Monthly Archives: June 2013
A while ago, I engaged in a long debate regarding protectionism with a blogger named “MarxistMax”, author of the blog The Red Threat. After our long exchange, MarxistMax posted this on his blog as a final response to me. Now, I’m not going to respond to the points he made regarding the topic of Protectionism; I’m giving him the last word on that front.
Instead, I am going to give a lesson in what is not seen; a lesson stressed heavily by Henry Hazlitt in the best-selling economic text, “Economics in One Lesson” and Frederic Bastiat in his famous essay, “What is Seen and What is Unseen.” Frederic Bastiat said, “The Bad Economist takes account of only what is seen. The Good Economist takes into account that which is seen, and that which is unseen.”
I mention all of this because MarxistMax, who I assume is a Marxist due to his name and the name of his blog, paid me a few very high compliments which, coming from a Marxist, is very huge.
Quote from MarxistMax: “Recently I’ve engaged in a very lengthy debate with a fellow WordPress blogger, kenpruitt666. His blog is very well written, and I have no doubt that his writings are full of intellectual rigour and professionalism. It’s clear that he’s a very intelligent chap, even if we don’t agree on this issue.
Surprisingly enough, I’m willing to concede that I’m losing the debate. This I do without bitter feelings, because I don’t underestimate the capabilities of my opponent. He truly is a tough nut to crack.”
My capabilities, as MarxistMax put it, lies in detecting the unseen consequences of a given set of policies. The unseen is what is perceptible to the mind only, i.e., it doesn’t show up on any statistic or any other formal system of measurement. Let me give you a popular example.
The Broken Window Fallacy
Suppose you have a bakery sitting on the street corner. Suddenly, some punk throws a brick through the glass pane and shatters it to a million pieces. The baker comes out mad as hell. Why? Because his window has been broken. He now has to pay the Glazier $250 to fix his window. The crowd who gathered around the bakery to see the spectacle sees one of its members say, “Wait, this isn’t a bad thing. Think about it for a moment. The money that the Baker gives to the Glazier is money that the Glazier can spend at the tailor, and he can in turn spend that money at a bookstore, etc.. The destruction of the window has enabled the circulation of income that wouldn’t have happened without it. So, this isn’t a bad thing at all.”
The fallacy with the above quotation is paying attention to what is seen and not to what is unseen. While it is true that the money the Baker gives the Glazier is money that the Glazier can spend on X Y and Z, it fails to consider what the Baker would’ve done had he not had to spend the $250 to replace his window. He could’ve spent that money at a tailor, or he could’ve replaced his old shoes with new shoes, or he could’ve bought some new books, he could’ve put it away in a savings account which means the money would’ve been lent out to entrepreneurs looking to start a new business (which creates opportunities for a whole set of other businesses), or he could’ve invested that money back into his own business.
The point is; you have the same set of opportunities (except for the Glazier of course) without the broken window. This is forgotten in the above example because the person in the crowd only sees two parties in the above transaction; the Baker and the Glazier. He doesn’t see that there is a third person to be considered here, and to make this even harder on the person in the crowd, we don’t even know who this third person is. He could be anyone; tailor, shoemaker, etc.. And indeed, the statistics will show an increase in GDP as a result of the broken window, but the statistics do not, and cannot, capture the opportunities foregone as a result of the Baker having to pay the Glazier $250 to fix his window.
The broken window hasn’t created new wealth by allowing for the circulation of money that wouldn’t have existed without it, it has simply made society as a whole less wealthy to the tune of one window.
This is all simple enough to figure out, if you simply give it a little thought, and it applies to an entire range of economic issues, including Protectionism (an example of which I used in my debate with MarxistMax). Of course, all of the above is really just an exercise in observation and deductive reasoning, but nonetheless, it gives us the tools we need to understand what we need to understand about exchange and human behavior in the market. Such things as econometrics are unnecessary.
