Saturday, February 24, 2007

On Borders

From Cafe Hayek:

The Economic Meaninglessness of Political Borders

Sheldon Richman, of the Foundation for Economic Education, firmly grasps what Adam Smith meant when that Great Scot wrote in The Wealth of Nations the following wise words:

In the foregoing Part of this Chapter I have endeavoured to shew, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium. Both suppositions are false [emphasis added].
In this essay, Richman wisely asks

What is an export? What is an import? These words are defined in reference to political boundaries of only one kind: national boundaries. If there were no such boundaries, there would be no exports or imports. But political boundaries are just that. They are not economic boundaries. To the extent that they can, people go about their business as though those boundaries weren't there. People cross the Canadian-American and Mexican-American borders to transact business every day. If they give them a thought it is only because governments put up barriers patrolled my armed guards who make them wait in line. People learn early in life that they can gain immensely from trade, and with that understanding comes the insight that it doesn't much matter on which side of a Rand-McNally line your trading partner lives.

So the very concepts imports and exports are founded on an arbitrary construct that has little practical consequence for people's economic activities. Back in the 1980s, when neomercantilists feared Japan's economic success at selling us stuff (seems a little crazy now, no?), I used to ask what would happen to the trade deficit if Japan were made the 51st state. Obviously, the deficit would have disappeared because we don't reckon trade imbalances between states. Why not?

In reality, then, there are no imports and exports. There is only what I make and what everyone else makes. Few people would want to live just on what they themselves could make. Frederic Bastiat pointed out that each of us daily uses products we couldn't make in isolation in a thousand years. Talk about poor, solitary, nasty, brutish, and short! "What makes this phenomenon stranger still is that the same thing holds true for all men," Bastiat wrote. "Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else."

This is just another way of saying that the case for free trade is conceded the moment someone eschews self-sufficiency. After that, we're just haggling over the size of the trade area. But if free trade (read: division of labor) is good, then the bigger the free-trade area the better. Globalization should be the worldwide removal of all barriers to the exchange of goods and services -- rather than trade managed through state capitalism and multinational bureaucracies. Unilateral, unconditional free trade is the smartest policy.

20 comments:

A.J. said...

So is this guy saying that my concern for illegal immigration that is screwing us is unfounded?

Matthew said...

My take is that he's calling borders irrelevant in a trade sense, not a political sense. Rules governing a people make borders relevant, however when applied to trade, borders are not relevant.

Matthew said...

To elaborate, I see this is being the main thesis: "In reality, then, there are no imports and exports. There is only what I make and what everyone else makes." In that, he makes the strong case for unrestricted free trade while simultaneously pointing out the illogical trade deficit "problem."

Anonymous said...

As far as national borders are concerned I see the economic difference as thus:

If some one does business inside of one country, that country collects tax revenue on that business, if they conduct business outside of the country they do not.

So national borders do not matter in economics... unless you want the government to be able to fund the infrastructure that your company depends on too do business. After all it'd be pretty hard to ship a product without roads and rail systems and companies depend on police and the government forces to protect them from potential thieves, they trust the navy to guard their shipments so they are not seized at sea, or seized by other countries.

The taxes paid to a country provide the necessary stability for an economy to exist. There would be no trade at all if not for the infrastructure funded by taxes. So in that sense, what country business is done in does make a difference.

Allan said...

This article in emblematic of the problems with the free trade movement. While it is logical, it is based on an implicit assumption that does not correspond with the real world.

Specifically, it argues that all else being equal, less restricted trade is better. But all else is not equal. Trade has political consequences as well as economic consequences.

For example, selling weapons could lead to them being used against you to take away your freedom. Creating free trade areas can lead to the creation of supranational government institutions to regulate it.

This doesn't mean that all or most trade is bad, but we need to analyze the political as well as economic consequences of trade.

Anonymous said...

Allan,

You make a good point. I am glad to see that you and I have at least some opinions in common

Matthew said...

The primary case this post was making was debunking the fallacy of the notion of a "trade deficit."

Futhermore, I don't think any of the points brought up are effictive criticisms of unrestricted free trade. A simple solution to the question of who to tax for trade is to simply not tax trade. Even with taxes, borders are not necessary for them to be applied. For example, trading within states and cities occurs without political boundries and the taxes are still collected. If anything, political borders only serve to inhibit trade at the expense of both parties.

