A Quick Thought on the Balance of Trade

When a foreign nation buys resources and goods from the domestic nation and takes them out of the country (exports), it’s considered “good” by mercantilists.

When a foreign nation sells goods and resources to the domestic nation (imports), it’s considered “bad” by mercantilists.

When the number of resources coming in is higher than going out, and some resources are bought by the foreign nation and kept in the domestic country (trade deficit), it’s considered terrible by mercantilists.

Mercantilism is a strange doctrine.

Inspired by today’s Cafe Hayek post

Know Your Limits

Former Representative Ron Paul tweeted and republished a recent article on Mises Institute  discussing “scientism” (that is, the phrase coined by FA Hayek to describe the over-reliance on the scientific method) written by Jonathan Newman.  Scientism is a problem, but Mr. Newman inaccurately describes it, and in the process, attacks science rather than scientism.

Newman’s biggest error is here (emphasis added):

Scientism is the over-reliance on or over-application of the scientific method. Scientism has many forms, one of which is the use of empirical methods to do economic science, or the dismissal of claims not based on experiment results that question other claims that are based on experiment results.

The bolded part is flat-out incorrect.  First off, if one doesn’t do empirical methods, one isn’t doing economic science.  Second, if that were true, the Mises, Hayek, Smith, Ricardo, et al are all guilty of scientism.  The empirical method requires observation, consideration, testing, etc of natural phenomena.  If we aren’t doing that, then we aren’t doing anything worth doing.  Smith’s Wealth of Nations is an empirical work.  Mises’ Human Action is empirical work.  Hayek’s Prices and Production is empirical work.

One might argue Newman is speaking more (like Hayek was) on the heavily mathematization of economics.  Ok, fine.  Newman’s criticism is still incorrect.  Mathematical and statistical models can provide us insight, so long as they are used correctly.  We must remember that the output from such models is model-dependent.  It is conditional upon certain assumptions.  This is true whether it is a highly advanced econometric model or a simple Marshallian supply and demand graph.  Knowing the limitations and applicability of models is important to getting the intuition (a great discussion of this point is made in Robert Ableson’s “Statistics as Principled Argument“).  The problem arises when we treat the results of these models as Gospel without consideration of their conditions.

Newman’s article has other issues (such as posing the hypothetical “what if the Pythagorean Theorem is wrong?”) which I will cover at a later time.

HT: Garett Jones

Update: I had incorrectly attributed the article in question to Ron Paul instead of Jonathan Newman.  My apologies.  The blog post has been updated to reflect this correction.

Someone Else

The other night I went into Georgetown to see a show a friend from childhood was performing (shameless plug: check out Grace Morrison).  It occurred to me, as it sometimes does, how wealthy trade has made us all.  Here I was, in a bar, having a drink, watching a friend sing.  How was any of this possible?  Because of trade:

Someone else was growing my food
Someone else was writing my books
Someone else was brewing my beer
Someone else was making my clothes
Someone else was driving my train
Someone else was lighting the room
Someone else…

These countless “someone elses” had freed up time for me to have that greatest luxury of all: leisure time with friends.  And, subsequently, they freed up time for Grace and her band to write songs, travel hundreds of miles, and perform for us.  And all these “someone elses” asked for in return from me was a few economic ramblings and writings.  All they asked for in return from Grace was a few songs.

Trade allows us to free up time, time which can be used for innovation, or study, or leisure.  Despite what the protectionists (whom I shall now refer to as scarcitists, since they peddle scarcity.  That name may need work) argue, this increase in time is a good thing.  It’s how humanity advances and why we can afford diversions.  We can study things like medicine, music, art, and philosophy because someone else is growing the food, making the clothes, etc.

Ruminations on Equal Pay Day

Today is Equal Pay Day, which means two things are certain: 1) some groups will be arguing that the pay gap is very real and must be addressed and 2) some groups will be arguing the pay gap is a myth and should be dismissed.  Both groups are simultaneously right and wrong.  It is true that, adjusting for various economic factors, much of the pay gap goes away (Group 2 is correct).  However, it is also true that there is some gap that remains which could be due to discrimination (Group 1 is correct).

But economics is limited in this story.  We can provide economic explanations, but there are other factors that other fields could provide insight into as well.  For example, why is it that there is an unadjusted 80-cent gap to begin with?  Are women encouraged to avoid the higher-paying fields?  Sociology could help answer that.  Are women just worse negotiators then men?  Psychology could help answer that.  Are the biological differences that could account?  Biology could help answer that.  Is there legislation that encourages discriminatory hiring practices?  Legal studies can help answer that.  These various disciplines could provide valuable insights.

A mistake I think many economists make (myself included) is sometimes thinking the economic way of thinking is the only way of thinking.  It is powerful, to be sure, but it is not alone.  We can help provide some answers (like on the pay gap) but not all the answers (nor should we.  Division of labor).

My two cents on the pay gap: Is discrimination an explanation for the difference between men’s and women’s pay?  It’s probable; the size of the effect is difficult to know.  Unlikely responsible for a large portion.  Is government the solution?  Possibly.  If the issue is poor incentives from legislation, then government would have to repeal such legislation.  If there are other causes, governmental interference would likely cause more harm than good.

I think the pay gap deserves more thought than many economists are willing to give it, and it especially deserves thought from the sociologists and legal scholars (my gut feeling is that is where we will find much of the gap explained).