Proponents of protectionist fallacies are never short of sophisticated arguments (sophistry) to support their agendas; they will invoke everything from patriotism to economics, and will even appeal to your emotions by throwing pity-parties for the domestic shopkeepers and laborers that are put out of business due to the "unfair” competition from foreigners.
To their appeals to patriotism I say, “When did America become a nation of whiny little bitches!?”
To their throwing pity-parties for domestic shopkeepers and laborers, I call it what it is; a fallacious appeal to emotion meant to shut down any argument against the protectionist agenda.
But to their appeals to the economic aspects of the problem, I’m afraid a more in-depth analysis is called for, especially in the case of “dumping”. Dumping describes a process by which an exporter of a product will “dump” his product onto a foreign market by selling it (or just giving it away freely) below cost of production. The theory is that by doing this, the foreign market will put the domestic suppliers for that product out of business. Then, when there are no more domestic suppliers of that product, the foreign suppliers raise their prices in order to recoup what they lost by dumping, and as a result, domestic consumers suffer while foreign producers profit by our expense.
For example, suppose it costs a Chinese manufacturer of computer chips $1,000 to create that chip. Dumping theory would have it that the Chinese supplier will then sell those chips to an American importer in bulk for what amounts to $100 per chip. Then, when the domestic supplier of those chips are put out of business, the Chinese supplier will boost the price of those chips from $100 to $2,500.
There is one problem here that should immediately jump out at you, even if you’ve never had any sort of training in economics; if you were the owner of a company that made computer chips and it costs $1,000 to make one chip, can you seriously see yourself selling that chip in bulk to anyone at $100 per chip? There is an obvious incentive right here to not try to engage in this sort of thing. Ah, but the protectionist will be quick to answer, “No, normally this would bankrupt you, but the Chinese government subsidies it’s exports, so these companies can maintain the loss for long periods of time.”
But even so, this doesn’t guarantee that domestic suppliers will be put out of business. True, there is a huge economic incentive to buy Chinese instead of American in the above example, but there are many people who’ll buy American no matter what. Even today in the real world, there are people who refuse to buy foreign-made cars and will go out of their way to buy American over Japanese for instance.
But, let’s entertain this thought for a moment that this foreign subsidizing of exports will put American suppliers out of business, and that they the foreign supplier will indeed raise his price well above. What this means is that foreign competitors will sharply undercut him. In our example of the Chinese Manufacturer of computer chips, if he indeed raises his price to $2,500, he will be undercut by a Japanese Manufacturer who’ll be competing for the American consumer. He will offer the same chip for $1,500 – $2,000, which puts downwards pressure on the price of Chinese computer chips, and this says nothing about the other countries that are in the computer chip business.
There are two other variables here that must be considered. First, there is the possibility that America might return to the computer chip business. If that is the case, the Chinese Manufacturer now has even more downwards pressure put on the price of his product.
The second variable here (and the one that is most likely to happen in my opinion) is that when the Chinese Manufacturer is dumping the chips in bulk at $100 per chip, American importers are most likely to buy as many of them as possible because they know the price of those chips are eventually going to go through the roof. This way, when the price does go through the roof, American importers of those chips have enough of them to not have to import any more of them. This throws a monkey wrench into the plans of the Chinese manufacturer who planned on profiting at the expense of Americans, and it completely destroys the dumping argument put forth by Protectionists.
I don’t go to McDonalds that often (usually opting to go to Sonic or Taco Bell if on the rare occasion I’m going out to eat fast food), but when I do go to McDonalds, they far more often than not get my order wrong. My order could be something simple, like, “Two McChickens and a Coke.” When they had me my order however, they’ll hand me a Big Mac or a double quarter pounder with a sprite or some other weird combination… now of course, I’m not dumb enough to go to McDonalds when they’re slammed at lunch time, but it makes me seriously wonder that if they can’t even get a simple order right when business is relatively slow, how do they fare when they’re slammed at the peak of lunch?
