UPDATE BELOW
In an otherwise good critique of a recent op/ed by Steve Moore, titled “Steve Moore Is No Free Trader,” economist Don Boudreaux makes his own error. He writes:
First, exporting, as such, no more enriches a country than does vandalism or arson. Exporting enriches a country only insofar as the people of that country receive imports in return for their exports. Unlike Mr. Moore, every true free trader understands that exports lead to growth only if and to the extent that exports bring in more imports.
Consider those first two sentences together. When you commit vandalism or arson, you destroy wealth. But when you export, you get something in return. The exports are sold for money. And the exporter must value the money more than the exports or he wouldn’t do it. So the exporter gets what economists call “producer surplus,” which is the amount the exporter is paid for the exports minus the minimum amount for which the exporter would have been willing to supply the exports. That’s very different from vandalism or arson.
It’s true that when this money is used to buy imports, those who buy the imports are better off also. They get what economists call “consumer surplus,” which is the maximum amount they would have been willing to pay for the imports minus the amount they do pay.
But imports are not necessary for exporters to gain from exporting. In the extreme case where they buy zero imports, they will typically use the money to buy (1) bonds from foreign governments, (2) commercial bonds from foreign firms, (3) shares in foreign firms, or (4) real estate in foreign countries. Or they may (5) directly invest in plant and equipment in the foreign country. Indeed, because it is the United States that runs a large current account deficit with the rest of the world (in other words, the value of our exports of goods and services is well below the value of our imports of goods and services), people in those other countries do all 5 things above.
Now to Don’s final sentence. I’m a free trader and I think (I certainly hope) that Don would call me a “true free trader,” and I don’t understand that. Exports could lead to growth if exporters use the proceeds of their exports wisely, not just to purchase imports (although that might be, and probably is, a very wise decision), but also to do some or all of the 5 things listed above.
UPDATE:
In his response to me on his blog, Cafe Hayek, Don Boudreaux writes:
Suppose now, instead, that I buy with my 69,100 yuan a condo in Shanghai for my own private use. This purchase is not reckoned as an American import; it is, as a matter of accounting convention, recorded on each country’s capital (or financial) account and not on its current account. Yet this accounting convention should not blind us to the reality that, economically, this condo is indeed the equivalent of an American import. I exported to China my teaching services and ‘imported’ from them the ability to enjoy having a place to hang my hat in Shanghai.
This purchase of a condo in Shanghai comes under (4) above in my list of ways of getting value from selling exports without buying imports. Notice that Don felt the need to put “imported” in quotation marks, because even the services of a condo in Shanghai, let alone the condo itself, are not imported.
READER COMMENTS
Josh
Jun 4 2019 at 5:23pm
But what are “proceeds”. You can’t eat proceeds. I see Don’s point as saying that only “real” stuff makes you better off. An infinite string of IOUs doesn’t.
I think all of your possible ways to spend producer surplus on non-imports are basically IOUs. By saying they have value, aren’t you projecting into the future where you’ll eventually convert them back into real stuff?
In practice that’s likely to be the case. But if we imagine imports are zero for all of time, it’s hard to see how producing stuff and getting IOUs makes us better off.
coupon_clipper
Jun 4 2019 at 7:13pm
What Josh said. I think that’s exactly what Don was saying.
Though I also agree with Alan that it’s confusing to see DH & DB disagree!
David Henderson
Jun 5 2019 at 6:41pm
You write:
A purchase of a bond is a purchase of an IOU. A purchase of land or stock, or a direct investment in plant and equipment is not. And, by the way, one of the people who has been clearest in pointing out that these are not IOUs in Don Boudreaux.
Alan Reynolds
Jun 4 2019 at 6:47pm
Reynolds’ First Law of Prudent Self-Defense is: Never Ever Argue with David Henderson.
Reynolds’ Second Law of PSD is: Never Ever Argue with Don Boudreaux.
Reynolds’ Third Law of PSD is: If Henderson Argues with Boudreaux then go back to the First Law and Declare Henderson the Victor (as he is).
David Henderson
Jun 5 2019 at 6:42pm
Thanks, Alan. By the way, did you notice that someone (I’ve forgotten his name) got a whole article out of something you pointed out about 2 or 3 weeks ago about what’s wrong with the Fed Reserve finding that 40% of people don’t have $400 to spare for an unexpected expense?
Benjamin Cole
Jun 4 2019 at 7:33pm
I am happy to say that David Henderson has summed up the correct situation correctly and I agree.
