- Liberty Fund Network
About this week's guest:
About ideas and people mentioned in this podcast:Books:
Podcasts and Blogs:
Podcast Episode Highlights
|Intro. New book is in Greenwood Press Series, book price high, not Don's choice. Authors typically get only a fraction of a book's price because of marketing, etc. Writing goal was to be concise, clear, accessible. Quip: "I would have written you a short letter but I didn't have the time"--editing takes effort. Book is overview of globalization debate.
|Fundamentals of trade, trade makes us wealthy. Tendency is to see trade in goods as moving stuff around, better to have stuff you like and can't make. But that ignores the role of division of labor, specialization, increasing the size of the pie. Adam Smith, and David Ricardo. Smith's full title, asks what causes the wealth of nations. Wealth is created by division of labor and specialization in opening chapters. Observed that it causes wealth, 1. by reducing time spent moving task to task; 2. repetition increases skill; 3. specialization makes it more likely that machines will be invented, which releases human labor. Is that a negative, as opposed to craftsmen, unemployed? Foreign v. domestic labor. Ultimate resource is human labor; economizing on it makes us better off. Ricardo, principle of comparative advantage, Paul Samuelson said of it that it's the one thing in economics that is both true and non-obvious. Boudreaux's book's goal is to explain it. If Joe can do something at a lower cost than Sam, then Joe should specialize in doing that and Sam the other thing; and they should trade. They should do this even if Joe can do both things better than Sam. Kathy runs errands across campus to deliver documents, sacrificing less than department chairman would, even if it takes her more time because her legs aren't as long. How much of what you consume could you have produced? the people in your town? Virtually nothing. All around us in modern society.
|Smith-Ricardo interface, Buchanan and Yong Yoon's paper. Not all equally good at all tasks, so it matters how people get allocated to tasks. Most effective is to have people do what they are most productive at, where "most productive" doesn't mean what you are best at, but who has the lowest opportunity costs, what you forego. That's the Ricardian insight, size of pie today. That specialization gives rise to capital, and thus induces growth, Smith's insight. People who are put out of work, either by trade or application of machinery, both of which do the same things: make us wealthier but harm a particular group of people who are put out of work for a while. Boudreaux: that's the wrong language, but why? Time perspective. "Trade hurts some people"--e.g., the steel worker--misses the fact that the job the steel worker lost would not have existed had it not been for trade. Blog: man loses wife, who leaves him for another man. In a longer time perspective, he probably won the wife to begin with from some other man, so do we say that love has good sides and bad sides? Change inherently has unanticipated surprises, some good, some bad. Buy land in Montana and live without much trade, can forget about currency values, etc.; won't be buffeted by economic change. But can't escape change in weather; and either way you'll be dirt poor. And maybe dead. Jim Buchanan, constitutional bargain: agree to become part of this worldwide exchange nexus, and we get wealth that would otherwise be impossible. What we give up, our willingness to play by the rules: consumer sovereignty and entrepreneurial dynamism are critical to driving economic growth and material prosperity. We agree to adjust ourselves. In any one case, you can defect. Seems like a noble thing, John Edwards, Republicans as well; but if everyone does it there would be no growing prosperous society. Playing by the rules means you do not stop consumers from taking better deals.
|Not much opportunity to be a blacksmith outside Williamsburg, rural areas. Our emotions and our pocketbooks get tied up in these issues. Don't want to minimize the challenges, but what sustains our quality of life is this nexus of exchange, opportunity to interact by specializing. It has nothing to do with national borders. If dieting becomes the rage, candymakers can take the hit; has nothing to do with [international] trade. Trade is just another example of it. Most of us accept that there are times when we are going to be hurt. Tenured professors--people sometimes argue that they can say free trade is good only because their jobs are not at risk. Should anyone with a stake in the matter not be allowed to comment on trade because trade might up-end their jobs? Have to look at the arguments, not who is making the arguments. Podcasts are alternative to classrooms, so even tenured professors face competition.
|National borders. Manuel Ayau: If in 1988, it was good for Vaclav in Prague, western Czechoslovakia, to trade with Vladimir in eastern Czechoslovakia, is it any less important for the same Vaclav to trade with the same Vladimir now that the country is split in two? The economic relevance of political borders is zero. Governments are notoriously prone to protect. Hong Kong though has largely practiced free trade. United States itself is a gigantic free trade zone, 13 original states were a free trade zone. Why does the optimum amount of specialization occur between national political boundaries?