Likewise, the selling of weapons is a poor counterexample for the meaninglessness of economic borders. It is not necessary to have borders in order to stop weapons from being sold to enemies. In fact, our current system has very thick political borders, and we see they are largely ineffective at stopping this as evidenced by the US selling Tomcat parts to Iran.

With trade, is isn't one country trading with another country. It is simply individuals trading with other individuals. Political borders do not help this to occur, they simply serve to hinder it.

Anonymous said...

If you do not collect taxes, how will you fund the infrastructure such as rails and roads, that trade depends on?

It is our taxes that pay for police and armies that give us security to trade in peace. Without those tax dollars put to use to protect us, war lords could simply seize our goods, as sometimes happens in less developed countries.

Without wisely invested taxes, there can be no trade.

Matthew said...

Taxes do not have to be collected on trade. They can be collected in other ways.

Furthermore, the main premise of the article is not about taxes, but about borders. Borders are relevant with regard to taxes. Borders are relevant with regard to laws, rules, etc. One side of every political decision benefits at the expense of the other. In a democracy, 50% + 1 makes the rules and the rest have to grin and bear it. Therefore, dividing peoples into sections which have the same political beliefs makes sense; by sectioning people into like-beliefs we reduce the number of people who are "losers" in a political decision.

However, borders are irrelevant when it comes to trade. In trade, both parties benefit. There are no "losers" in trade. There is no such thing as a "trade deficit." If a trade would benefit one person at the expense another's detriment, the trade would not occur. We know this because trade is voluntary, therefore trade would not happen if both parties didn't benefit.

So unlike taxes and laws, which tend to benefit one group at the expense of others, making borders relevant, trade benefits all individuals involved in the trade. Borders to trade, the notion of "trade surpluses and deficits," "protective tariffs" and other nonsense only hurt all parties involved.

Matthew said...

"Without wisely invested taxes, there can be no trade."

This is an incorrect statement.

Anonymous said...

The statement is correct. Please explain your thoughts on why it is not.

I agree with a lot of what you said above, theoretically we could collect no taxes on trade, but to do that we would have to make up the lost revenue somewhere else. And that would probably mean raising taxes on something or cutting services which our economy depends on. Still you are right in that it is an option.

I must disagree with your assertion that there are "losers" in politcs. In politics 2 sides present their point of view (sometimes more than 2) and then the people decide which one to listen to (this is a simplification of course, but generally that is the underlying idea)

If we choose to view politcs in terms of "winning" and "losing" it leads to anger and hurt feelings between the 2 parties. Even worse, it can result in people taking actions in politcs for the sole purpose of "winning." If the only thing we want to do is "win" we have forgotten our duty to serve the people. Sometimes doing what is best for the American people includes admiting that we were wrong. We should be willing to do this and not worry about appear to have "lost."

Politics is not about "winning and losing"-at least it doesn't have to be. For me, Politics is about helping people.

Matthew said...

People are not "one size fits all," and the effects of political decisions are similarly not. A political decision can provide a benefit to the majority at the expense of the minority. An example of this is slavery. Utilitarian ideals, which focus on doing the "greatest good," routinely do so at the expense of the minority.

In a political election rarely do the people decide which option is best uniformly. Often the votes are very close. In this instance it becomes very apparent that the "one size fits all" mentality of a democracy has its shortcomings. It very well may be that the majority of a people do benefit from a specific policy, however that ignores the very real negative that there is a significant minority which do not benefit from a particular political decision as much as another decision.

This can be contrasted with trade. In trade, it's not simply the majority that benefits from a decision; rather all parties involved with the trade benefit. For this reason it becomes irrational to be concerned with hollow scare tactics such as "trade deficits" and putting restrictions on unilateral free trade. If all parties involved with trade benefit from it, and we restrict trade, then we are preventing parties from benefiting. This is not only illogical, but a serious strain on economic progress and growth.

Anonymous said...

“All parties involved with the trade benefit”

All Parties do NOT automatically benefit from trade. To state this as a fact is to grossly oversimplify. The claim that the very fact that trade takes place proves that all people benefit, is flawed. It is very possible that some one would NOT benefit at all from trade, but they do not have any other better options either.

