Trade is Not Zero-Sum

On this post on Cafe Hayek, Per Kurowski writes in the comments:

Trade deficits per se do not worry me as much as a wrongly structured trade deficit. If current trade conditions permit other countries better chances to develop 1st class robots and the smartest artificial intelligence than mine, then I do fret for the future of my grandchildren. Let us not forget the “Arsenal of Democracy”

Mr. Kurowski makes a common mistake regarding trade: trade is not zero-sum.  If other countries are developing 1st class robots and smarter artificial intelligence, it does not necessarily follow that the domestic nation is made worse off by such innovations.  Indeed, the domestic nation stands to gain from such innovations.  A wealthier nation has more to offer the world.  More to trade means more trade.  More trade fosters more growth for both parties.  Even if a nation loses an absolute advantage in robotics or AI or something (as Mr. Kurowski postulates), it still becomes wealthier because of the Law of Comparative Advantage.

Mr. Kurowski also seems to insinuate that such gains by trading partners would pose a threat to national security.  I’ve written on the “protectionism for national defense” argument before, but it bears repeating that trade fosters peace, not violence.  There are two main ways to get what one wants: through cooperation or coercion; through trade or violence.  When trade is encouraged, peaceful cooperation takes hold.  Goods and services can cross borders, making all better off.  Since this trade is mutually beneficial, both nations face higher costs of breaking off those ties.  Even if the two nations get wealthier and can afford more expensive military equipment, the costs of war will rise quicker and the benefits of war fall.  With rising costs and falling benefits, the likelihood of conflict drops (we have seen this pattern take hold over the past few decades as trade liberalized).

If Mr. Kurowski is concerned about the future of his grandchildren, then he should welcome deeper trade ties among nations and not be concerned about trade deficits.  This would mean a wealthier and more peaceful world.  A move to protectionism would mean a poorer and more violent world.

Cause, Effect, and Misallocation

In preparation for a price theory book I am writing, I am re-reading George Stigler’s classic 1966 text The Theory of Price.  The following is found on page 19 (3rd edition):

[I]t has become a major task demanded of all economies: they are required (as soverigns use this word) to provide technological advances, capital accumulations, improved labor forces, and larger incomes.  So strong is this demand, that sometimes a method by wich western nations become richer–industrialization–is confused with the growth itself, and inappropiate industries that reduce a nations’s income are adopted to increase it.

Confusing cause with effect is a major problem facing all analysts.  This becomes doubly true when discussing economic growth when policy is involved.

Industrialized nations are wealthy, but it doesn’t necessarily mean such industrialization is the cause of wealth.  Rather, industrialization is itself a symptom of a deeper cause, that is the division of labor.  “Industrialization” is a term without definition, as it can refer to many kinds of industries.  Comparative advantage is what tells us what kind of industrialization is needed to foster growth.

The United States has a comparative advantage in high tech industries; we are an extremely intelligent people with lots of capital (both human and machine) at our disposal.  China, however, has a comparative advantage in low tech industries; they have lots of unskilled labor at their disposal.  It makes sense for the US to industrialize in high tech industries and China to industrialize in low tech industries.

But even within countries, industrialization is varied.  In the US, the vast middle of the country has some of the most fertile farmland in the world.  It makes sense for those states to be agriculturally-based and other places, like Texas, to be resource-based, and others, like Massachusetts, to be tech-based.

A scheme based on the mistaken notion that “industrialization = progress” will lead to misallocation of resources.  Resources, such as labor, capital, time, will be diverted into less productive and more costly areas.  This, in turn, leads to a net decline in wealth compared to where it otherwise would have been.  An example of this is China during the “Great Leap Forward.”  Industrialization, specifically of steel, was all the rage of the Communist Party.  All production was geared toward steel production.  This inherently meant a rapid decline in production of other items–like food.  China’s poverty deepened.