By the way, a nation running chronic current-account deficits is selling assets to finance imports. Particularly if property or equities are sold offshore, then people offshore have a permanent claim on the output of the United States. Something like a permanent tax.
Curiously, the globalist IMF has posited that the United States, by running chronic and large current-account trade deficits, is flirting with an asset-bubble bust. The axiomatic foreign capital inflows must find a home and that inflates equity, property and bond values.
To an unknown extent this inflation of US asset values is artificial, due to foreign government subsidies of exports. In any event the IMF advises that the US export more, sounding curiously like a certain Don Trump.
Eventually, with US asset values on stilts due to foreign capital inflows, you get a Hyman Minsky moment and then a asset value collapse. Something like 2008?
Pierre Lemieux
Jun 4 2019 at 8:18pm
David: I might dissent on part of what you seem to be saying. Here are my problems.
First, I do not think it is necessarily true that the producer gets producer surplus. If the producer is taken to be a firm, it gets only profits, which, apart from temporary entrepreneurial gains, is just the normal remuneration of capital. It is true that the ultimate owner of the factors of production (if, like labor, they have a positive supply curve) get a producer surplus, but this producer surplus is an ordinary cost for the firm, included in its supply curve. Chapter 10 in E.J. Mishan’s Cost-Benefit Analysis, 2nd Edition, makes this point, while arguing that producer surplus must not be included in cost-benefit analysis. Another, perhaps related, point would be that producer surplus is only an artifact of partial equilibrium analysis; general equilibrium would show the producer surplus’s true nature as part of the consumer surplus of the factor owners on other markets—a producer/consumer surplus that they could gain (at least in part) by producing something else than the exports in question.
Second, I am not persuaded by your last paragraph. Exports use “national resources” (pardon my collectivism here!) to produce goods and services for foreigners: they might help the growth in foreign countries, but it is not clear how they contribute to the economic growth of the exporting country. Consider the extreme case where all GDP is exported. One could not say that these exports contribute to the exporting country’s growth if something is not imported in return to keep the exporters alive. Even if food is imported, growth—an increase in GDP—would seem possible only if another part of the imports consisted of capital goods. Or, of course, if the working of comparative advantage leaves more resources available for investment (on which I would agree with you).
David Henderson
Jun 5 2019 at 6:47pm
You write:
My point holds even if it is factors of production, and not the firm, that gets all the producer surplus. But I do find your claim implausible. Ask yourself this: If it is suddenly announced that firms in industry A, which are currently exporting, will no longer allowed to export, will they spend at least $1 on objecting? If your answer is yes, then they are at least getting quasi-rents.
You write:
Good point. Your point applies, though, to GDP, not GNP, which, if you recall, was how we measured growth up until the early 1990s.
Rob Rawlings
Jun 6 2019 at 10:23am
Also on ‘‘Second, I am not persuaded by your last paragraph. Exports use “national resources” (pardon my collectivism here!) to produce goods and services for foreigners: they might help the growth in foreign countries, but it is not clear how they contribute to the economic growth of the exporting country.’
Its not clear to me why we are framing this discussion in terms of “economic growth” (Don uses the term “enrichment”). If one instead looks at in terms of utility maximizing behaviour then there is no reason in theory why the participants of a national economy could not maximize the present value of their future utility stream by exporting all their economic output and using the proceeds to invest in foreign capital that will provide greater utility (future utility discounted back to present utility) than either present consumption (of domestic goods or imports) or investment in capital deployed domestically . This will enrich the participants of the economy even while causing growth of the domestic economy to be suboptimal.
David Henderson
Jun 6 2019 at 4:49pm
Well put. I agree. The only thing I would take issue with is your last clause, “even while causing growth of the domestic economy to be suboptimal.” It wouldn’t necessarily be suboptimal. It would simply be below the level it would otherwise be. Indeed, it could well be optimal.
