Free To Choose: A Personal Statement – Charter 2 : The Tyranny of Controls (4)

People, in whatever country, want dollars primarily to buy useful items, not to hoard.

Another complication is that dollars and yen are used not only to buy goods and services from other countries but also to invest and make gifts. Throughout the nineteenth century the United States had a balance of payments deficit almost every year—an “unfavorable” balance of trade that was good for everyone. For- eigners wanted to invest capital in the United States. The British, for example, were producing goods and sending them to us in return for pieces of paper—not dollar bills, but bonds promising to pay back a sum of money at a later time plus interest. The British were willing to send us their goods because they regarded those bonds as a good investment. On the average, they were right.  They received a higher return on their savings than was available in any other way. We, in turn, benefited by foreign in- vestment that enabled us to develop more rapidly than we could have developed if we had been forced to rely solely on our own savings.

In the twentieth century the situation was reversed. U.S. citizens found that they could get a higher return on their capital by in- vesting abroad than they could at home. As a result the United States sent goods abroad in return for evidence of debt—bonds and the like. After World War II, the U.S. government made gifts abroad in the form of the Marshall Plan and other foreign aid programs. We sent goods and services abroad as an expression of our belief that we were thereby contributing to a more peaceful   44 FREE TO CHOOSE: A Personal Statement world. These government gifts supplemented private gifts—from charitable groups, churches supporting missionaries, individuals contributing to the support of relatives abroad, and so on.

None of these complications alters the conclusion suggested by the hypothetical extreme case. In the real world, as well as in that hypothetical world, there can be no balance of payments problem so long as the price of the dollar in terms of the yen or the mark or the franc is determined in a free market by voluntary transac- tions. It is simply not true that high-wage American workers are, as a group, threatened by “unfair” competition from low-wage foreign workers. Of course, particular workers may be harmed if a new or improved product is developed abroad, or if foreign pro- ducers become able to produce such products more cheaply. But that is no different from the effect on a particular group of workers of other American firms’ developing new or improved products or discovering how to produce at lower costs. That is simply mar- ket competition in practice, the major source of the high standard of life of the American worker. If we want to benefit from a vital, dynamic, innovative economic system, we must accept the need for  mobility and adjustment. It may be desirable to ease these adjustments, and we have adopted many arrangements, such as unemployment insurance, to do so, but we should try to achieve that objective without destroying the flexibility of the system— that would be to kill the goose that has been laying the golden eggs. In any event, whatever we do should be evenhanded with respect to foreign and domestic trade.

What determines the items it pays us to import and to export? An American worker is currently more productive than a Japanese worker. It is hard to determine just how much more productive— estimates differ. But suppose he is one and a half times as pro- ductive. Then, on average, the American’s wages would buy about one and a half times as much as a Japanese worker’s wages. It is wasteful to use American workers to do anything at which they are less than one and a half times as efficient as their Japanese counterparts. In the economic jargon coined more than 150 years ago, that is the   principle of comparative advantage.  Even if we were more efficient than the Japanese at producing everything, it would not pay us to produce everything. We should concentrate   The  Tyranny  of  Controls 45 on doing those things we do best, those things where our superi- ority is the greatest.

As a homely illustration, should a lawyer who can type twice as fast as his secretary fire the secretary and do his own typing? If the lawyer is twice as good a typist but five times as good a lawyer as his secretary, both he and the secretary are better off if he practices law and the secretary types letters.

Another source of “unfair competition” is said to be subsidies by foreign governments to their producers that enable them to sell in the United States below cost. Suppose a foreign govern- ment gives such subsidies, as no doubt some do. Who is hurt and who benefits? To pay for the subsidies the foreign government must tax its citizens. They are the ones who pay for the subsidies.

U.S. consumers benefit. They get cheap TV sets or automobiles or whatever it is that is subsidized. Should we complain about such a program of reverse foreign aid? Was it noble of the United States to send goods and services as gifts to other countries in the form of Marshall Plan aid or, later, foreign aid, but ignoble for foreign countries to send us gifts in the indirect form of goods and services sold to us below cost? The citizens of the foreign govern- ment might well complain. They must suffer a lower standard of living for the benefit of American consumers and of some of their fellow citizens who own or work in the industries that are subsi- dized.   No doubt, if such subsidies are introduced suddenly or erratically, that will adversely affect owners and workers in U.S.

industries producing the same products. However, that is one of the ordinary risks of doing business. Enterprises never complain about unusual or accidental events that confer windfall gains. The free enterprise system is  a profit and  loss  system. As already noted, any measures to ease the adjustment to sudden changes should be applied evenhandedly to domestic and foreign trade.