My On-Going Discussion with David Henderson on the Ultimate Purpose of Trade

by Don Boudreaux on June 6, 2019

in Balance of Payments, Myths and Fallacies, Trade

UPDATE: I misread David’s comment. He did not say that I was trying to redefine imports; rather, David correctly noted that an EconLog commenter was attempting to salvage my point by redefining imports. I apologize for my careless reading.

To keep the record straight I will keep this post on-line to serve as a reminder for me to be more careful in my reading. (Also, other than the part about attributing to David the accusation that it is I who am redefining imports, I stand by the economic substance of the post.)

……….

In a comment yesterday at EconLog, David Henderson wrote that my “point is to redefine imports in a way that they have never been defined.” David here refers both to my response last month to a mercantilist op-ed by Steve Moore and to my earlier comments on David’s argument that “imports are not necessary for exporters to gain from exporting.”

But my point is not to redefine imports. Here’s a slightly modified version of the comment that I left at EconLog in response to David’s claim.

David: I don’t believe that I’m redefining imports in a way that they have never been defined. I am saying that when I sell something I can cash out the proceeds for goods or services immediately, or I can do so in the future, holding financial instruments in the interim. When these options are exercised across national boundaries, imports occur, in the first case, immediately or, in the second case, in the future.

I do not define financial instruments as imports. They, of course, are not imports. But these instruments are cashed out later for imports. And because it is the prospect of cashing out these financial instruments for imports that gives these instruments value, imports are indeed necessary for exporters to gain from exporting.

(There’s one exception to my defense that I do not redefine imports. It is my claim that foreign real estate purchased for consumption purposes – although not real estate purchased for investment purposes – can be considered to be an import. I believe further that economically any purchase of foreign real estate for consumption purposes should be considered to be an import, in the same way that the renting of a hotel room in a foreign country is considered to be an import.)

For purposes of my point in my original response to Steve Moore, the timing of the arrival of imports is inconsequential.

Again, my only point in writing the passage that you, David, quote was to counter Moore’s mercantilist suggestion that the ultimate gains from international trade come in the form of exports rather than in the form of imports. My point, of course, is a thoroughly Smithian one. I did not intend to suggest that all of those gains come immediately in the form of imports. And for purposes of my point – for purposes of countering the mercantilist myth that exports rather than imports are the ultimate goal of trade – it does not matter if the imports that in reality are the ultimate goal of trade arrive in the home country today or if they arrive in the home country 30 years from today.

……

At the risk of belaboring a small disagreement among friends, allow me to offer a slight variation on what I take to be your objection to my point:

Suppose that a student says to you that “People work for money.” Suppose further that the context and tenor of the conversation prompt you to reply that “People ultimately work to increase their standard of living.” Your wish is to instill in the student the Smithian understanding that the ultimate purpose of economic activity is neither production nor the miserly accumulation of money but, instead, consumption.

You drive home your point by explicitly noting that increasing one’s standard of living requires that the money earned from work be spent on food, clothing, housing, and other real goods and services.” You end your reply with “Ultimately, people work for what money can buy and not for money as such.”

Now imagine someone else – Jones – replies to you that you are mistaken. Jones says that you are correct that people do spend some of the money they earn on goods and services, but they also use some of the money in other ways – they use money to buy financial instruments, they use money to buy real estate, and they even hold some of their earnings as cash. Jones thus concludes that “Henderson is wrong. Goods and services are not necessary for workers to gain from working.”

The point of my response to Steve Moore is no different – indeed, it is identical – to the point that you make here in my little hypothetical example.

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