Earlier in the week I heard Harry Binswanger of the Ayn Rand Institute on the radio argue that Labor Day in the US should celebrate the achievements of man’s mind, rather than main’s muscles. For me, the most interesting bit of the show was when Binswanger pointed out that free trade benefits everyone. The interviewer jumped on this and pointed to the US’s huge “trade deficit” with China. Binswanger started to debunk this, but was cut off by a break for the adverts.
Now he has an article up on Capitalism Magazine explaining his position, entitled: ‘Buy American’ is UN-American. He writes:
The lucrative workings of free markets do not depend upon lines drawn on a map. The economic advantages of international commerce are the same as those of interstate, intercity, and crosstown commerce. And if we kept crosstown trade accounts, the “trade deficits” that would appear would be as meaningless as are our international “trade deficits.” Fact confirms theory: the U.S. ran a trade “deficit” practically every year of the nineteenth century, the time of our most rapid economic progress.
If you are still worried about America’s “trade deficit”, here’s something you should get your head around: each year, America exports exactly the same value as it imports. The “trade deficit” merely refers to part of trade – the current account of the balance of payments. It ignores completely the capital account of the balance of payments. Because successful countries tend to get a lot of investment coming into the country – which is recorded on the capital account – it looks superficially as though these countries have “deficits”, despite the fact that they continue to get richer. In short, a “trade deficit” is a meaningless term.
The Randians are very good on economics, its with philosophy that they fall to pieces.
Perhaps because the economics was worked out for Ayn, but the philosophy is more her own, hence not very good?
While trade deficits are mythical, yes, people can reasonably object to certain kinds of balanced trade – such as a current account deficit balanced by big investment inflows which can suddenly be reversed when the money gets sucked out again, leaving the country much poorer than it seemed to be.
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The issue is what happens if there is a reversal of fortune and you are still dependant on sucking in items which require your capital to obtain.
The Economist raised this point concerning the warnings that many Asian countries will stop holding the huge dollar reserves they are which will leave the US far more vunerable to this sort of thing.
So the reason we don’t worry about the trade deficit of, say, Harrogate, is that it isn’t vulnerable to the dumping of Asian toffee reserves?
No; the problem is the pathetic fallacy of economics: the personification of countries and attribution to them of all economic activity within their boundaries. Aggregates are just big sums. To say a country is rich or poor is just a shorthand way of saying that its people are (on average) rich or poor. Harrogate and Stockport aren’t affected in the same way by a change in trading conditions.
“America exports exactly the same value as it imports.”
Actually, wouldn’t you expect America to import more value as it exports, at least if you measure it in American dollars? That’s what happens in any sort of trade situation… you get back a higher value, from your own point of view, than you give up. Thus, wouldn’t you expect the dollar value of imports (i.e., their valuation from the point of view of Americans) to exceed the dollar value of exports (i.e., the valuation on what we’re sending overseas from the point of view of Americans)?
Ken: comparative advantage. Both parties enjoy increased utility from the transaction even though the amount of money exchnaged is symmetrical. If I’m a Taiwanese semiconductor manufacturer, I would rather have crispy bits of green paper with pictures of Benjamin Franklin on them than 512 MB DRAM chips. If I’m an American computer manufacturer, the reverse is true.
Both sides go away satisfied, net utility is increased, people are wealthier and happier. Ain’t capitalism grand?
Binswanger’s article does, however, raise an interesting point. I am actually boycotting a lot of French produce as a protest over their attitudes towards the liberation of Iraq. This would be cutting off my nose to spite my face if it were not for the fact that in every case there is a product identical or near-identical in price/quality from another source (I buy Chilean wine, Polish jam, Japanese beer, American Brie). What does free-market theory have to say about the (dis)utility of boycotts in a stuation where there is near-perfect substitutability? Anyone? Bueller?
In short, a “trade deficit” is a meaningless term
Can I get an “AMEN”?
Isn’t a trade deficit basically the difference between imports & exports? Can someone explain why the two are related? If exports & imports are going up, who cares what the difference between the two is.
