In my latest column for AIER I report on the (semi-)fictional country of Dynamia. A slice:
The low prices and high quality of the products manufactured by Westside and Woodlike attracted the attention of foreigners, whose demand for these companies’ outputs skyrocketed. Dynamia became a major exporter of specialty wood and faux wooden products. But this increase in Dynamia’s exports was made possible only because Dynamia’s government followed a policy of free trade: Producers in Dynamia could export more only because foreigners had more dynams to spend on goods produced in Dynamia – and foreigners acquired this greater number of dynams by selling more of their wares to Dynamians. (Economics students at Dynamia University learn that this connection between exports and imports is sometimes called “Lerner symmetry.”)
The innovations that gave rise to Woodlike, that prompted Westside to change what it produced, and that increased the productivity of workers at both firms made these Dynamian workers more prosperous. These workers and their families increased their demands for the likes of health care, entertainment, and household furnishings. Dynamian entrepreneurs took advantage of these higher demands to create firms that supplied what these consumers, with rising incomes, wanted. Some of the former mill workers – and especially many of their children – found employment with these new enterprises. Competition ensured that these new firms operated efficiently, using the latest, economically feasible production and distribution techniques.
Dynamia’s growing wealth also attracted immigrants. These new denizens of Dynamia increased not only the supply of labor but also (because they spend and invest their incomes) the demand for goods and services. And as the demand for particular goods and services rises, so, too, does the demand for labor to produce those goods and services. This increased supply of labor encouraged and enabled Dynamian producers and merchants to make their workers more specialized. For example, as Dynamia’s population and wealth grew, that little country soon could afford physicians with narrower specialties. Whereas in 1985 Dynamia had only a few family-practice physicians, at the dawn of the 21st century it had not only pediatricians, dentists, and gastroenterologists, it had a pediatric gastroenterologist, a pediatric dentist, and a doctor specialized in sports medicine.
As Adam Smith correctly taught, when the market incents workers to become more specialized, they become more productive. This increased specialization of Dynamia’s labor force – again, fueled by Dynamia’s rising population of hard workers – further raised Dynamians’ wealth.
Some of the higher wages earned in Dynamia were invested in pension plans, but most were spent on goods and services – larger and larger amounts of which were imported – that enriched the lives of Dynamian families. (Some professors at Dynamia U. publicly scorned the new consumption habits of their fellow citizens, calling this consumption “frivolous” and “wasteful.” Most Dynamians ignored these intellectual scolds.)
Today, Dynamia – although still not without problems, some serious – remains prosperous and entrepreneurial. As a result, foreigners are more eager than ever to invest in Dynamia. Because these investments are made using dynams, large numbers of the dynams that Dynamians spend on imports return to Dynamia, not as demand for Dynamian exports, but as investments in Dynamia.
Of course, these investments enlarge and improve the capital stock of Dynamia no less than do investments made in Dynamia by native Dynamians. And also like investments in Dynamia made by her own citizens, these foreign investments destroy particular jobs and create others. Nevertheless, pundits at a new Dynamian thinktank – Dynamian Sextant – are forever warning that, because these foreign investments in Dynamia bring about a situation that accountants call a “Dynamian trade deficit,” Dynamian trade with foreigners is stripping Dynamia of its wealth.
Dynamian Sextant calls on the Dynamian government to severely restrict Dynamians’ freedom to purchase imports.
To bolster their case against free trade, the pundits at Dynamian Sextant remind their fellow citizens of the Dynamia of 1985. Nostalgia for those seemingly simpler, happier times prompts some Dynamians to join with Dynamian Sextant in supporting high tariffs as a means of restoring the Dynamia of the past. Yet serious Dynamians know that even if, contrary to fact, high tariffs could transform the Dynamia of 2025 into the Dynamia of 1985, Dynamians of 2025 would, upon finding themselves with the economic opportunities and standard of living of their forebears of 40 years ago, clamor for an immediate and complete return to 2025.
After all, the country’s name is Dynamia, not Stagnatia.
