Dr. Sowell on why study econ Every politician affects economic policies We cannot opt out of economics... we can be informed, uninformed or misinformed. Its your choice You have chosen to be informed (or your parents chose for you) Colossians 3:23 Whatever you do, work heartily, as for the Lord and not for men Q: How many Chicago School economists does it take to change a light bulb? International Trade International Trade Run into our friend: zero sum thinking International Trade Run into our friend: zero sum thinking Both sides can gain in international trade, and in fact, usually must or it wouldnt take place International Trade Run into our friend: zero sum thinking Both sides can gain in international trade, and in fact, usually must or it wouldnt take place Dr. S contends: no need for government or experts to tell us whether its fair or not International Trade Run into our friend: zero sum thinking Both sides can gain in international trade, and in fact, usually must or it wouldnt take place Dr. S contends: no need for government or experts to tell us whether its fair or not Remember the mercantilists? International Trade No fixed number of jobs countries must fight over: when countries become more prosperous, they all tend to create more jobs International Trade No fixed number of jobs countries must fight over: when countries become more prosperous, they all tend to create more jobs When NAFTA was approved, number of jobs increased in Mexico, Canada and U.S. Sowellian thought Most international trade, like most domestic trade, is done by millions of individuals, each of whom can determine whether the item purchased is worth what it cost and is preferable to what is available from others. Gibson Les Paul Standard made in U.S.: $ Epiphone Les Paul Standard made in China: $459 International Trade Opponents of international trade are still using language to confuse the situation. Examples? International Trade Opponents of international trade are still using language to confuse the situation. Examples? favorable trade balance, record trade deficit International Trade Opponents of international trade are still using language to confuse the situation. Examples? favorable trade balance, record trade deficit Fact is, if the goods and services available are greater as a result of trade, then America is wealthier Sowellian thought take 2 If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer regardless of whether there is a deficit or a surplus in the international balance of trade. U.S. had a trade surplus during Great Depression Q: How many Keynesian economists does it takes to change a light bulb? How can both sides gain? The three advantages Absolute advantage: Absolute advantage: when one country, for any number of reasons, can produce some things cheaper or better than others The three advantages Absolute advantage: when one country, for any number of reasons, can produce some things cheaper or better than others Examples? The three advantages Absolute advantage: when one country, for any number of reasons, can produce some things cheaper or better than others Examples? Weather for bananas, engineers such as India, contra-seasonal veggies from South America The three advantages Absolute advantage: when one country, for any number of reasons, can produce some things cheaper or better than others Examples? Weather for bananas, engineers such as India, contra-seasonal veggies from South America The country with the advantage gains from the larger markets for its products; the importer gains from the lower cost goods Q. How can you tell the difference between an economist and someone with a really bad concussion? How many Marxist economists does it take to change a light bulb? The three advantages Comparative advantage: The three advantages Comparative advantage: When one country can produce anything more efficiently than another, it still makes sense to trade thanks to comparative advantage The three advantages Comparative advantage: When one country can produce anything more efficiently than another, it still makes sense to trade thanks to comparative advantage We gotta get this; foundational to international trade! Comparative advantage The secret is that even if a country can produce anything cheaper than another, it will be unable to make everything comparatively cheaper Comparative advantage The secret is that even if a country can produce anything cheaper than another, it will be unable to make everything comparatively cheaper What??????????????? Are you nutz??? Comparative advantage The secret is that even if a country can produce anything cheaper than another, it will be unable to make everything comparatively cheaper What??????????????? Are you nutz??? No, answer is our oldest econ friend, SRTHAU Lets try another example, shall we? Example Portugal is twice as efficient at producing cloth and three times more efficient at wine making than England Example Portugal is twice as efficient at producing cloth and three times more efficient at wine making than England Comparative advantage says Portugal should focus on making and trading with England that which it is most best at producing namely, wine Example England should focus on producing that which is it is least worse at producing, namely cloth Example England should focus on producing that which is it is least worse as producing, namely cloth They both can trade and win Example England should focus on producing that which is it is least worse as producing, namely cloth They both can trade and win Also, remember the eye surgeon who is a better car washer but it makes no sense for him to wash his own car, he can do a lot better working on eyes The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong. Little more Comparative Advantage Its been centuries since Great Britain could feed itself Little more Comparative Advantage Its been centuries since Great Britain could feed itself Nation focused on producing those things where it had comparative advantage... manufacturing, shipping, finance Little more Comparative Advantage Its been centuries since Great Britain could feed itself Nation focused on