ECONOMISTS who believe in the market economy seldom
have kind words for the ideas of the late John Maynard Keynes, and
understandably so. Keynes, who did so much to make inflation a popular
policy worldwide, was no friend of the free market. Scattered here and
there in his voluminous writings, however, are passages with which free
market advocates can wholeheartedly agree. This one in particular
deserves to be carved in stone and enshrined forever:
The ideas of the economists and political philosophers,
both when they are right and when they are wrong, are more powerful than
is commonly understood. Indeed the world is ruled by little else.
Practical men, who believe themselves to be quite exempt from any
intellectual influences, are usually the slaves of some defunct
economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years
back.1
Today it seems that defunct economists and academic
scribblers are making a dramatic comeback. Economics has become burdened
with foolish notions that were once thought to be discredited. Some of
these notions are put forward as if they are imaginative, new
discoveries; too many are designed to turn the clock back to the days
before free trade unleashed the creative energies which have built the
prosperity of Western civilization.
Twin Obstructions
A leading illustration of this point involves the twin
concepts of "balance of trade" and "balance of payments." These two
concepts, which sound innocuous in name, often form the basis for
erecting barriers to foreign goods. With the demand for "protectionist"
legislation on the rise throughout the world, we can expect to hear more
about them in coming months.
How are these terms defined? The "balance of trade" is
considered to be the difference between the money value of a country's
merchandise imports and the money value of its merchandise exports. The
"balance of payments" is regarded as a broader measure of economic
activities between nations because it includes merchandise and such
"invisible" imports and exports as credit transactions and government
payments abroad (for foreign aid or to support military forces, for
example).
The definitions are not as important, though, as the
actual purpose behind them. Both "balance of trade" and "balance of
payments" concepts attempt to fracture the process we know as "trade" so
that the resulting fragments can be designated either "good" or "bad."
In this way, "trade" is deemed to be "good" if it meets certain
statistical criteria and "bad" if it does not. Such value judgments,
moreover, are reached independently of the individuals who are doing the
actual trading.
The Mercantilists
The first economists to develop this analysis of trade
were the mercantilists, so it is certainly not new with today's
theoreticians. Thomas Mun, a leading mercantilist scholar of the
seventeenth century, argued that England would prosper in foreign trade
if only she would strive for a "favorable" balance:
The ordinary means, therefore, to increase our wealth
and treasure is by Foreign Trade wherein we must ever observe this rule;
to sell more to strangers yearly than we consume of theirs in value. For
suppose that when this Kingdom is plentifully served with Cloth, Lead,
Tin, Iron, Fish and other native commodities, we doe yearly export the
over-surplus to foreign countries to the value of twenty two hundred
thousand pounds, by which means we are enabled beyond the Seas to buy
and bring in foreign wares for our use and consumption's, to the value
of twenty hundred thousand pounds; By this order duly kept in our
trading, we may rest assured that the Kingdom shall be enriched yearly
two hundred thousand pounds, which must be brought to us in so much
Treasure, because that part of stock which is not returned to us in
wares must necessarily be brought home in treasure .... 2
Mun and the mercantilists believed that a nation must
never buy from foreigners more than it sells to them. If such an
"unfavorable" balance occurred, the nation had to pay the difference in
gold, the internationally-accepted medium of payment. To prevent that,
the government was supposed to actively promote an excess of exports
over imports. Mercantilists were so convinced that specie itself
constituted the wealth of the nation that they closed their borders to
trade and often waged war in order to protect and accumulate vast
supplies of gold. That a nation should strive for a "favorable" balance
of trade (more exports than imports) is the economic heritage of the
sixteenth, seventeenth, and eighteenth centuries.
Mercantilist reasoning did not die with the
mercantilists, however. According to the U.S. Department of Commerce,
imports surpassed exports for eight consecutive months through January
1977. This situation, disparagingly labeled a trade "deficit," is
provoking concern among many orthodox economists. Already, demands are
increasing for restricting imports to redress the "imbalance." Japan is
singled out for particular scorn, because she sold $5 billion more in
goods to the U.S. than the U.S. sold to her in 1976. Each month that
government statistics indicate an ,,unfavorable" balance seems to push
America closer to a neo-mercantilist policy of protectionism and trade
wars.
Adam Smith and Bastiat
It was Adam Smith who first attacked the notion that
exports are good and imports are bad. He postulated a "harmony of
interests" in trade, by which both parties to an exchange benefit. With
the exception of obvious fraudulent practices, which are minimal in
number and a responsibility of the courts, there can be nothing
"unfavorable" about voluntary trade from the point of view of the
individuals doing the trading, otherwise those individuals would not
have engaged in it.
This principle is readily visible when trade involves
two parties within a country; it somehow becomes confused if an
invisible political barrier separates the two. Introduce more than one
currency and the principle becomes all but totally obscured in the
welter of economic fallacy. Mercantilists of yesteryear and like-minded
economists of today face an impossible dilemma posed by this question:
Since each and every trade is "favorable" to the individual traders, how
is it possible that these transactions can be totalled up to produce
something "unfavorable"?
Frederic Bastiat, the nineteenth century French
economist and philosopher who exploded myths with stunning clarity, once
addressed himself to this very point. His analysis remains to this day
one of the best critiques of the "unfavorable balance" concept:
M.T. dispatched a ship from Le Havre to the United
States, with a cargo of French goods, chiefly those known as specialties
of Parisian fashion, totaling 200,000 francs. This was the amount
declared at the customhouse. When the cargo arrived in New Orleans, it
had to pay a shipping charge of ten per cent and a tariff of thirty per
cent, which brought the total to 280,000 francs. It was sold at a profit
of twenty per cent, or 40,000 francs, for a total price of 320,000
francs, which the consignee converted into cotton. This cotton had to
pay ten per cent more, for transportation, insurance, commissions, etc.;
so that, when the cargo arrived at Le Havre, its cost amounted to
352,000 francs, and that was the figure entered into the accounts of the
customhouse. Finally, M.T. again realized, on this return trip, twenty
per cent profit, or 70,400 francs; in other words, the cotton sold for
422,400 francs.