Take for example, the hundreds of thousands of Chinese laborers working in near slave like conditions in factories. A common practice for these workers is for the company to force them to live in squalid dorm rooms. If the workers which to leave these cement rooms with little ventilation and horrible conditions they are still forced to pay rent on the rooms they are not living in. Because of this, these people can never afford to move out. They are essentially prisoners with no better option. This is happening at this moment, while you are reading this post.

Now, these people still participate in their country’s economy, they are still a part of “trade.” Yet if we were to ask them if they wanted to continue building the cheap goods that are traded to America, I some how doubt they would say yes. So the assertion that trade always benefits all parties involved is false. Many people involved in trade simply feel trapped and cannot think of a way out. So they continue to participate in a system that abuses them

Let me be clear: I do not say all trade is like this. Sometimes trade does benefit all parties. I merely point at that trade is not automatically good, as has been implied. All parties involved in trade do NOT automatically benefit.

Also please respond to my other 2 points I have stated earlier:

1. There cannot be a stable economy without at stable government, and there cannot be a stable government without wisely invested taxes. Therefore without wisely invested taxes there can be no large scale, economic trade.

2. If we choose to think of politics in terms of “winning and losing” we run the risk of becoming obsessed with “winning” and can forget our duty to serve the people. It is better to at least try to think of politics in terms of helping people.

Do you agree?

A.J. said...

I agree with your first point. Well said. Wisely invested taxes means that the government doesn't have to tax more in order to make up for their inefficiency. It also means that trade is more effective as well.

I somewhat disagree with your second point however. In politics, winning and losing is important. In governing however, it is not. It is important that we seperate the two. I agree that in governing, the winning and losing is a distraction, and gridlock ensues. Winning in politics is important, because it allows a lawmaker, candidate, or party to allocate and expend political capital, therefore gaining leverage that will help to govern. I see politics as a means to an end, that end being effective governing, in which as you say, the concerns of the people are well met.
I don't know if that was clear, but I hope you can at least understand what I was trying to say.

Anonymous said...

A.J.

I do understand the point you are trying to make, and perhaps you are right. As you say, elections do indeed have clear “winners.” And I understand what you mean about separating politics and governing. However, I think it is often nearly impossible to draw the line where politics ends and governing begin.

I was talking more about our motivations for entering into politics. When I play sports, a large part of my motivation is the rush I feel from “winning.” When I participate in politics, that is not my motivation. I do not take part in politics because I want to “beat the other side.” I do it to help people.

I believe adopting this mentality of politics makes it more likely we will do a good job serving the people. We risk losing sight of that if we become obsessed with “winning.”

Matthew said...

"Take for example, the hundreds of thousands of Chinese laborers working in near slave like conditions in factories."

If laborers are in actual slavery or indentured servitude, then they are not trading. They are coerced by external forced to do work. This differs from voluntary trade. A premise of my argument was that the trade be voluntary; I suppose some clarification was necessary.

I do not doubt that slavery does exist in many places, however is limiting trade the best option for combating that?

"1. There cannot be a stable economy without at stable government, and there cannot be a stable government without wisely invested taxes. Therefore without wisely invested taxes there can be no large scale, economic trade."

There can be a stable economy without government. Is it ideal? In some circumstances I would imagine and others not. I think the distinction is the question of whether public goods can be provided by a means other than government. The answer is yes. It is possible to create roads, bridges, infrastructure, etc, without the use of government and taxes. Therefore the trade that is aided by this infrastructure can also exist without government and taxes.

Again, I am not saying that it is ideal in every circumstance, but rather that a stable economy can exist without a stable government.

"2. If we choose to think of politics in terms of "winning and losing" we run the risk of becoming obsessed with "winning" and can forget our duty to serve the people. It is better to at least try to think of politics in terms of helping people."

You can think of it any way you want as far as I'm concerned. I generally don't think that intentionality is very relevant in politics. Consequences matter. Furthermore, often when a political decision is made, the votes are relatively equal but all the spoils go to the victors. This seems to be a flaw with a democratic system. Would you agree?

Anonymous said...

