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One of the most curious – and most mistaken – arguments that Ian Fletcher made during our debates on trade earlier this week at Hillsdale College occurred repeatedly during discussions of the trade deficit.  One of the facts that I pointed out is that a U.S. trade deficit is good for the U.S. insofar as such a deficit means that capital is flowing into the U.S. and creates new businesses (or bolsters existing businesses).  Think, for example, of BMW’s factory in Greer, South Carolina, or of any of the many Ikea stores across the United States.

In reply, Fletcher agreed that such investment is productive, and even that it’s beneficial for Americans.  “However,” he replied (and here I quote from memory), “it would be even better if those assets were owned by Americans.”

If you watched or listened to the debate you heard my response.  I here want to drive that response home.

The core error in Fletcher’s reply is the assumption that the productive assets that are brought into being by foreign investment would exist in the absence of foreign investment.  Fletcher assumes, for example, that the successful Ikea store in Dale City, Virginia, would exist in the absence of Ikea’s decision to build and operate a store there.  Fletcher assumes, in other words, that the ownership of an asset is economically distinct from the creation of an asset.  But this assumption is plainly mistaken.  Nothing prevented Americans from building a large furniture (or other kind of) store on that very location before Ikea built its store there – nothing, that is, other than the failure of any Americans to have the vision or the willingness to do so.  Ikea’s entrepreneurial vision and willingness to take the risk of building a store in Dale City added to the capital stock in America (and in the world).

Once the store exists, of course it’s child’s play to imagine it now being owned by Americans.  And in a hyper-static view of economic reality, one might even agree that were that store owned by Americans rather than by Swedes then Americans as a group would be richer.  But it is nonsensical to leap from this childish observation to the conclusion that the U.S. trade deficit means that Americans are made worse off.  Again, the reality is that that store would not exist were it not for the foreign investment and entrepreneurship that created it.

One cannot legitimately do what Fletcher here does, namely, separate the existence of the asset from the individuals and the processes that bring that asset into existence.  Assets do not create themselves; assets are not created ‘naturally’ or ‘automatically.’  The creation of each productive assets requires savings, creativity, risk-taking, and actual effort that are unique to that asset.  As I said in my verbal response to Fletcher’s claim, I would be richer if Microsoft were fully owned by me.  (This fact is a matter of mere arithmetic.)  Yet it hardly follows that if Bill Gates and Paul Allen had been prevented from doing what they did to create and successfully launch Microsoft that Microsoft would nevertheless exist for me to own.  Had these entrepreneurs been prevented from creating Microsoft, I’d be poorer today, not richer – for Microsoft products, many of which I use, would not be available for me to use.  And, of course, I would not have created Microsoft.

Put differently, Fletcher implicit assumes that the processes that give rise to the U.S. trade deficit have no effect on the size of the U.S. capital stock.  For Fletcher, this capital stock exists independently of the details of human decision-making.  ‘If Ikea had not built that store, it would have been built instead by Americans, with Americans as a group being richer for owning the store’ – this is among Fletcher’s faulty premises.

Fletcher fails to see that the size, quality, and vital details of the capital stock, as these exist at any moment and as they change through time, are themselves determined by the pattern of international trade and investments that give rise to them.  They are not phenomena independent of the market process.  Therefore, it is illegitimate simply to imagine all of these phenomena as they are except with the pattern of capital ownership being different.

Relatedly, Fletcher doesn’t understand that, because the size and quality of the capital stock aren’t fixed (or, more generally, because they aren’t independent of the particular economic arrangements and individual decisions that give rise to them), when non-Americans successfully invest in America this investment does not mean that Americans’ capital ownership declines correspondingly.  Each individual American remains free to invest as little or as much as he or she pleases.  Ikea’s successful building and operation of retail furniture stores in America doesn’t stop me from investing.  And if I invest successfully, then I’m become wealthier; if I don’t, I don’t.  Ikea’s successful investment in America is not legitimately considered to be any subtraction from or constraint on my, or Fletcher’s, or any other person’s ability to invest in America.