producing those things where it had comparative advantage... manufacturing, shipping, finance Result: Nation is better fed and more prosperous than if it grew its own food And final advantage Economies of scale: And final advantage Economies of scale: when you sell products outside of your own borders, you can often achieve a great economy of scale And final advantage Economies of scale: when you sell products outside of your own borders, you can often achieve a great economy of scale Examples? And final advantage Economies of scale: when you sell products outside of your own borders, you can often achieve a great economy of scale Examples? Heineken beer, Japanese cars, Swiss watches, Chinese toys And final advantage Economies of scale: when you sell products outside of your own borders, you can often achieve a great economy of scale Examples? Heineken beer, Japanese cars, Swiss watches, Chinese toys Having the world as your marketplace helps cover the large fixed costs in many industries International trade restrictions Politics are important consideration with international trade International trade restrictions Politics are important consideration with international trade The same fallacies disproven by Adam Smith continue to be heard today (and tomorrow) The definition of "waste a busload of economists plunging off a cliff with some of the seats unoccupied. Trade fallacies Fallacy 1: a high-wage country cannot trade fairly with a low-wage one Trade fallacies Fallacy 1: a high-wage country cannot trade fairly with a low-wage one Why its false: need to look at more than wages, but at overall costs including capital, shipping, productivity. Trade fallacies The reason the U.S. is so prosperous is that were very efficient at producing things; likewise, theres a reason Vietnam, for example, is so poor Trade fallacies Fallacy 2: we need import restrictions to save American jobs from lower cost nations Trade fallacies Fallacy 2: we need import restrictions to save American jobs from lower cost nations Why its false: It usually costs America more in higher costs and lost jobs overall when we try to protect certain jobs from imports And remember opportunity costs? Trade fallacies So politicians impose tariffs (taxes on imports such as Brazilian orange juice and sugar) or limit the amount of imports to protect American jobs Trade fallacies So politicians impose tariffs (taxes on imports such as Brazilian orange juice and sugar) or limit the amount of imports to protect American jobs All of this is known as protectionism Trade fallacies So politicians impose tariffs (taxes on imports such as Brazilian orange juice and sugar) or limit the amount of imports to protect American jobs All of this is known as protectionism Our new friend, the fallacy of composition, at work! Smoot-Hawley Act of 1930 Raised tariffs on 20,000 items to record levels Smoot-Hawley Act of 1930 Raised tariffs on 20,000 items to record levels 1,028 economists opposed it Smoot-Hawley Act of 1930 Raised tariffs on 20,000 items to record levels 1,028 economists opposed it Trade wars broke out Smoot-Hawley Act of 1930 Raised tariffs on 20,000 items to record levels 1,028 economists opposed it Trade wars broke out U.S. exports to Europe decreased from $2.3 billion to $784 million from Smoot-Hawley Act of 1930 Overall international trade declined 33% Smoot-Hawley Act of 1930 Overall international trade declined 33% U.S. unemployment went from 7.8% in 1930 to 25.1% in 1933 Trade fallacies Fallacy 3: We need to protect our infant industries Trade fallacies Fallacy 3: We need to protect our infant industries Why its false: infant industries rarely have enough clout to get restrictions passed to help them; winds up as an excuse to protect inefficient industries at expense of consumers and taxpayers Trade fallacies Fallacy 4: we need to keep the industry in event its needed for national defense Trade fallacies Fallacy 4: we need to keep the industry in event its needed for national defense Why it can be false: we do need gun, bullet makers, etc. But many other industries claim to be essential to defense so need to carefully validate this Trade fallacies Fallacy 5: we need to stop the dumping of goods into our markets selling things at a loss to get market share and then raise prices later. Examples from today: Chinese steel, Mexican tomatoes, Brazilian shoes, Chinese tires . Trade fallacies Fallacy 5: we need to stop the dumping of goods into our markets selling things at a loss to get market share and then raise prices later. Examples from today: Chinese steel, Mexican tomatoes, Brazilian shoes, Chinese tires . Why it is usually false: almost impossible to determine actual costs of production; and guess who wins with cheaper goods? Types of restrictions Tariffs (import taxes) Types of restrictions Tariffs (import taxes) From 1776 up until early 20 th century, tariffs were the dominant way the feds raised revenue (95% of budget in 1860) Today tariffs account for just 1% of federal budget why? Types of restrictions Tariffs (import taxes) From 1776 up until early 20 th century, tariffs were the dominant way the feds raised revenue (95% of budget in 1860) Today tariffs account for just 1% of federal budget why? 16 th amendment: The Congress shall have power to lay and collect taxes on incomes Types of restrictions Tariffs (import taxes) From 1776 up until early 20 th century, tariffs were the dominant way the feds raised revenue (95% of budget in 1860) Today tariffs account for just 1% of federal budget Auto parts, fruits and veggies, clothes, tires some 12,000 products are subject to tariffs Types of restrictions Import quotas can only bring in a limited number of the item: U.S. did this to Japanese autos in the 1980s. Resulted in Honda, Toyota et al. opening plants in U.S where they make more cars than ever Types of restrictions Red-tape: Making products meet health and safety requirements, certify that their workforces receive living wages, or that the manufacturer had carbon offsets, etc. Assignment 4/29 Chapter 21: International Transfers of Wealth There will be a mini-MOAT on chapters 20, 21 and 25 (history of econ)