From: D
Sent: Wednesday
To: [email protected]
Subject: How to compete with free
Professor Block,
I am not a trained economist; rather someone interested in economics, generally. As such, I support free trade and the proposition of comparative advantage: “Another implication of the law of comparative advantage is that no country or region of the earth is going to be left out of the international division of labor under free trade. For the law means that even if a country is in such poor shape that it has no absolute advantage in producing anything, it still pays for its trading partners, the people of other countries, to allow it to produce what it is least worst at.” (The Law of Comparative Advantage, Murray Rothbard)
After hearing the producer of the documentary Poverty Inc on Tom Woods’ podcast, I watched the documentary, which concerned the “poverty industry” flourishing in impoverished nations. The documentary stressed how poor countries, (Haiti, etc.), respond better to policies that fosters business development over “perpetual aid.” Yet, a paradox emerged that I haven’t resolved.
As I understand the argument, while a country that institutes protectionism may “protect” nascent industries, or those unable to compete in labour costs, etc. with foreign competitors, it is at the expense of a greater community, which benefits from imported lower cost goods. Effectively, protectionism coerces the greater community to subsidize select companies or industries, which reduces the overall wealth in a society.
In the cited documentary, in at least two instances, (solar panel street lighting and eggs), local business people were interviewed and commented how it was impossible to compete with aid agencies that “exported” free goods (low cost imports). One exasperated businessman: “How can I compete with free?” Theoretically, it sounds sensible that importing low cost goods releases resources that can then be used more efficiently elsewhere; in this documentary’s examples, releasing resources simply meant unemployment and continued impoverishment.
So my dilemma: in the documentary, quite clearly, international aid (low cost imports) creates unemployment, freeing resources that can’t be absorbed by the society and used more efficiently elsewhere. People are unemployed, further impoverished, because business couldn’t compete with “free” aid (low cost imports). While the free goods may benefit some people, others are deprived of employment and both its financial and psychological benefits (self esteem), by which to work themselves towards prosperity. Poverty is perpetuated, both economically and psychologically; it’s systematized by aid, donations, “free” stuff, hence the documentary title, Poverty Inc. A society is conditioned to depend on aid, so what appears to be generosity is actually a thinly veiled industry institutionalizing poverty.
Yet seemingly just as clear, a government that subsidizes an industry so that companies might “flood the market” of another country with low cost goods, frees up resources of the importing country and boosts that country’s overall wealth. However, the same policy by an aid agency “helping” an impoverished country appears to retard a viable means of poverty relief. How do you resolve the apparent contradiction?
Dear D:
Free is good for the economy. Suppose God, or government, or a rich guy like Bill Gates, gives any country, even a poor one, eggs, or cars. And, assume, they are reliable in that they will keep doing this forever. Will the recipient country be better off? My answer is, Yes. True, the egg and car industries will be devastated. They won’t be able to compete against these free imports. So, instead of whining, these people should get into other industries, such as bacon, or bicycles. Free imports are a boon. Yes, they cause unemployment in the egg and car industries in our example, but so what. The economic ideal is that ALL goods would be free, and we’d then have vast “unemployment” but we wouldn’t need employment In the first place, since the entire point of jobs is to get the goods and services it makes possible, but under our assumptions, we already have these goods and services. Read on this Econ in One Lesson by Henry Hazlitt.
6:09 pm on May 6, 2016