David Gillies, regarding your question about what free market lovers have to say about boycotts. I don’t know what the answer is, but I think free people can buy or not buy items for whatever reason they see fit as long as they aren’t forcing others to agree with their definition of value. If you believe that a product holds less value because it will contribute to the tax base that Chiraq gets to play with, then that’s your opinion that’s fine. A product’s value doesn’t merely have to be monetary or easily quantifiable.
David Gillies, re boycotts.
Markets are fundamentally about exchanges of equal value as determined by the participants, i.e. the buyers and sellers. The value doesnt have to be restricted to the utility of the product. It can be the value the buyer ascribes to supporting the producer. Buying poppies or similar for charity is a good example, where the product has no utility and the entire value (paid) is to support the producer.
When you boycott a product or the products of particular producer then you are ascribing negative value to supporting the producer. Similarly from the sellers perspective he has to compensate for the reduced value of his product by reducing the price, selling less, or increasing the percieved value (increasing percieved value is largely the point of advertising).
In the case of France, the negative value results from the perception of french government policy. There are several ways to reduce this negative value effect – advertising, obscuring origin, and changing the government policy.
From an economic perspective boycotts are entirely rational, and probably the most effective way an individual can affect corporate or government behaviour.
Thanks for that. So I can carry on cheerfuly boycotting the Frogs. Good. Chilean/Australian wine’s loads better for the same money anyway.
Personally I find buying poppies highly rational from a utility theory standpoint. There’s not many things I can buy for a pound that so enhance my sense of personal wellbeing.
A country’s national income identity is:
Y = C + I + G + (X -M)
national output is used up by consumers, businesses investing, government and exporters. Imports should be taken away from GDP.
Assume there’s no investment, no government and this country exports nothing. You’re left with:
Y = C – M, so C = Y + M
In other words, if you run a trade deficit, people must necessarily be surrounded by more consumer goods. Run a trade surplus and ordinary people have to tighten their belts (Ceausescu’s Romania ran big trade surpluses, look what a miserable life people led). There’s no point trading if you don’t want to import. Worrying that it’s unsustainable is silly because the effect of a sudden stop in capital inflows on peoples’ material situation would be no different to what would happen if you voluntarily cut importing.
Problem is, Guy, that Harrogate and Stockport would actually benefit from being able to view their trade flows explicitly.
That’s why the euro is going to cause damage – it is actually concealing useful local information that was visible before in the intercurrency exchange rates and trade flows.
The information is useful, which is why focussing on accounting identities is not quite enough. Of course, Ceausescu-style mercantilism is pointless and self-defeating, but to claim that persistent trade deficits or trade surpluses don’t have important effects is wrong.
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If I’m a Taiwanese semiconductor manufacturer, I would rather have crispy bits of green paper with pictures of Benjamin Franklin on them than 512 MB DRAM chips.
The issue for the US economy is if the aforesaid semiconducter manufacturer decides it would rather have crispy bits of multi-coloured paper with European landmarks on them rather than the green ones, but insists that the US computer company pays in the Euro.
According to the Economist not an improbable scenario at the moment.
That could have some interesting nett effects on the US economy and the value of the dollar.
Apparently the current economic conditions are disturbingly like the last massive (20%+) fall of the dollar. Of course, that would be nasty for the European economies too.
The Japanese ran huge trade surpluses for decades, and then their economy collapsed into a depression that has lasted over ten years.
The ultimate trade surplus was the gold and silver looted from the Americas by the Spanish. By the time they had brought home tons of new wealth, their money supply collapsed, and their economy never recovered.
The key to vibrancy is not how much wealth can we obtain and hold, but how much can we create? The genius of a capitalist economic system protected by a reasonably free representative government is the creativity it nourishes. Everything else is a secondary consequence.
The countries of the world watched in amazement as the economy of the US, declared dead in the water in the 70’s, created millions of jobs and entire new industries in the 80’s and 90’s. During much of this time, the nation had a trade deficit, and the government operated in the red.