Rob Rawlings
Jun 6 2019 at 5:22pm
agreed
Greg Jaxon
Jun 4 2019 at 8:57pm
Reynold’s laws aside, I think both Henderson and Boudreaux are failing to make a convincing case for free international trade. Both are entirely correct in the attacks they make on the sock puppets’ rationale for merchantilism. But that argument is not going to be won by appeal to utilititarian optima. Boudreaux frequently offers the reductio of an individual’s trade balance with his/her division-of-labor cohort. How should we properly project his analogy onto the nation-states who impose tariffs, quotas, et cetera? Are we going to merely sum all of each populations’ subjective valuations and time-preferences to describe their nations’ best choice? Or does the fact that states have been magically granted the power to coerce (physically and economically) so long as they can sustain the consent of the population have a bearing? At the very least we have to consider one emergent subjective need of the state: to maintain the (uninformed-) consent of its population. The US does this most convincingly by manufacturing the border as a “skin” around the analogous “self” and projecting the individual’s right of self-defense onto the geography it thus captures. Nothing makes clearer this view of the merchanitilist’s reasoning than the proposed tariffs against Mexico to be traded for coordination in border enforcement. These are the kind of statist goods the merchantilists feel they are entitled to purchase by expending some of the US population’s willingness to be taxed and regulated. The argument for pure free-trade is equivalent to the argument for anarchy (anarcho-capitalism, I suppose). It may well be right, it’s just not the right knife to take to a gunfight.
Don Boudreaux
Jun 4 2019 at 9:48pm
Thanks for your post, David.
I fear that this misunderstanding is due to my poor inability to express myself.
My only point is that exports as such – transferring ownership rights in real goods and services to foreigners – does not itself enrich those who transfer the ownership rights. Exporting enriches those (call them “Exporters”) who successfully export only insofar as these “Exporters” are able to exchange the value of the real goods and services that they export for real goods and services that they consume.
“Exporters” may exchange their exports directly for real goods and services imported.
Or “Exporters” may exchange their exports indirectly for domestically produced goods and services: “Exporters” receive from foreigners money for their exports and then use this money to purchase domestically produced goods and services. In this latter case, of course, the sellers (to the “Exporters”) of the domestically produced goods and services must be willing and able to use the monetary proceeds from these sales to purchase from abroad real goods and services. (Or what is in essence the same thing, some other fellow citizens earlier purchased from abroad some real goods or services, and the monetary proceeds from those earlier sales were later used by those foreigners to purchase the “Exporters” wares.)
Timing issues can be introduced, and are realistic. Today’s “Exporters” might choose not to cash out their monetary proceeds immediately on the purchase of real goods and service for consumption; “Exporters” might instead use their monetary proceeds to purchase financial instruments that give them claims in the future on (hopefully larger) quantities of real goods and services for consumption.
Yet no matter how directly or indirectly – across space or time or both – “Exporters” transform the proceeds of their sales to foreigners of real goods and services into the acquisition for themselves of real goods and services for their consumption, the fact remains that “Exporters” do not export for the sake of giving up property titles to real goods and services. Rather, they export for the sake of increasing their own abilities to consume real goods and services.
This is my only point: production and selling occur only insofar as these activities are expected by the producers and sellers to enhance their abilities to consume, either today or tomorrow. It is not – it is never – the exporting as such that enriches those who export. What enriches those who export is only whatever increase in their abilities to consume – today or tomorrow – is made possible by their exporting.
My plea is to keep our eye on the ultimate goal of economic activity, which isn’t to produce and sell, but to acquire real goods and services for consumption. And so when I wrote that “exporting, as such, no more enriches a country than does vandalism or arson” I meant only the utterly trivial point that the giving up of possession of real goods and services, as such, does not enrich the people of a country. What enriches them is what the giving up of real goods and services enables those who give them up to obtain in the form of other real goods and services.
This point, as trivial and obvious as it is to anyone who knows economics, warrants repetition because people who don’t know economics – and they are many, and they include the current POTUS and his gang of apologists – seem not to grasp it. Such people apparently believe that those who transfer to foreigners ownership rights to real goods and services are enriched merely by the receipt of money from abroad and are impoverished by any net expenditures of money on imports. (This belief, remember, is central to mercantilism.)
Don Boudreaux
Jun 5 2019 at 8:55am
I elaborate further, and with a different emphasis, here.
David Henderson
Jun 5 2019 at 6:48pm
Thanks, Don. I see that you’re going to write a longer post, and so I’ll hold off until I have time to read and think about it.
dede
Jun 5 2019 at 9:36pm
It would be more efficient to exchange the yuans against Swedish Krones. The market for euros is more lively in the eurozone than in Sweden.
Todd Ramsey
Jun 5 2019 at 9:55am
Arguing that an infinite string of IOUs does not make someone better off is arguing that a 1967 purchase of Berkshire Hathaway stock, which has never paid a dividend, did not make the buyer better off.
Even as the stock price went from $16 to $300,000.
dede
Jun 5 2019 at 9:59pm
And that is true if you die before reselling the share.