But then again, Drive-Thrus are notorious for getting the orders wrong. So whenever I get a order from McDonalds and it’s demonstrably wrong, especially when the drive-thru is working at a relatively slow pace, I am reminded of this antic by the Joker. To be perfectly honest, as many times as drive-thru gets their customer’s orders wrong, I’m surprised this hasn’t happened.
Henry Hazlitt’s words on imports/exports are even more relevant today than they were when he wrote them, especially with regards to our economic relation to China. Not only does he show that China isn’t actually enriching themselves loaning us money to buy their goods, but he destroys the idea that exports are more desirable than imports.
The following quotation is taken from Chapter XII of Henry Hazlitt’s “Economics in One Lesson” With that, I’ll hand it over to the Master.
“EXCEEDED ONLY BY the pathological dread of imports that affects all nations is a pathological yearning for exports. Logically, it is true, nothing could be more inconsistent. In the long run imports and exports must equal each other (considering both in the broadest sense, which includes such “invisible” items as tourist expenditures, ocean freight charges and all other items in the “balance of payments”). It is exports that pay for imports, and vice versa. The greater exports we have, the greater imports we must have, if we ever expect to get paid. The smaller imports we have, the smaller exports we can have. Without imports we can have no exports, for foreigners will have no funds with which to buy our goods. When we decide to cut down our imports, we are in effect deciding also to cut down our exports. When we decide to increase our exports, we are in effect deciding also to increase our imports. The reason for this is elementary. An American exporter sells his goods to a British importer and is paid in British pounds sterling. But he cannot use British pounds to pay the wages of his workers, to buy his wife’s clothes or to buy theater tickets. For all these purposes he needs American dollars. Therefore his British pounds are of no use to him unless he either uses them himself to buy British goods or sells them (through his bank or other agent) to some American importer who wishes to use them to buy British goods. Whichever he does, the transaction cannot be completed until the American exports have been paid for by an equal amount of imports. The same situation would exist if the transaction had been conducted in terms of American dollars instead of British pounds. The British importer could not pay the American exporter in dollars unless some previous British exporter had built up a credit in dollars here as a result of some previous sale to us. Foreign exchange, in short, is a clearing transaction in which, in America, the dollar debts of foreigners are canceled against their dollar credits. In England, the pound sterling debts of foreigners are canceled against their sterling credits. There is no reason to go into the technical details of all this, which can be found in any good textbook on foreign exchange. But it should be pointed out that there is nothing inherently mysterious about it (in spite of the mystery in which it is so often wrapped), and that it does not differ essentially from what happens in domestic trade. Each of us must also sell something, even if for most of us it is our own services rather than goods, in order to get the purchasing power to buy. Domestic trade is also conducted in the main by crossing off checks and other claims against each other through clearing houses.
It is true that under the international gold standard discrepancies in balances of imports and exports were sometimes settled by shipments of gold. But they could just as well have been settled by shipments of cotton, steel, whisky, perfume, or any other commodity. The chief difference is that when a gold standard exists the demand for gold is almost indefinitely expansible (partly because it is thought of and accepted as a residual international “money” rather than as just another commodity), and that nations do not put artificial obstacles in the way of receiving gold as they do in the way of receiving almost everything else. (On the other hand, of late years they have taken to putting more obstacles in the way of exporting gold than in the way of exporting anything else; but that is another story.) Now the same people who can be clearheaded and sensible when the subject is one of domestic trade can be incredibly emotional and muddleheaded when it becomes one of foreign trade. In the latter field they can seriously advocate or acquiesce in principles which they would think it insane to apply in domestic business.
