On those very rare occasions when I disagree with David Henderson, I feel uneasy and worry – sincerely – about my skills as an economist. But at the risk of exposing myself as a poor economist, I here express a disagreement with David.
A few days ago I shared here at Cafe Hayek this quotation from a paper written by my intrepid Mercatus Center colleague, Veronique de Rugy:
One of the biggest fallacies about trade is that the ultimate value of trade for a country is found in that country’s exports, with imports being valuable only insofar as they better enable the country to export. But in reality, the opposite is true: Imports are the end and exports are the means. If we could acquire imports without exporting anything, that would be the best of all worlds for us. Unfortunately, foreigners won’t work for us for free. They want things in return for what they produce for us, and so we must export.
David disagrees with Vero and with me (who he rightly infers agrees with Vero). He writes:
There are two ends: imports and exports. We want imports: that’s one end. But our exporters want to export: that’s their end.
Of course exporters want to export, but this fact – contrary to David’s belief – doesn’t make exports an end in the same way that imports are an end. Merely wanting to do something doesn’t render that something an end.
Because I voluntarily work, I obviously want to work. But working is not my economic end. I work because, ultimately, I want to increase my ability to consume. My end is an increased ability to consume. My willingness to work is a means to this end. If George Mason University refused to pay me, I’d quit working for George Mason University. If David’s statement were correct, then it would also be correct to write:
There are two ends: consumption and working. We want consumption: that’s one end. But we also want to work; that’s another end.
Put differently, if exporting were truly an end, exporters would demand no payment to export; exporting would be its own reward. The fact that exporters export only to obtain something in return necessarily means that exporting is not an end. What they ultimately want in return is their end. In contrast, we don’t import necessarily to obtain anything else in return.
David goes on:
It’s not clear that if we could get imports without exports, that would be the best of all possible worlds. In particular, potential exporters wouldn’t like it because they would like to make money by exporting. Also, what if the alternative to exports is a huge foreign investment in our country? That could be good.
Potential exporters want to export only because doing so increases their ability to consume – either by buying imports with their export earnings, or by spending or investing their export earnings in the domestic market, with those earnings eventually being spent by fellow citizens on imports.
Nevertheless, let’s assume that foreigners give goods and services, free of charge, to Americans. David presumably worries that, by not earning U.S. dollars, foreigners will be unable to buy American exports, thus harming America’s would-be exporters. But this worry is unwarranted. First of all, if exporting were an end, American exporters could and would just ship their goods and services abroad as gifts to foreigners. There’d be no need to by paid for these exports.
But David obviously doesn’t really believe that exports are an end because he understands that American exporters want to be paid. And they can be paid in this scenario – not with U.S. dollars but with foreign currency. So now American exporters have (say) euros after selling their wares in Europe. What will they do with these euros? There are three realistic possibilities: (1) spend the euros in Europe; (2) invest the euros in Europe; or (3) convert the euros into dollars and then spend or invest the dollars in America.
Let’s take each possibility in turn.
(1) The American exporters spend the euros in Europe. In this case, the European goods and services the American exporters purchase are the ultimate payment for the exports. The exports were a means of obtaining the end of increased consumption (here, consumption of European goods).
(2) The American exporters invest the euros in Europe. In this case, the Americans hope that the investments will increase in value. If they do increase in value, the Americans will be able to cash out their investments for a greater number of euros – at which point the Americans will spend those euros buying imports from Europe. As in (1), the exports were a means of obtaining the end of increased consumption (here, consumption of an even larger number of European goods).
(3) The American exporters convert the euros into dollars and then spend or invest the dollars in America. If the former (spend the dollars in America), the additional consumption of American-made goods is the end to which the earlier exporting was the means. If the latter (invest the dollars in America), consumption remains the end – it’s just consumption delayed in the hopes of being consumption increased in amount.
Note that in (3), the American exporters must find holders of dollars who are willing to part with those dollars in exchange for euros. The Americans who are willing to do this currency exchange obviously want either to spend or to invest the euros in Europe – that is, to increase either today or in the future their ability to consume.
At this point I hear David saying “Ah ha! Gotcha! Central to this hypothetical is that Europeans are willing to give, not sell, stuff to Americans. Now you, Don, sneak in Americans demanding euros in order to buy stuff from Europeans. You’re violating the hypothetical.”
Let’s see. Nothing in the hypothetical requires that Europeans have an unlimited willingness to give us Americans goods and services free of charge. But let’s assume that they do have this unlimited willingness. In this case, American exporters can get whatever goods and services they want from Europeans – American exporters can achieve their ends – simply by asking; the Americans don’t need money because, by assumption, the Europeans are willing to give unlimited amounts of their property away to Americans. Indeed, we should no longer call them “American exporters.” To the extent that Europeans are willing to send us Americans their stuff without charge, we achieve our ends, not by the more tedious means of producing stuff and shipping it abroad; we achieve our ends simply by putting in verbal requests to our European benefactors.
…..
The bottom line is that, because every exporter expects to be paid to do so, exporting clearly is not an end; it’s a means. And because the payments that exporters receive are either directly or indirectly exchanged for imports, imports are the end. It might well be – and often is – the case that a particular exporter has no desire to import, but because exporting occurs only insofar as it increases the ability of people in the same country to import, imports are an end to which exports are the means.