You may feel rich sitting on your Berkshire stock but Boudreaux’s argument is that up to the moment you get something useful against it, you are not better off (you may think about it this way : Robinson Crusoe could have bought the stock in 1967 and then landed on his island – even if this is worth 300K today, he would not be much better off for it until somebody saves him and he can find a broker in New-York)
robc
Jun 5 2019 at 10:35am
Don has explained himself above, but I think part of the problem (from my persepective) is that people aren’t flexible enough about what they consider imports (or exports).
I think of everything in David’s list as an import.
Back when people talked about the trade imbalance with Japan, I said it was absolutely balanced, it was just that we were imported goods from Japan and exporting NYC skyscrapers and Hawaiian golf courses.
And Japan overpaid for the real estate.
I recently wondered if anyone sold real estate to Japan at a high price, bought the same real estate back low, then resold it recently to China at a high price (with the plan to later buy it back low again in the future)?
I am sure this has happened at least once.
David Henderson
Jun 5 2019 at 6:49pm
It certainly is true that the easy way to salvage Don’s point is to redefine imports in a way that they have never been defined.
Don Boudreaux
Jun 6 2019 at 6:31am
David: I don’t believe that I’m redefining imports in a way that they have never been defined. I am saying that when I sell something I can cash out the proceeds for goods or services immediately, or I can do so in the future, holding financial instruments in the interim. When these options are exercised across national boundaries, imports occur, in the first case, immediately or, in the second case, in the future.
I do not define financial instruments as imports. They, of course, are not imports. But these instruments are cashed out later for imports. And because it is the prospect of cashing out these financial instruments for imports that gives these instruments value, imports are indeed necessary for exporters to gain from exporting.
(There’s one exception to my defense that I do not redefine imports. It is my claim that foreign real estate purchased for consumption purposes (although not any such real estate purchased for investment purposes) can be considered to be an import. I believe further that economically any such purchase for consumption purposes should be considered to be an import.)
For my point in my original response to Steve Moore, the timing of the arrival of imports is inconsequential.
Again, my only point writing the passage that you quote was to counter Moore’s mercantilist suggestion that the ultimate gains from international trade come in the form of exports rather than in the form of imports. My point, of course, is a thoroughly Smithian one. I did not intend to suggest that all of those gains come immediately in the form of imports. And for purposes of my point – for purposes of countering the mercantilist myth that exports rather than imports are the ultimate goal of trade – it does not matter if the imports that in reality are the ultimate goal of trade arrive in the home country today or if they arrive in the home country 30 years from today.
……
At the risk of belaboring a small disagreement among friends, allow me to offer a slight variation on what I take to be your objection to my point:
Suppose that a student says to you that “People work for money.” Suppose further that the context and tenor of the conversation prompt you to reply that “People ultimately work to increase their standard of living.” Your wish is to instill in the student the Smithian point that consumption and not production is the ultimate purpose of economic activity.
You go on to point out that increasing one’s standard of living requires that the money earned from work be spent on food, clothing, housing, and other real goods and services.” You end your reply with “Ultimately, people work for what money can buy and not for money as such.”
Now imagine someone else – Jones – replies to you that you are mistaken. Jones says that you are correct that people do spend some of the money they earn on goods and services, but they also use some of the money in other ways – they invest it, they buy real estate with it, and they even hold some of it as cash. Jones thus concludes that “Henderson is wrong. Goods and services are not necessary for workers to gain from working.”
The point of my response to Steve Moore is no different – indeed, it is identical – to the point that you make here in my little hypothetical example.
David Henderson
Jun 6 2019 at 9:30am
I was replying to robc’s point, not to you. He really did redefine imports.
Don Boudreaux
Jun 6 2019 at 9:45am
Ah, my apologies. I see that now. Thanks.
robc
Jun 6 2019 at 10:43am
Don’s point is, of course, better than mine.
I think it is the same, just instead of saying that the assets received in exchange for exports will eventually be converted into imports, I just go ahead and call those assets imports from the start, sidestepping the whole subtlety of the situation.
It is obviously something an economist wouldnt do, but it simplifies the problem in my head, by taking the time delay out of the problem.
robc
Jun 5 2019 at 10:49am
The value of a stock is the present value of its future dividend stream.
For BRK, that PV has gone up enormously from 1967 to present, but it is still based off that future stream.
Right now, Buffett thinks he can earn more by keeping the money than the shareholders can after receiving a dividend (those who own BRK stock agree, those who don’t sell it). One day, he may change his mind and the dividend stream will start.
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