A typical example is the belief that the government should make huge loans to foreign countries for the sake of increasing our exports, regardless of whether or not these loans are likely to be repaid. American citizens, of course, should be allowed to lend their own funds abroad at their own risk. The government should put no arbitrary barriers in the way of private lending to countries with which we are at peace. As individuals we should be willing to give generously, for humane reasons alone, to people who are in great distress or in danger of starving. But we ought always to know clearly what we are doing. It is not wise to bestow charity on foreign people under the impression that one is making a hardheaded business transaction purely for one’s own selfish purposes. That could only lead to misunderstandings and bad relations later. Yet among the arguments put forward in favor of huge foreign lending one fallacy is always sure to occupy a prominent place. It runs like this. Even if half (or all) the loans we make to foreign countries turn sour and are not repaid, this nation will still be better off for having made them, because they will give an enormous impetus to our exports. It should be immediately obvious that if the loans we make to foreign countries to enable them to buy our goods are not repaid, then we are giving the goods away. A nation cannot grow rich by giving goods away. It can only make itself poorer. No one doubts this proposition when it is applied privately. If an automobile company lends a man $5,000 to buy a car priced at that amount, and the loan is not repaid, the automobile company is not better off because it has “sold” the car. It has simply lost the amount that it cost to make the car. If the car cost $4,000 to make, and only half the loan is repaid, then the company has lost $4,000 minus $2,500, or a net amount of $1,500. It has not made up in trade what it lost in bad loans.
If this proposition is so simple when applied to a private company, why do apparently intelligent people get confused about it when applied to a nation? The reason is that the transaction must then be traced mentally through a few more stages. One group may indeed make gains—while the rest of us take the losses. It is true, for example, that persons engaged exclusively or chiefly in export business might gain on net balance as a result of bad loans made abroad. The national loss on the transaction would be certain, but it might be distributed in ways difficult to follow. The private lenders would take their losses directly.
The losses from government lending would ultimately be paid out of increased taxes imposed on everybody. But there would also be many indirect losses brought about by the effect on the economy of these direct losses. In the long run business and employment in America would be hurt, not helped, by foreign loans that were not repaid. For every extra dollar that foreign buyers had with which to buy American goods, domestic buyers would ultimately have one dollar less. Businesses that depend on domestic trade would therefore be hurt in the long run as much as export businesses would be helped. Even many concerns that did an export business would be hurt on net balance.
American automobile companies, for example, sold about 15 percent of their output in the foreign market in 1975. It would not profit them to sell 20 percent of their output abroad as a result of bad foreign loans if they thereby lost, say, 10 percent of their American sales as the result of added taxes taken from American buyers to make up for the unpaid foreign loans. None of this means, I repeat, that it is unwise for private investors to make loans abroad, but simply that we cannot get rich by making bad ones.
For the same reasons that it is stupid to give a false stimulation to export trade by making bad loans or outright gifts to foreign countries, it is stupid to give a false stimulation to export trade through export subsidies. An export subsidy is a clear case of giving the foreigner something for nothing, by selling him goods for less than it costs us to make them. It is another case of trying to get rich by giving things away. In the face of all this, the United States government has been engaged for years in a “foreign economic aid” program the greater part of which has consisted in outright government-to-government gifts of many billions of dollars. Here we are interested in just one aspect of that program—the naive belief of many of its sponsors that this is a clever or even a necessary method of “increasing our exports” and so maintaining prosperity and employment. It is still another form of the delusion that a nation can get rich by giving things away. What conceals the truth from many supporters of the program is that what is directly given away is not the exports themselves but the money with which to buy them.
It is possible, therefore, for individual exporters to profit on net balance from the national loss—if their individual profit from the exports is greater than their share of taxes to pay for the program. Here we have simply one more example of the error of looking only at the immediate effect of a policy on some special group, and of not having the patience or intelligence to trace the long-run effects of the policy on everyone.
If we do trace these long-run effects on everyone, we come to an additional conclusion—the exact opposite of the doctrine that has dominated the thinking of most government officials for centuries. This is, as John Stuart Mill so clearly pointed out, that the real gain of foreign trade to any country lies not in its exports but in its imports. Its consumers are either able to get from abroad commodities at a lower price than they could obtain them for at home, or commodities that they could not get from domestic producers at all. Outstanding examples in the United States are coffee and tea. Collectively considered, the real reason a country needs exports is to pay for its imports.”