and not how much the people of that country manage to produce directly. The amount that they manage to produce directly is worthwhile to them only insofar as it enhances their ability to consume. The protectionist cannot get his mind around this elementary reality.
This protectionist denies that Jeff Bezos is wealthy because Jeff Bezos, personally, possesses virtually no capacity to produce goods and services directly for his and his family’s use.