Here’s one final point about this faulty argument by Fletcher: if you accept its premise and logic, then there’s no reason to confine the analysis to America.  Fletcher can just as easily observe, for example, that while it’s true that, say, the Mercedes-Benz factory in Sindelfingen, Germany, is a productive asset, Americans would be even richer were that factory owned exclusively by Americans rather than chiefly by Germans.  So by Fletcher’s poor, nationalist logic, American trade policy ‘fails’ insofar as it doesn’t result in Americans owning every productive asset in the world.

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The essence of protectionism is captured nicely in this headline that just appeared at World Trade Online:

Protectionists are masters at frightening economically uninformed people with far-fetched hypotheticals.  ‘What if all of our farmers go bankrupt and we are then left at the mercy of our military enemies to supply us with food?  Do you want to risk that outcome?!’ – is the sort of absurd ‘argument’ that protectionists mistake for serious argument.  This sort of precautionary-principle argument is prevalent when protectionists are trying to persuade people to allow the government to restrict their – the people’s – access to goods and services.

But the true essence of protectionism is captured nicely by this headline about Argentine lemon imports.  No one with any sense can possibly interpret this demand by the U.S. citrus industry as reflecting anything other than an attempt to pick the pockets of consumers by denying to consumers access to imported lemons.

Protectionism in theory is dubious.  Protectionism in practice is cronyist thuggery costumed as “policy.”

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… is from page 404 of the 2014 collection, The Market and Other Orders (Bruce Caldwell, ed.), of some of F.A. Hayek’s essays on spontaneous-ordering forces; specifically, it’s from Hayek’s previously unpublished 1961 lecture at the University of Virginia “Economics and Technology” (which is the third of four lectures that Hayek delivered in UVA’s Newcomb Hall during the Spring 1961 semester; the title of this lecture series by Hayek is “A New Look at Economic Theory”):

[T]he various technological possibilities are not necessarily simultaneous possibilities.  Which of them can be realized at the same time depends on economic circumstances which are thus chiefly a restraint on what technology pictures as  ossible.  This means that, while technology deals with pleasant facts which give people a thrill, economics deals with unpleasant facts which people would prefer not to be true.  Compared with the glamour of technology, economics is still the dismal science which explains why we can’t do what we would like to do.

DBx: Yes.  The economic challenge is not a technological challenge.  Getting the vital details of economic processes ‘right’ is not an engineering problem, for no amount of science can discover how each of the constantly arising unavoidable trade-offs should be made.  Getting that task ‘right’ requires that each individual has as much as possible freedom to strike each of his or her trade-offs as only he or she has the knowledge to know how each such trade-off should be struck.

Economics, therefore, should study how individuals exchange with each other.  Economists should stop treating ‘the economy’ as if it is a real thing onto itself that has an objective ‘solution’ that, at least in principle, can be discovered by genius third-party investigators.

(By the way, I do wish that Hayek had not used the term “dismal science” in this hackneyed way.  See David Levy and Sandra Peart.)

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Here are videos of my two rounds of debate on Tuesday on trade with Ian Fletcher.  The debate took place at Hillsdale College.

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… is from page 183 of the 2015 Fourth Edition of Douglas Irwin’s brilliant volume, Free Trade Under Fire; Doug here summarizes the conclusion he reached after carefully surveying the procedures that define, and the results of, Uncle Sam’s scheme to shield U.S-based producers from the competition posed by what U.S. bureaucrats determine are imports offered to American consumers at prices that are too low:

It is hard to avoid the conclusion that the antidumping laws are simply a popular means by which domestic firms can stifle foreign competition under the pretense of “fair trade.”

DBx: Here again is evidence of the importance of language.  If a nice name comes to be attached to a nefarious policy, even those people who are harmed by that policy can be misled into mistaking that policy as being one that works in their favor – or as being at least a policy that is admirably motivated or that achieves commendable outcomes for the public at large.  Who, after all, dares oppose trade that’s “fair”?  Who can object to “level” playing fields?  Who would not want the government to prevent its citizens from being “dumped” on by foreigners?  Who would applaud prices that are “too” low?  These labels sneak in the false conclusion both that what is so labeled really exists as such, and that the accompanying policies actually achieve the results implied by their labels.

