The Mercantilist fallacies exposed as long ago as Adam Smith still hold sway in popular thinking in part because of language of Mercantilism has not been abandoned.   Many people, including those responsible for making policy, still believe that having a net of exports over imports is in some way “favourable” to a nation, while net imports over exports is “unfavourable.”  This misunderstanding is constantly used as a justification of trade protectionism.

The Mercantilists held this belief because of their interest in maximizing the quantity of gold and silver in country.  A net of exports meant an inflow of precious metals.  A net of imports meant an outflow of them.   But as Adam Smith pointed out, it is not money or gold that constitutes wealth, but goods and serves that satisfy our needs and wants.  Money is valuable only insofar as it enables us to purchase goods and services.  In the division of labour, individuals “export” what they produce themselves to others for money in order to “import” goods from others.  How much better would it be if we could send out paper money and receive goods and services from people in other countries forever?

Changes in trade flows can, of course, be beneficial or harmful to specific groups of individuals for periods of time.  But a “favourable balance of trade” is not favourable to a country as a whole.

In the passage below, The Balance of Trade, Frederic Bastiat uses a clever thought experiment to demonstrate the foolishness of trying to create a surplus of exports over imports.

“The Balance of Trade

The balance of trade is an article of faith.

We know what it consists in: if a country imports more than it exports, it loses the difference. Conversely, if its exports exceed its imports, the excess is to its profit. This is held to be an axiom, and laws are passed in accordance with it.

On this hypothesis, M. Mauguin*136 warned us the day before yesterday, citing statistics, that France carries on a foreign trade in which it has managed to lose, out of good will, without being required to do so, two hundred million francs a year.

“You have lost by your trade, in eleven years, two billion francs. Do you understand what that means?”

Then, applying his infallible rule to the facts, he told us: “In 1847 you sold 605 million francs’ worth of manufactured products, and you bought only 152 millions’ worth. Hence, you gained 450 million.

“You bought 804 millions’ worth of raw materials, and you sold only 114 million; hence, you lost 690 million.”

This is an example of the dauntless naïveté of following an absurd premise to its logical conclusion. M. Mauguin has discovered the secret of making even Messrs. Darblay*137 and Lebeuf*138 laugh at the expense of the balance of trade. It is a great achievement, of which I cannot help being jealous.

Allow me to assess the validity of the rule according to which M. Mauguin and all the protectionists calculate profits and losses. I shall do so by recounting two business transactions which I have had the occasion to engage in.

I was at Bordeaux. I had a cask of wine which was worth 50 francs; I sent it to Liverpool, and the customhouse noted on its records an export of 50 francs.

At Liverpool the wine was sold for 70 francs. My representative converted the 70 francs into coal, which was found to be worth 90 francs on the market at Bordeaux. The customhouse hastened to record an import of 90 francs.

Balance of trade, or the excess of imports over exports: 40 francs.

These 40 francs, I have always believed, putting my trust in my books, I had gained. But M. Mauguin tells me that I have lost them, and that France has lost them in my person.

And why does M. Mauguin see a loss here? Because he supposes that any excess of imports over exports necessarily implies a balance that must be paid in cash. But where is there in the transaction that I speak of, which follows the pattern of all profitable commercial transactions, any balance to pay? Is it, then, so difficult to understand that a merchant compares the prices current in different markets and decides to trade only when he has the certainty, or at least the probability, of seeing the exported value return to him increased? Hence, what M. Mauguin calls loss should be called profit.

A few days after my transaction I had the simplicity to experience regret; I was sorry I had not waited. In fact, the price of wine fell at Bordeaux and rose at Liverpool; so that if I had not been so hasty, I could have bought at 40 francs and sold at 100 francs. I truly believed that on such a basis my profit would have been greater. But I learn from M. Mauguin that it is the loss that would have been more ruinous.

My second transaction had a very different result.

I had had some truffles shipped from Périgord which cost me 100 francs; they were destined for two distinguished English cabinet ministers for a very high price, which I proposed to turn into pounds sterling. Alas, I would have done better to eat them myself (I mean the truffles, not the English pounds or the Tories). All would not have been lost, as they were, for the ship that carried them off sank on its departure. The customs officer, who had noted on this occasion an export of 100 francs, never had any re-import to enter in this case.

Hence, M. Mauguin would say, France gained 100 francs; for it was, in fact, by this sum that the export, thanks to the shipwreck, exceeded the import. If the affair had turned out otherwise, if I had received 200 or 300 francs’ worth of English pounds, then the balance of trade would have been unfavorable, and France would have been the loser.

From the point of view of science, it is sad to think that all the commercial transactions which end in loss according to the businessmen concerned show a profit according to that class of theorists who are always declaiming against theory.

But from the point of view of practical affairs, it is even sadder, for what is the result?

Suppose that M. Mauguin had the power (and to a certain extent he has, by his votes) to substitute his calculations and desires for the calculations and desires of businessmen and to give, in his words, “a good commercial and industrial organization to the country, a good impetus to domestic industry.” What would he do?

M. Mauguin would suppress by law all transactions that consist in buying at a low domestic price in order to sell at a high price abroad and in converting the proceeds into commodities eagerly sought after at home; for it is precisely in these transactions that the imported value exceeds the exported value.

Conversely, he would tolerate, and, indeed, he would encourage, if necessary by subsidies (from taxes on the public), all enterprises based on the idea of buying dearly in France in order to sell cheaply abroad; in other words, exporting what is useful to us in order to import what is useless. Thus, he would leave us perfectly free, for example, to send off cheeses from Paris to Amsterdam, in order to bring back the latest fashions from Amsterdam to Paris; for in this traffic the balance of trade would always be in our favor.

Yet, it is sad and, I dare add, degrading that the legislator will not let the interested parties decide and act for themselves in these matters, at their peril and risk. At least then everyone bears the responsibility for his own acts; he who makes a mistake is punished and is set right. But when the legislator imposes and prohibits, should he make a monstrous error in judgment, that error must become the rule of conduct for the whole of a great nation. In France we love freedom very much, but we hardly understand it. Oh, let us try to understand it better! We shall not love it any the less.

M. Mauguin has stated with imperturbable aplomb that there is not a statesman in England who does not accept the doctrine of the balance of trade. After having calculated the loss which, according to him, results from the excess of our imports, he cried out: “If a similar picture were to be presented to the English, they would shudder, and there is not a member in the House of Commons who would not feel that his seat was threatened.”

For my part, I affirm that if someone were to say to the House of Commons: “The total value of what is exported from the country exceeds the total value of what is imported,” it is then that they would feel threatened; and I doubt that a single speaker could be found who would dare to add: “The difference represents a profit.”

In England they are convinced that it is important for the nation to receive more than it gives. Moreover, they have observed that this is the attitude of all businessmen; and that is why they have taken the side oflaissez faire and are committed to restoring free trade.”

 

 

What do you think