Consulting by RPM || Free Advice Blog

Follow-Up On Free Trade and Household Analogy

I think Don Boudreaux would be fine with me quoting his comment from my previous post here in the big lights. So I’ll break his comment up and respond piecemeal.

Bob: Thanks. Your example is valid, but I believe that it doesn’t cast any suspicion on the household analogy (which, of course, was used also by Adam Smith).

Right, it was used by Adam Smith, but look at the different use to which it was put. Here’s Smith:

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” –Adam Smith, Wealth of Nations

Exactly. So now when it comes to the conduct of every private family, what would most people consider prudence? To have spending exceed income for thirty years in a row? No, that sounds incredibly imprudent. The prudent thing for a household is to actually have income exceed expenditures. And since the whole point of the van Cott FEE article was to tell us that in international trade, we should think of “exports” as income from our job and “imports” as our spending on consumption, then clearly what is prudence for the household can scarce be folly for the nation. Hence we should agree with Trump that we need to start running trade surpluses and make America great again.

Now back to Don’s comment:

“The argument for free trade – and the use of the household analogy – isn’t that trade is guaranteed to produce only happy outcomes. Just as individuals and households can be irresponsible and profligate, so, too, can larger groups of people (for example, citizens of a country). Just as a household can overspend, so too can the people of a country.”

Right, but that’s not what you would have gotten from van Cott’s article. Here’s what he said:

That the gains associated with exports ultimately trace to imports is no doubt a bitter pill for many to swallow! Nevertheless, virtually all of us organize our own economic lives consistent with this idea. In the marketplace we produce goods and services which we sell (export) to buyers. This is the source of our incomes which we use to buy goods and services from others—that is, import. The more imports, the better.

People who choose to export while importing as little as possible will find themselves ill-clad, ill-housed, ill-fed, and possibly dead in short order. [Bold added.]

I don’t see anything in there about imports possibly hurting you if they’re too high. He explicitly says, “The more imports, the better.” The kind of example I brought up was not even hinted at in his article. The whole point of his article was to tell you that imports were benefits and exports were costs, which is the flip side of how most people (including Trump) think about it.

Back to Don:

One additional, small point before signing off: I would remind your readers in light of your example that, while a country-level trade deficit might become all debt for the citizens of that country – and while such debt might be incurred exclusively and irresponsibly to increase consumption today – a country-level trade deficit is not necessarily debt, and in practice much of it is in fact not debt.

Right. In other words, Don is warning readers not to take the household analogy too seriously, because there are important ways that a “US trade deficit” really isn’t analogous to “a household that buys more shoes, houses, and food than it earns in income” (to use the three examples from van Cott).

Since the whole point of my post was to warn free traders in how they are telling people to make analogies with households, the fact that Don signs off by warning about this subtlety is, to me, further evidence that my warning was sound.

DO NOT MISUNDERSTAND ME, I understand the point Don and van Cott were making. It *is* important for people to realize that a country pays for its imports through its exports, and that other things equal it would be a blessing–not a curse–if foreigners for some silly reason decided to send us TVs and cars for free.

However, in the actual FEE article I was (moderately) criticizing, they were lecturing people who think like Trump, and telling them to think of trade like a household with income and expenditures. So I was merely pointing out that that *is* how Trump and his fans on trade think, and that’s why they understandably think it must be a really bad idea to consistently run trade deficits. That’s exactly the conclusion you would draw if you view the country as a household, where its exports are the job and imports are buying things like shoes, shelter, and food.