|Trade deficit. Confusion over money. Smith pointed out that wealth doesn't come from money, neither gold nor pieces of paper. Worry when money "leaves the country," trade with Canadian as opposed to trade with someone from another state in the U.S. Is a miser with a lot of money wealthy? Has opportunity but if money is never used, he's very poor, just holding lots of pieces of paper with pictures of presidents. Money that leaves the country is not gone forever. Canadians accept those dollars because they want to buy things priced in dollars--American goods, services, or assets. The money eventually comes back. Though, by the way, it would be good for Americans if it never came back! If we run a trade deficit, i.e., we buy more from foreigners than they buy from us, people worry. Current account deficit is trade in goods and services, as opposed to merchandise trade deficit is just trade in physical goods. Services are a large part of the U.S. economy, so first, merchandise trade deficit is not measuring much of U.S. trade. For 30 years we've run a current account deficit, but that means the money is still coming back--it comes back as demand for assets, measured in the capital account. When you add up the current and capital accounts, by definition they are equal and opposite: the balance of payments is 0. That, too, employs Americans. Other things equal, we have more capital here because it comes back in the capital account: more investment, R&D, other things equal, lower interest rates, etc., in the U.S. Sellers of the assets very much want buyers to bid on them and they want to sell them to the highest bidders. If you had stock in a company would you feel good if only people in your home town could bid on it? Want pool of bidders to be as large as possible. Economically, assets are not just idly held. Foreign direct investment is active involvement and control. People worry about that, but if the most creative idea for how to use a piece of capital machinery in Alaska happens to come from someone in Romania, we sacrifice that creativity by restricting who can buy our assets.
|Trade deficit or current account deficit is not a measure of our indebtedness. You can define those deficits as being debt, but that's not the way we use the word. Have Apple computer, previously had a Sony Vaio. Suppose after I bought the Vaio, Mr. Sony had stuffed the $2000 in a sock drawer. Then U.S. has a trade deficit, but there's no debt involved. If Sony takes the money and lends it to someone in the U.S. it becomes debt, but if he does something else like buying U.S. stock, there is no debt. Part of the trade deficit can be transformed into debt, but it is not automatically debt. U.S. Federal government borrows in the open market--from both U.S. citizens foreigners. The debt itself is because government spending exceeds taxes, though; it's not related to the trade deficit. Debt itself is not necessarily bad--allows for investment, buying factories, houses. Federal government's funding of programs with borrowing. When we run a trade deficit, we are given the privilege of consuming more than we produce. To do that, we have to attract capital. To say that we are "living beyond our means" is incorrect. John Makin article. Would you be upset if Bill Gates wanted to invest in you? Suggests you have promise. It's encouraging when U.S. investment account rises, foreigners have confidence in our future. Nationalizing U.S. industry would definitely reduce our current account deficit, but it would be disastrous for us! Doug Irwin, Free Trade Under Fire, 1/3 of U.S. imports are capital goods used in production--machinery, etc.--not just U.S. citizens on a buying spree. Hal Varian article on iPod components: all China does is assemble them, but it's counted as a Chinese product. It was American creativity, which is paid for when you buy an iPod; small amount for Chinese value added.
|Inequality, one of the concerns about globalization. Time travel example in book, imagine if your great-great-grandmother was transported to the home of Bill Gates; what would that person find remarkable? They would probably be dumbstruck most about things we take for granted: bathe daily in hot water that doesn't have to be hauled, indoor plumbing, keep all teeth, tuberculosis cured, TV, cars that drive at unheard of speeds, take pills called aspirin to relieve headaches, contact lenses. Difference between Gates's family's life and yours and mine is small compared to the difference between our lives and our ancestors' lives. No one in America starves, we have basic health care, little and curable head lice, music, TV, entertainment available for everyone. China and other countries are less poor because they have opened their borders, and we are less poor for it.
|Addendum: Last week's podcast, Munger on the Nature of the Firm, shoe store example: hard for a department store to compete with mall stores carrying similar merchandise because it has to impute a rent, figure out how much of its legal advice should be attributed to the shoe department, etc. Standalone store has more easily measurable information about its profits. Economies of scale that are held somewhat by department store are somewhat offset by standalone stores being parts of chains, which have their own economies of scale. Filters, economizing on search costs: department store has an advantage by being under one roof, but mall itself is all under one roof; standalone may be easier to search under because stores are well-marked. But department stores offer filters for quality, reducing variation in quality. Department store's brand name searches for me, and I'm willing to pay a premium for that comfort. That's likely what is offsetting the department store's disadvantage. Sears. Why does an author use a publisher when you could self-publish? Editing, marketing, but more: publisher is a filter that reassures book buyers that the book will be of a certain quality.