Oh, but don’t forget (we are reminded), that there are formal procedures in the United States through which Uncle Sam’s officials consider complaints by American producers that American consumers have access to foreign goods sold at prices that are “too” low.  But here again is Doug Irwin (pages 178-179):

AD [antidumping] rules are intentionally stacked in favor of the domestic petitioner, both in reaching a conclusion that dumping has occurred and in the size of the dumping margin.  Even the Congressional Budget Office notes that the Commerce Department “effectively serves as investigator, prosecutor, judge, and jury in dumping and subsidy determinations.”  And although it should be neutral in these roles, Commerce is “actually an advocate of one of the parties to the case.”

You can call a grown wolf a “puppy,” but this change of names will not make the beast a trustworthy companion.

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My colleague Pete Boettke writes eloquently of our late, great colleague Gordon Tullock.  A slice:

A lot can be understood simply by recognizing that individuals strive to achieve the best they can as they perceive it, rather than asserting that they achieve best outcomes in their actions. And, similarly, a lot can be understood by stressing the evolution towards a solution involved in market and social interactions rather than focusing exclusively on solution states. But the price of that understanding is predicative power in social science. Tullock, though, was part of a generation of thinkers who understood that while measurement could be an important aspect of science, it didn’t exhaust science. The problem with the plea that if something is important, measure it, is that work-a-day social scientists will start to believe that whatever they can measure is important. Tullock, unlike the next generation of scholars in economics and political economy, relied on multiple forms of evidence to illustrate and illuminate, and did not restrict his work to only those questions amenable to parsimonious models and sophisticated statistical techniques.

Mary Anastasia O’Grady busts some Trumpian myths about NAFTA.  A slice:

The pushback against Mr. Trump’s Nafta assault is not coming from “coastal elites” contemptuous of what they refer to as “flyover country.” It’s coming from the “flyover” industrial and farming heartland itself, which has the most to lose.

Pierre Lemieux uncovers the hubris-slathered history of a government program.

My colleague Bryan Caplan explains why we so little “reverse grandfathering” in government policies.

Here’s Ryan Bourne on the GOP tax plan.

And here’s Richard Epstein on tax reform.

Here’s a video of the first round of my debate on trade yesterday, at Hillsdale College, with Ian Fletcher.

In this video, my colleague Dan Klein explores Adam Smith and liberalism.

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… is from pages 126-127 of Liberty Fund’s 2017 expanded English-language edition, brilliantly edited by David Hart, of Frédéric Bastiat’s indispensable work Economic Sophisms and “What Is Seen and What Is Not Seen”; specifically, it’s from Bastiat’s February 1848 essay “The Physiology of Plunder” (“Physiologie de la Spoliation”):

[G]overnments take it upon themselves to cure all the ills of humanity.  They will revive commerce, they say; they will bring prosperity to agriculture, develop factories, encourage arts and letters, abolish poverty, etc., etc.  All that is needed is to create some new government functions and pay for some new functionaries.

In a word, the tactic consists in presenting as real services things that are only hindrances; the nation then pays, not for services but for disservices.  Governments take on gigantic proportions and end up absorbing half of the total revenue.  And the people are surprised at having to work so hard, at hearing the announcement of astonishing inventions that will infinitely increase….

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Anyone who’s interested can watch live my debates with Ian Fletcher later today here.  The first half of the debate starts at 4:00pm EST; the second half starts at 8:00pm EST.

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… is from Bryan Riley’s superb Forbes article from this past September 14th:

When a company like BMW or Hyundai builds a new U.S. factory, the BEA calls it a “U.S. incurrence of direct investment liabilities.”  A clearer and more precise description would be “new job-creating investments in the United States.”

(Pictured here are BMW’s facilities in Greer, South Carolina.)