Leadership to Freedom

I see many articles in the news lately, especially with the US election, talking about the challenges facing Barack Obama’s second term in regards economic threats from abroad. But how is that possible?

This is only possible if one country having a better economy than yours is bad for your own economy. The best way to see the absurdity of this is to think in terms of your neighbor  or maybe a friend. Better yet, since it’s usually countries that we don’t like which are considered economic threats, think of that co-worker you can’t stand, or the guy you really don’t think should be marrying your daughter.

If you are making $50000 CAD a year, and that person you dislike gets a raise, let’s say from $45000 to $55000, do you now have less purchasing power? You might say yes due to the inflation of prices from more money now being in circulation, which would be true if that person you disliked worked for the government which is printing new money to give the raise, but let’s leave that out for the moment; it has no bearing on economic threats from another country having a better economy.

Does that person’s raise diminish your ability to advance in your own career, or stop you from a getting a raise of your own? Does it diminish your ability of finding a better job? Absolutely not! If anything, the fact that your friend got a raise could mean good things for you. If the company can afford to give the raise, it means things must be good. They must be productive, which is good for the economy as a whole.

The only way this situation is really a threat is if this person used this increase to be able to afford a gun or hire a gang, and used the threat of force against you. But in this case it now a threat of force, and not of economics that we are talking about.

All this is just as true when discussing different countries, and one might even argue that it is even truer since most countries use different currencies. If one country gave itself a raise by printing more money, it will be devalued from inflation; their currency will not have the same purchasing power.

The truth of the matter is that it is usually the country thinking of another as an economic threat, which is the threat, and it is a threat to itself. This can be explained through the idea of free trade. Before you start thinking of what is wrong with free trade you need to realize I’m not talking about the usual government free trade agreements; most of those are really just trade agreements with some special deals mixed in them.

True free trade boosts a country’s standard of living, rules and regulation against free trade hurt a country’s standard of living. Here is a snippet from my introduction to economics to see why two people making a decision for their own benefit without interference always has the best outcome for both parties:

Let’s look back at the idea of economics being about interactions; or trade. Think about the axiom, the inherent truth, that Murray Rothbard provided on the concept of human action,

“All action is an attempt to exchange a less satisfactory state of affairs for a more satisfactory one.”

If I choose of my own free will to give you a cow in exchange for a horse and you choose of your own free will to give me a horse in exchange for a cow, it means that you value the cow more than the horse, and I value the horse more than the cow. We are both better off from our free exchange. In a free society where there is no coercion involved in an exchange, everyone gains and no one loses. If one part did not see themselves gaining from the exchange, the exchange would never happen. No one will ever make any exchange, after taking all considerations into account, where they see themselves being worse off. You might think this is not true when considering gifts, but psychic value is also part of an exchange, and one can get satisfaction from giving to others and making them happy.

So why does one country, looking at another as a threat, actually become a threat to itself? It is because that country will do things to try to lessen the threat, and the only thing that country can do is remove a piece of freedom from trade. They might think that tariffs are a good idea, to reduce imports from the threatening country; or maybe they might think that they should just forbid trade completely.

The problem with tariffs or lack of trade completely, is that it actually hurts the country which has them in place. For example, if your country is spending $100 million a year on furniture manufactured in China, and a 10% tariff is put in place, that means your country will more than likely be spending $110 million, or close to it. The manufacturer is not likely to reduce the costs, and the distribution companies still want their profits. The price will get passed on to the consumers. This means the citizens of your country will have $10 million less to spend on other things, thus reducing their standard of living. You might argue that they can choose to buy less of it and spend that extra $10 million on other things, but that means having less of the furniture which they wanted most. This means having less of what they need, still reducing their standard of living.

If you were to forbid trade completely, stopping you from buying furniture from China completely, things might be even worse. You might want to argue that this is good since it will create the jobs at home instead. In fact many countries put tariffs in place for this reason alone, to boost its own productivity. But think in terms of the previous example.

If people were buying the products from China in the first place, it is because it was in their own best interest; it was cheaper and gave them more money to spend on other things. If you forced them to but it from your own country where it was not produced with the same efficiency, it means they have to pay more for it, reducing their standard of living. Because they have less money to spend on other things, it means fewer jobs available in those other areas, even if it is only in the distribution chain to get things imported from China.

The only way another country can be a threat to your economy is to put its own tariffs and regulations in place. But since this hurts them more than you.. Is that country’s economy really still a threat?

For a more in-depth explanation of this issue, I suggest reading ‘Economics in One Lesson’ by Henri Hazlitt, especially the chapter on tariffs.

On a final note, even though this has no bearing on any economic threat, I feel I should cover the moral issue of those workers in other countries being paid peanuts compared to what they may get in Canada or the United States.

I strongly suggest reading this article by Mike ‘Mish’ Shedlock. It explains how those people working for peanuts are doing so because those peanuts are better than the alternative of not working at all. If we didn’t produce anything there it means even those peanuts would not be available to them, reducing their standard of living. Our trade with countries having a low labor cost does not actually reduce the standard of living of those in the country; it raises it by making labor a little more scarce eventually raising their wages.

addendum 11/14/2012

after this was posted on the Ludwig Von Mises Institute of Canada site, this article by Patrick Barron was mentioned in the comments, and I think it is a great read on the subject – it explains things in even greater detail than what I did. He also goes into the concepts of trade deficits and currency devaluation. Here is great part on trade imbalance issue:

After purchasing goods from the protectionist nation or bloc of nations, that nation’s currency will find its way back into its economy in the form of export demand from some other nation that accepted the currency in payment for some other good or service or it will receive a capital investment. If the currency never finds its way back to the nation that adopted unilateral free trade and is held indefinitely in the coffers of some foreign bank or central bank, that nation has simply been on the receiving end of a gift. An analogy would be that of a friend or neighbor who sells you something and then never cashes your check.