Economists Debate

I listened to a podcast between 2 economists yesterday as they debated the trade deficit with China. On the one hand, argues one, China gains a competitive advantage by manipulating its currency. By devaluing their renminbi, the effectively increase the demand for their products by making them cheaper.

“So?”, argues the other economist. If they want to sell us their stuff for cheaper than it’s worth, better for us.

Not so, argues the first economist. If China is selling us all their goods, a greater portion of our aggregate demand goes to them, rather than to American business. So American business suffers while Chinese business flourishes.

But we can move our resources to better uses then, points out the second economist. If they’re willing to produce stuff for us cheaper than we can make them ourselves, it’s better for us to use our resources for other things.

Ok, here’s where I interject my argument. The first economist’s argument is founded in the idea that if we buy all our stuff from China, we’ll run out of demand for our own stuff, and our economy will implode. This, of course, is nonsense. If we trade with China, China expects something in return. They’re not charitably giving away all their stuff, and if they did we’d be even better off. No, China expects us to give us something of equal value back to them. The aggregate demand is a wash. We demand the stuff they make better/cheaper, they demand the stuff we make better/cheaper.

The second economist is exactly right, why should we fight to keep our labor resources stuck in employment where they are less efficient than others in the world? If the world gives it to us cheaper than we could produce ourselves, aren’t we just hurting ourselves if we make it ourselves? We could make a pie for $5, or buy a better pie than our own recipe for $3. If we refuse to let the law of comparative advantage work in our favor, we lose the benefit of the talents and hard work of the rest of the world, which is the majority of people.

While it’s important to be self-reliant, self-reliance does not need to mean that you grow all your own food, build your own house, generate your own electricity, perform all needed medical procedures on yourself, and never get any help from anyone. It means that you do what you do best for yourself and others, while those others do what they do best for you in return, enough that you are able to provide for your own well-being. This maximizes efficiency and output. It is these principles, outlined by Adam Smith, that led to the creation of our free nation, and thus to the long-awaited exit of mass poverty with the exponential growth of worldwide wealth that capitalism created.

Protectionism, such as the first economist advocates, appeals to our emotional senses, to help those of our countrymen who do what others from other nations do better. But if we are to protect those workers from their own competitive failure, we force all others to pay the price at the expense of growth. You make the poor pay more for their food than they are able because the farmers want to be protected from foreign competition. You force the entrepreneur to give up his idea because it costs too much to start his business due to the rules and regulations established to protect existing industries.

No, there is no trade imbalance, and it would be detrimental to pretend that there is one. Let politics be reason without emotion, and let us govern ourselves wisely, even if it means a few will have to find new careers.