If M. Lestiboudois requires it, I shall send him some
figures taken from the books of M.T. There he will see, in the credit
column of the profit-and-loss account-that is to say, as profit-two
entries, one for 40,000 francs and the other for 70,400 francs; and M.T.
is fully satisfied that in this respect his accounting is not in error.
And yet, what do the figures in the account books of
the customhouse tell M. Lestiboudois regarding this transaction? They
tell him that France has exported 200,000 francs, and that it has
imported 352,000 francs; whence the honorable deputy concludes "that it
has consumed and dissipated the proceeds of previous savings, that it
has impoverished and is on the way to ruining itself that it has given
away 152,000 francs of its capital to foreigners. "
Some time afterward, M.T. dispatched another ship with
a similar cargo, worth 200,000 francs, of products of our domestic
industry. But the unfortunate vessel sank while leaving the harbor, and
there was nothing else for M.T. to do but to inscribe in his books two
brief entries phrased thus:
Sundry goods due to X: 200,000 francs for the purchase
of various commodities carried by ship N.
Profits and losses due to sundry goods: 200,000 francs
for ultimate total loss of the cargo.
Meanwhile, the customhouse on its part was entering
200,000 francs into its export ledger; and as it will never have
anything to enter into the opposite import ledger on this account, it
follows that M. Lestiboudois and the Chamber will view this shipwreck as
a clear net profit of 200,000 francs for France.
There is still a further conclusion to be drawn from
all this, namely, that, according to the theory of the balance of trade,
France has a quite simple means of doubling her capital at any moment.
It suffices merely to pass its products through the customhouse, and
then throw them into the sea. In that case the exports will equal the
amount of her capital; imports will be nonexistent and even impossible,
and we shall gain all that the ocean has swallowed up.3
In a parting shot, Bastiat again applies reductio ad
absurdum logic to the argument. He declares: Assume, if it amuses you,
that foreigners flood our shores with all kinds of useful goods, without
asking anything from us; even if our imports are infinite and our
exports nothing, I defy you to prove to me that we should be the poorer
for it.4
A Two-Way Street
It ought to be obvious that trade is a two-way street.
In a free market, where trade is a voluntary, desired, and spontaneous
feature of human action, there is a "perfect balance." Professor W.M.
Curtiss demonstrates that trade between people of different nations is
no different in this respect from trade between people of the same
nation:
Suppose you sell a bushel of apples for two dollars.
You get two dollars, which you would rather have than the apples; the
buyer gets the apples, which he would rather have than the two dollars.
A perfect balance!
True enough, our exporters may sell goods to English
buyers and get sterling exchange. They may spend this money in France or
Germany rather than in England, so that the flow of goods is not
directly between England and America. But the same might be true in the
trade of apples for dollars. With your two dollars, you probably will
buy something from a third party rather than from the man who bought
your apples.5
The mercantilists, we have noted, viewed the export of
money and bullion as inherently evil. Exports were to be encouraged and
imports discouraged by means of tariffs and quotas in order for money to
be "kept in" the country. Similar cries are heard today. Many economists
and government officials view with alarm any net outflow of money to
foreigners.
In the context of individuals engaged in free trade,
such alarm is misplaced if directed at the market. Often a net outflow
of funds is a symptom of the government's own policy of inflation which
erodes public confidence in the dollar. Professor Ludwig von Mises
believed that in any case, this occurrence
... is not the product of an unhappy concatenation of
circumstances that befalls a nation like an act of God. It is the result
of the fact that the residents of the country concerned are intent upon
reducing the amount of money held and upon buying goods
instead.6
Furthermore, Mises contended, it is not correct to
assume that government must take measures to prevent a total loss of the
nation's money by such an "unfavorable balance." Quoting from Professor
Mises again:
No government interference is needed to prevent the
residents of New York from spending all their money in dealings with the
other forty-nine states of the Union. As long as any American attaches
any weight to the keeping of cash, he will spontaneously take charge of
the matter ... But if no American were interested in keeping any cash
holding, no government measure concerning foreign trade and the
settlement of international payments could prevent an outflow of
America's total monetary stock.7
Keynes was correct when he said that ideas, right or
wrong, rule the world. The undue concern over the "balance of trade" and
the "balance of payments" will quite probably produce wider restrictions
on international trade. If that occurs, our government's policy-makers
will be treading blindly in the footsteps of the defunct economists and
academic scribblers of mercantilist times.
At the time of the original publication, Mr. Reed of
Beaver Falls, Pennsylvania, was a recent graduate of Grove City
College, now studying for an advanced degree in American history with
emphasis on economics.
l John Maynard Keynes, The General Theory of
Employment, Interest and Money (New York: Harcourt, Brace and World,
1964), p. 383.
2 "England's Treasure by Foreign Trade," 1664 by Thomas
Mun in John R. McCulloch (ed.), Early English Tracts on Commerce
(Norwich: Jarrold and Sons, Ltd., 1952), pp. 125-26.
3 Frederic Bastiat, Economic Sophisms (Irvington, New
York: Foundation for Economic Education, 1968), pp. 53-54.
4 Ibid, p. 55.
5 W.M. Curtiss, The Tariff Idea (Irvington, New York:
Foundation for Economic Education, 1962), p. 36.
6 Ludwig von Mises, Human Action (Chicago: Henry
Regnery Co., 1966), p. 452.
7 1bid
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
July, 1977, Vol. 27, No. 7.
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