Money Can’t Buy Me Love

At Cafe Hayek, Don Boudreaux writes about “the idiocy of mercantilism.”  I agree with the substance of his post, but I think he assumes something which is known to many Cafe Hayek patrons but not to many laymen.  And that is the role of money.

Don says:

 

According to the mercantilist dogma held by nearly all politicians and pundits (and, yes, also by the People), the best possible outcome for any country – call it country A – whose government is negotiating a trade deal is the following: the government of A arranges for the maximum possible number of citizens of A to work the maximum possible number of hours producing goods and services of maximum possible value to be exported to the maximum possible number of foreigners whose governments agree to prevent those foreigners from ever sending in return to the people of country A even as much as a single wooden toothpick.

All this is absolutely correct.  However, many proponents of mercantilism would object and say “Don, you loon!  Of course we get something in return!  We get money.  Our firms get profits!”

This is also true.  However, money is not wealth.

“But Jon, now you are the one being the loon!  How is money not wealth?” those same proponents would ask me.

Money is only good insofar as it can be traded for something else.  Money in and of itself is just little scraps of paper with numbers and pictures printed on them.  You cannot eat dollar bills.  You cannot clothe yourself in Korean won.  You cannot shelter yourself in Euro or live on Reals.  They can be traded for something, yes, but in and of themselves they are not resources.

So, a nation that only exports and gets nothing but money in return is, indeed, made worse off.  They send off their resources and get nothing but paper pictures back.  However, if they send off goods/services and get other goods and services back, then they are made better off!

Exports are a cost; they are what we give up in order to import.  Imports are the real benefits of trade.

In short, the purpose of trade is not to acquire more money but to acquire more wealth.

Update: Responding to a commentor at Cafe Hayek, Scott Drummond makes the same point more succinctly: “[M]oney isn’t wealth unless it can be used to acquire goods.”

3 thoughts on “Money Can’t Buy Me Love

  1. Let’s take Country A and B to an extreme, such as if Las Vegas were a country. With Las Vegas a different country using a different currency we can keep track of which way the money is flowing. We in the U.S. have to convert dollars to vegas and before long, they have billions of dollars and we have billions of vegas.
    To make it more real the Americans don’t approve of the immorality of the Las Vegans; the women there are mostly whores and the men run gambling operations. And the Las Vegans don’t think much of our uptight society whose multitude of prejudices are based on silly traditional family values.
    The ones who are worried are a few Las Vegans, who attended a lecture where the speaker was Paul Krugman. They are worried that in the future they will need more manufacturing and with very little product going out billions of those filthy dollars are just piling up.
    – Is there a natural limit to how high the “current account” can get?
    – Is there interest to be paid on the “current account” and who gets it?
    – In this model, what form does the “capital account” take?

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  2. Walter

    – If billions of dollars and vegas are flowing between LV and US it appears there is healthy trade going on between the two countries. Why are respective currencies “piling up” instead of buying goods and services or assets in the issuing country? That’s the only thing they’re good for.

    – If LV-ians have no use for dollars why do they accept them as money? If US-ians have no use for vegas, why do they accept them as money?

    – Why do LV-ians believe hey need more manufacturing? It sounds like they are doing a thriving business in services.

    – Is there a natural limit?

    Yes. As the domestic currency becomes scarcer in the issuing country, it becomes more valuable, which means prices of goods and services will drop. At some point the higher value of the dollars in LV and the lower prices in US will make it irresistibly attractive for LV-ians to buy cheap products and services in the US, and vise-versa.

    – Is there interest to be paid?

    No.

    – What form does the “capital account” take?

    In this case, in the form of dollars and vegas in the respective countries holding them.

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