First, yes I agree that the "winner take all" system seems to be a flaw in our democracy. (I ought to know, I had to suffer through 2000 and 2004 and 6 uninterrupted years of total Republican dominance of nearly every level of government)

Second, intentions DO matter. As do consequences. Our intentions for entering politics will determine what consequences we create. Are you interested in politics because you want to help the American people or because you want to "Beat" people like me?

Third, I suppose that theoretically your example of trade occurring with private funded infrastructure might be possible, although you'd be hard pressed to find an example of that ever happening in the real world, so who's to say if it's possible or not? But even allowing for this hypothetical situation which we both agree would probably not be ideal anyways, there STILL no way to have a stable economy without a stable government.

A stable economy depends on government to provide security, such as police and armies and a navy to protect the goods that are traded. Without these security services, then whoever had the most guns and weapons could simply take whatever they wanted. If you choose to advocate that private companies hire personal security forces, and that be the only form of security in a country (because to have non-private security would require government), then the rich will just have their own private armies. Then suddenly we have a state with no government, crawly with rich warlords who each control a private army and answer to one but themselves. That is exactly the kind of "failed state" that is a breeding ground for terrorist that the US is always trying to prevent. You need a government for security and you need security for trade.

Furthermore, where does the money even come from in this economy? The government prints it. Should we privatize that too, so that individual companies print there own money and each one has different claims about how valuable their currency is? The only people in a position to regulate currency are governments, such as the FED.

I say again:
“There can be no stable economy, without a stable government, and there can be no stable government without wisely invest taxes.”

Finally, I applaud your clarification that trade should not be coerced by external forces! It is exactly this kind of give and take that could lead us to find common ground, and discover what we agree on!! When our leaders in Washington take this approach (instead of calling each other “faggots”) they are more likely to actually get things done and really serve the people. When our leaders find common ground they are able to stop arguing and start acting, so it is a good habit for us to emulate.

The next logical question I would ask then is how should we respond to “coerced” trade? After all the squalid worker conditions in China and also in Latin America are clearly not voluntary, when workers take the simple step of forming unions to negotiate for better working conditions they are violently repressed. The cheap goods we trade for overseas are all too often made possible by the coerced labor of workers living in squalid conditions. The practice of exploiting employees is not only very real; it makes up a HUGE chunk of the countries we trade with.

Matthew said...

I haven't forgotten this!

"Second, intentions DO matter. As do consequences. Our intentions for entering politics will determine what consequences we create. Are you interested in politics because you want to help the American people or because you want to "Beat" people like me?"

I strongly disagree that intentions matter. Intentions can make people "feel good" about their decisions, but what matters are the consequences of political decisions. Furthermore, as the majority of big government policies show through their spectacular failures, good intentions usually don’t mean good consequences.

It's a curious situation. Governments generally acting with the best intentions routinely produce results which are not only contrary to those intentions, but leave society worse off. Contrast that with private industry, which acts generally with selfish intentions yet usually leave society better off. Observing the ineffectiveness of government and the effectiveness of the invisible hand leads me to the conclusion that intentions are largely irrelevant. Consequences are all that really matter.

"Third, I suppose that theoretically your example of trade occurring with private funded infrastructure might be possible, although you'd be hard pressed to find an example of that ever happening in the real world, so who's to say if it's possible or not? But even allowing for this hypothetical situation which we both agree would probably not be ideal anyways, there STILL no way to have a stable economy without a stable government."

Many places around the US have entirely privatized utilities. These are services which government once dominated, and now are largely in private hands. There are many toll roads which could probably be privately owned. With technology like iPass, this could be in our near future. Bridges too. Private security forces are a major business for individuals and companies. Obviously they can't compete on price with the free security that government police forces offer nowadays, but even just looking through our past we saw many frontier towns that had private police forces. There is no reason to believe that privately funded police forces would only serve the rich and as we can see in many places, public police forces in many situations do not serve and protect the poor like the angels you would make them out to be. Governments have killed more than all the wars in history.

The toughest public goods to privatize would be the courts and national defense. However, throughout history, and in many places around the world today, the church (or main religious institution) was and is the high court. In a society where all the citizens are of one major religion, there can be private courts through religious entities. This would not be a solution, however, in secular societies. However, government courts wouldn't necessarily need tax dollars to be funded. I would imagine that courts could be privately funded, or funded through penalties imposed on crimes against the state.