While there is enormous room for improvement, as long as money can move to the point of best return, concepts which resonate with the public will be rewarded. I am typing on one of those concepts now, and that is why ideas matter.
veryretired:
You lost me. I thought the Japanese economy capsized because of a mountain of bad loans/investments. How would a trade surplus foment this? As some kind of negative psychological “false-consciousness” or something? “We’ve got the surplus kids lets invest in Burmese tin production…” after the Karen’s blow up the factory for the nth time.
Sorry, I’m not trying to be glib but its counter-intuitive…
One of the things we tend to forget about the collapse of the Japanese economy is that they went from an unemployment level that most Western nations would think impossible to a typical one like 5%.
They may have collapsed but in comparison to others its not all that bad.
Mark, why would Stockport and Harrogate benefit from being able to see their net trade position? And what would you do if Stockport were running a huge surplus with Harrogate but, at the same time, a massive deficit with York? And why does the euro conceal useful local info? You can still find out today what any eurozone country’s trade position is with any other eurozone country.
Don’t worry about the US trade situation. The exchange rate will handle the problem. If the US stops attracting capital inflows, the dollar will fall, US exports will expand and imports slump.
Lots of people invoicing in dollars is not the reason why the US economy is relatively successful. If everyone started invoicing in the Zimbabwean $ instead of the US $, that wouldn’t make Zimbabwe successful. In fact, the causation is exactly the opposite. The US$ is used instead of the Zim $ because the US has more sensible economic policies and institutions than Zimbabwe.
My point was that trade surplusses don’t guarantee success any more than trade deficits automatically mean the economy is being ruined. I did not say the surplus caused the problem, that was the bursting of the Japanese real estate valuation bubble, only that it was basically immaterial.
Dave O’Neill: not that load of old pony again. The idea that the US economy would collapse if suppliers started preferrng Euros is bunk. Oliver Kamm neatly disposed of this theory a week or so ago. At the levels at which trade is carried out, currency conversion costs are effectively zero.
“Ken: comparative advantage. Both parties enjoy increased utility from the transaction even though the amount of money exchnaged is symmetrical. If I’m a Taiwanese semiconductor manufacturer, I would rather have crispy bits of green paper with pictures of Benjamin Franklin on them than 512 MB DRAM chips. If I’m an American computer manufacturer, the reverse is true.”
Exactly my point. Which means that when you’re measuring the “trade deficit” in dollars in terms of the net value exported versus the net value imported, does that measure the value from the point of view of Americans (i.e., the market value of the goods and services within the American economy)? And, if so, doesn’t a “trade deficit” represent exactly what’s supposed to happen in a profitable trading situation?
John Sheehy, the question you ask me in your first paragraph you answer yourself in your second paragraph.
Because towns, like countries, could have self-adjusting currency rates if they had separate currencies – as towns have had for most of history. The information lost with the introduction of the euro is exactly the price shift in valuation of franc versus mark or whatever that the dollar still has….
…. that, as you say, enables trade gaps between the US and the rest of the world to correct themselves automatically.
Towns in the north of England like Liverpool, Manchester, Bradford etc have been in persistent trade deficit with London for most of a century, but it is disguised by flows of migrating workers and migrating capital – and of course by the fact that the currency is the same.
The same problem afflicts the south of Italy, the north of Japan, and now the east of Germany.
The US deals with local slumps only by having a very high rate of mobility of labour, so that people move to jobs in unusually large numbers. Exchange rates enable two solutions rather than one: some people to move to jobs, and some capital to move the other way – into cheap regions.
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David,
The economic threat does not, as I am sure you are aware come from the conversion factors.
It comes from losing the power you get from being able to print your way out of reserve problems.
When left wing “rags” like The Economist start talking about a massive drop in the dollar after a serious fall and I am trying to close a multi-million dollar services deal, I have to start to take notice. A 20% fall like last week’s Economist suggests could mean the difference between a nice profit and a marginal services contract.
If your currency loses 20% against the Euro and your supplier demands Euros… you can work out what effect that can have on your inflation rates.