The Great Leap Forward is an extreme example, but other historical cases of misallocation of resources due to the mistaken belief of “industrialization = wealth” include the USSR, modern Venezuela, and North Korea.

When examining the causes of economic growth, one must be very careful in determining cause and effect.  This is where price theory really shines.

Today’s Quote of the Day…

…is from Chapter 3 of Frederic Bastiat’s final work Economic Harmonies (page 499 of the Mises Institute Edition):

Can we concieve a time when man can no longer form even reasonable desires? Let us not forget that a desire that might be unreasonable in a former state of civilization–at a time when all the human faculties were absorbed in providing for low material wants–ceases to be so when improvement opens to these faculties a more extended field. A desire to travel at the rate of thirty miles per hour would have been unreasonable two centuries ago–it is not so at the present day [or 70mph in Bastiat’s time! -JMM]. To pretend that the wants and desires of man are fixed and stationary quantities, is to mistake the nature of the human soul, to deny facts, and to render civilization inexplicable.

JMM: What we take for granted were once unobtainable wants because we had to focus on growing food. As that food was automated (thus destroying a lot of farmer jobs) and became cheaper and taken for granted, more desires, once unobtainable, became obtainable. Desires like kitchen appliances, faster transportation, recorded music, etc. Then, as more of those desires became taken for granted and cheap (displacing lots of manufacturing jobs), we moved to other desires, like better health, better medicine, more diversions (theatre, movies, sports, TVs, etc).

Shift happens, but it happens because desires are being met, which in turn allows new desires to come about. Human desires are indefinite.

Cleaned by Capitalism, Mold Edition

In humid climates such as Virginia, mold can be a real problem in homes and other poorly-ventilated areas.  There are lots of health issues associated with household mold, but fortunately, there are many ways provided to us by capitalism to fight mold.  Dehumidifiers, both large and small, can prevent mold from forming.  Should mold form, there are lots of products that make cleaning mold easy and cheap.  So, for less than an hour’s worth of work for the average American laborer, s/he can clean their bathroom from mold and prevent it from growing again.

This is just another small example of how our world is becoming a cleaner and better place.

First World Problems, Third World Nation

I like to think I am an optimist.  I like to look for the good in the bad.  This CNN story is one such example:

More than 2 billion adults and children globally are overweight or obese and suffer health problems because of their weight, a new study reports.

This equates to one-third of the world’s population carrying excess weight, fueled by urbanization, poor diets and reduced physical activity.

Another way of delivering this message is one-third of the world has too much to eat.  It’s true, according to the study, that much of this is in the highly developed nations like the US, but obesity is also becoming problems in poorer nations [emphasis added]:

The United States has the greatest percentage of obese children and young adults, at 13%, while Egypt led in terms of adult obesity, with almost 35%, among the 195 countries and territories included in the study.

…

The data revealed that the number of people affected by obesity has doubled since 1980 in 73 countries, and continued to rise across most other countries included in the analysis.

…

In terms of numbers, the large population sizes of China and India meant they had the highest numbers of obese children, with 15.3 million and 14.4 million, respectively.

What’s causing the increase?  The authors of the study write:

Obesity levels have risen in all countries, irrespective of their income level, meaning the issue is not simply down to wealth, the authors say in the paper.

“Changes in the food environment and food systems are probably major drivers,” they write. “Increased availability, accessibility, and affordability of energy dense foods, along with intense marketing of such foods, could explain excess energy intake and weight gain among different populations.”

This is an amazing development.  In 1992, approximately 17.5% of the world’s population was undernourished.  Now, we have the exact opposite problem!  1/3rd is over-nourished!  Undernourishment has fallen to approximately 9.8% of the population. In short, we’ve gotten so good at producing and distributing food, we’re dying from having too much!

To be sure, obesity has a myriad of health problems associated with it, but the fact that people who are in countries that, not too long ago, were suffering from starvation and famine, is an encouraging sign of how wealthy the world has become, especially since the fall of socialism and the rise of globalization.