National defense is another interesting subject. For likely almost every country on Earth, it's probably unnecessary to have an army outside of private militias. Simply put, the US acts as the defense for most of the world. I'm sure many nations could survive without a full-scale military, especially if they had good relations with the US. However on par I would concede that government sponsored defense is likely the best method for providing it.
Getting back to the original point, one doesn't need to fund national defense by taxing trade.

Furthermore, a national defense is not even necessary for trade to occur. Trade and business takes place in countries with no defense. Trade and business takes place in countries that are at war! It is happening right now in Iraq, during the midst of a full scale war. With risk of war interference, the transaction costs on trade are likely to be higher, yet that does not mean it is not possible.

Trade occurs even in communist countries, where it is banned. Trade of illegal goods still occurs as with the drug trade. In that case, there is no tax funded defense; rather there is a well-funded (by taxes) offensive force against it, and yet the trade of drugs still occurs!

Therefore it is clear that, as I stated before, the statement "Without wisely invested taxes, there can be no trade," is incorrect.

Dealing with the issue of slave labor, I would argue an informed consumer is the best remedy. If the consumer is aware of these situations, they will respond by simply not buying products made by slaves. There are many organizations that provide information on which products use this type of labor. If a consumer is aware of the situation, they can then make informed decisions on the products they buy. This solution has many examples of working; take Kathy Lee's clothing line, for one.

Working conditions are also improved by globalist free trade policies. This puts more investment dollars into these poor countries and gives them more choices on where to work, forcing employers to improve conditions to keep the most productive workers. We see this working already in many countries to improve the conditions there. Compare Hong Kong with China and you will see how free trade policies result in vastly improved working conditions when compared to the mainland.

The solution to improving the conditions for the poor people of the world is to not make it more difficult for investment money to reach them, but to make it easier. The solution to slave labor is competition. Competition is and always has been the single most effective means of improving labor conditions. We need to encourage globalization of trade and capital to produce greater competition and consequentially the greatest wealth for all peoples.

Anonymous said...

For my own clarification, are you arguing that all the privatizations listed above would be good things, or that they are merely theoretically possible?

Anonymous said...

Well it doesn't look as if I will see a response to my last post, I can't say I blame you, I thought you'd forgotten about this conversation, so it took me 8 days to realize you'd responded to me...oh wel.

A few responses to what is written above:

First, giving religious institution the power to run courts a horrible, horrible idea, that was why I asked if you thought it was a good idea or merely possible. History teaches that lesson again and again. The Salem witch trials and the Spanish Inquisition are 2 examples that spring to mind pretty easily as reason we should avoid returning to that system. Court’s run by the government are not perfect, because people are not perfect, but they are the best idea history has come up with yet.

Second privately funded security forces function today precisely because we have a tax investment in military to serve the people. If there were no government controlled military (funded by taxes) the situation would drastically change and there would be nothing to keep the private security forces from simply seizing control.

Third, even if trade happens in an illegal way, such as drug trade. The trade still could not exist without the infrastructure our taxes create, such as roads, bridges, rail etc…
If we simply stopped investing our taxes in infrastructure, our economy would collapse.
So… Without wisely invested taxes there can be no trade.

Finally, in response to the first point:

“I strongly disagree that intentions matter. Intentions can make people "feel good" about their decisions, but what matters are the consequences of political decisions. Furthermore, as the majority of big government policies show through their spectacular failures, good intentions usually don’t mean good consequences.”

As stated from the beginning I agree 100% that consequences matter. But intentions also matter. If we do not know what we intend to accomplish, how can we ever achieve anything? Intentions matter because they guide as before we begin our work. Our intentions help us choose what to begin working on. Also many government programs have been huge successes, people simply never talk about them. The interstate highway system has united us and helped business ship goods, the national institute of health kept our nation at the forefront of medical technology, and I think we can all agree that having police and firefighters has worked out very well. All of these things were tax payer investments by our government, so the characterizations of government programs as unsuccessful seems to be a huge over-generalization.

Also the statement “good intentions usually don’t mean good consequences” seems to over generalize. Are you implying that the only way to have good consequences is to have bad intentions? Surely most good consequences arise from good intentions, even if sometimes bad consequences arise from good intentions as well.

I hope that clears up what I was trying to say. I’ve enjoyed exchanging ideas.