The Case Against Renewable Energy, as Presented By Bernie Sanders

On his Facebook, Sen. Bernie Sanders uploaded the following graphic*:

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The Senator is trying to spin this as an argument for renewable energy, but in doing so he confuses costs and benefits.  Ironically, he makes an extremely strong case against renewables:

Looking at this chart, we see approximately the same number of jobs in coal and nuclear.  Renewables have a considerably higher number of jobs.  But their output are quite different.  According to the EIA, coal produces approximately 16% of our energy consumption (or about 15.6 quadrillion BTU).  Nuclear power is ~9% (or ~8.8 quadrillion BTU).  Renewables are ~10% (or 9.8 quadrillion BTU).

What does this mean for resource efficiency?  Quite a lot.  The average worker in coal produces 2.1e^11 BTU.  The average nuclear worker produces 1.1e^11 BTU.  The average renewable worker produces 1.8e^10 BTU.  That means the average coal worker is 1033.92% more efficient than the average renewable worker!   We’d need to put in approximately 10x the number of labor resources into renewables as coal to get the exact same results!  That’s highly inefficient and quite against the idea of resource conservation.  On environmentalist grounds, I oppose renewables at this date and time.

But, the point the Senator is making, is that the jobs themselves are desirable.  But he confuses costs and benefits.  Jobs are a means not an ends.  Our lives are improved by finding ways to reduce the amount of labor in them, not increase it.  In short, the Senator has things exactly bass ackwards.

*Note: I have not independently verified these figures.

A Tale of Two Roads

Commenting on this blog post at Carpe Diem, commentator (and friend of the blog) Walt Greenway says:

If people trade and not countries, should we condone theft from the Chinese people [in the form of subsidies on exported goods] just because we get a good deal in the U.S.?

Here is my response:

There are two issues here:

1) The question before us is whether or not trade with China (who subsidizes their stuff) harms us, Americans. That is an emphatic “no.”

2) As an economist, I advocate free trade for all. Were the Chinese government (or were I a Chinese citizen) to ask me what the best course to take would be, I’d argue for liberalizing trade. But I am not a consultant for the Chinese government nor a Chinese citizen. I am an American. I can only affect US barriers, not Chinese barriers. Therefore, I will content myself with reducing half of the trade barriers if I cannot reduce them all.

Allow me to elaborate in the manner of Frederic Bastiat:

There are two countries: Libertas and Protectistan.  The two build a road between one another; a road which overcomes barriers like mountains and deserts, allowing the two to trade with each other more cheaply.  For many years, both countries prosper from the trade.  One year, in a fit of madness, both erect artificial barriers (checkpoints, potholes, erroneous signs, anything to slow the flow and raise the price) along their halves of the road to keep the other from “flooding” their market.  As time moves along, the citizens of Libertas get frustrated they’re no longer once prospering the way they once did.  They hold a meeting.

One man gets up and says: “Our issues began when we erected barriers on the road to Protectistan.  First we paid for the road and then we paid for the obstructions!  That is absurd.  If we remove our barriers, we can improve our lot by making cheaper the goods we can get from Protectistan.  Let us do this post haste!”

Another man (this one from the government) stands up and says: “Do not listen to that crazy person.  We can only reduce our barriers if Protectistan lowers theirs! We have sent diplomats to Protectistan to negotiate the removal of barriers and they refused.”

The first man gets up again: “Sir, we have no control over what Protectistan does, but we do have control over what Libertas does.  Let us uphold our end and remove our barriers.  Perhaps, one day, they will see the folly of their ways, but why should we be punished just because they don’t want to remove barriers?”

The government man replies: “Do not listen to this dreamer, this theorist.  We can only prosper if our barriers are kept in balance.  Why, if we removed our barriers, all would be lost!  It would be more difficult to go than come, to export than import.  Our ruin would follow just as quickly as it has followed the cities at the mouths of the Mississippi, the Thames, the Amazon, the Yellow River, for it is easier to go downstream than upstream.”

A lady in the back responds: “The cities at the mouths are wealthier than the cities on the tributaries.”

The government man cries: “That is impossible!”

The same voice: “But it is a fact.”

The government man: “Then they have prospered against the rules!

The government man finished his oration by appealing to all manner of things: nationalism, patriotism, etc.  He spoke of murderous competition, of loss of pride.  The assembly, so moved, voted to keep the barriers in place, agreeing that it is only by paying and not receiving can profit be achieved.

Theory vs Practice

I always find it interesting that protectionists call us free-traders the fantacists, the theorists, the academic scribblers (etc), and cast themselves as the realists. They claim they are the ones who represent what people want, that we are just too deep in our cloistered academic world to understand that.

That may be true, but it’s strange. If they were really correct, that the supposed costs of mercantilism are really benefits, the supposed benefits are really costs, that people understand this and we do not…

If all that were true, why the need for tariffs? Why the need for government at all? Wouldn’t people just naturally buy domestic and never foreign?

In practice, no one is a mercantilist.  If we take their position to its logical conclusion, we can see this: no one, even the most hard-core mercantilist, abstains from trade.  Indeed, they personally act as though they agree with the free-market principle that it is better to buy what is more expensive for one to produce.  No mercantilist grows his own food, sews his own clothes, brews his own beer, etc.  He gladly trades for those items.  And yet, paradoxically, he argues that, in theory (but not in practice!) these actions harm people.

It seems to me that we are the realists and the mercantilists are the theorists given they need to force reality to coincide with their theory.