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Free Trade question

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SteveZissou posted on Wed, Jul 27 2011 11:37 AM

In a discussion with a friend regarding free trade, whereing I propose permitting any foreign worker to come in and work, He raises the following objection:

If you cannot control the flow of people into your country and you cannot limit the transfer of wealth out of your country, then you have no power to stop invasion, no one needs a military conquest if they can simply move their own citizens into your nation and have them transfer your nations wealth to their own.

I respond:

Controlling borders does not need to include controlling trade.

I suppose these uncontrolled citizens would somehow subsist without spending money in the local economy? Of course, the business would have to be owned by a foreigner, as well so he could repatriate all his profits. To make this effective, there would have to be a massive cartel.

How far off base am I? It seems it would be an enormous undertaking, more so than direct invasion to build what I view as a "money pump". There already exists a repatriation of money from the US to Mexico to such a degree that it is in the top 3 source of national income (supposedly).  Further, it seems an oversimplification as only one nation attempting this would be working against the trade its target nation had with all other nations. And somehow it would have to be self sufficient to the degree that it did not "lose" money to other nations that in turn put some of it back into the "invaded" nation.

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I think that free trade is actually one of the easiest aspects of 'free markets economics' to explain because it can be properly explained even if we take things in "aggregates" or according to the current framework. It's much more difficult than trying to explain how law can be provided by the market.

The objection raised by SteveZissou's friend, for example, can be addressed even if we take into account the current framework. I mean, how do you steal wealth from a country by sending productive workers there (thus reducing your own productive capacity and increasing your enemy's) to create wealth and then shipping this wealth back to their native countries?

I don't see how one country can impoverish another one by doing that. This objection is really silly, to be honest.

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What is occuring isn't just a transfer of wealth.  An immigrant comes to the United States and makes an income by working.  That immigrant has produced something of value -- it's an exchange, the labor (and its productivity) for a wage.  At this point, we can see that there is a benefit to immigrant labor, even if the immigrant takes his income back to his country of origin.

In a free market, the more labor the better, because the more productive that economy will be.

EDIT:  And, who cares if some wealth is transferred to their country of origin?  We benefit as much as they do when their economy grows in productivity, since we buy their goods.

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DD5 replied on Wed, Jul 27 2011 12:31 PM

 

The economic analysis in aggregates and the mythical concepts of national economy will stumble you everytime.  It stumbles the free market economists also who adovcate free trade, who end up giving weak and sometimes complicated explantions of why free trade is good.

Why is somebody labeled as a Mexican trading with somebody labeled as a US citizen somehow different then a US citzen trading  with another US citizen?   What can possibly be the reasoning for why one trade benefits both parties while the other does not?   Why are these objections to free trade and free immigration not also apply to any trade between any two individuals in any two places in general, and if they are the same, why do "we" free market economists resort to aggregates again to debunk them instead of pointing out that it is the exact same economic problem which warrants only an individualistic based analysis?

I would also ask Jonathan,  What if the Mexican goes home with his inocome and doesn't spend it on US goods? And what if no US citizes whats to buy Mexican goods?  Or what is so good about buying Mexican goods when Mexicans don't buy US goods?   I'm just saying, these questions will follow every time, and frankly, it's because these aggregate explanations are not persuasive in my opinion.  Perhaps for a very good reason.

 

 

 

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DD5 replied on Wed, Jul 27 2011 12:37 PM

Reread my post.  I wan't finished.  I posted it in the middle.

 

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The person who asks those questions will also question your individualistic analysis.  You are absolutely correct that an individualistic analysis, as opposed to a "national analysis", is probably the most accurate, at least in the sense that ultimately nationality is completely irrelevent to the issue of wealth production.  But, the answer is in a different framework than the question.  It doesn't really dispel the mercantilist myths which pervade anti-free trade arguments; it suggests they are irrelevant, but the person asking you the questions probably won't get it.

The framework of the argument is very important.  Academically, that's why the mainstream doesn't really get Hayek's contributions to the "knowledge problem".  I think for the sake of an argument between two non-economists it's best to stick to the same framework, to avoid confusion or talking past each other.

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DD5:
What if the Mexican goes home with his inocome and doesn't spend it on US goods?


That's impossible since he can't spend US dollars in Mexico, he'll have to exchange these US dollars for Mexican pesos and whoever got the dollars from him will have to spend them on US goods.

This whole "shipping wealth abroad" is such an elementary economic fallacy.

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Frederique,

DD5 isn't actually asking the question.  He's arguing that my response leaves potential questions unanswered.  DD5 is right, but I think that any response leaves questions unanswered.  He could very well respond to DD5 by saying what makes the difference is not the individual, rather their country's intentions, which puts us right back in his framework.

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DD5 replied on Wed, Jul 27 2011 1:00 PM

Jonathan M. F. Catalán:
Academically, that's why the mainstream doesn't really get Hayek's contributions to the "knowledge problem".  I think for the sake of an argument between two non-economists it's best to stick to the same framework, to avoid confusion or talking past each other.

The framework is fallacious.  It is based of false premises.  By using this framework, you are already conceding to what you need not coneed to.   This is why all such free trade arguments end up sounding defensive.

Rather, it would be more fuitful to attack the core of the problem and turn the tables around..  The burden of proof is on the person making the absurd claim that Geography matters precisely at the arbitrary borders of the State, but not between the inner cities, towns, streets, houses, and individuals.  Why are balances of trade important between one aggregate group called Mexcians and another aggregate group called US, but not important between one aggregate group called "all the Jonathans" and another aggregate group called "all the Roberts"?

 

 

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DD5 replied on Wed, Jul 27 2011 1:09 PM

Jonathan M. F. Catalán:
He could very well respond to DD5 by saying what makes the difference is not the individual, rather their country's intentions,

Countries have no intentions just like "all the Jonathans" have no intentions.  And honestly, there is no point to go on if one does not understand this.  This is praxeology 101 and the problem is that many economists think they can make the case for free markets without refuting the mytical aggregate collectives that do not exist.   All economics schools of thought that skip this part amount to really bad economic science.

The point is that once you refute the mytical collecive, you don't need to go on the defense for free trade any longer.  The problem just seizes to exist.  It never existed in the first place.

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Totally agree with all Jonathan wrote, just wanted to add a point.

The worker gets paid in dollars, not in pesos. That means he will have to spend his wages in only one place, the US of A. It may take a while to get here. He may send the money to his wife, who exchanges it in some Mexican bank for pesos, and the bank spends the dollars here. But ultimately, there is only one place to spend US dollars, which is in the US.

And if he puts the money under a matress in Mexico and it never gets spent here, that's even better. Because it means he will have worked here for us for free. Not only that, the value of the money we have in our wallets also goes up, because he retired some dollars, thus reducing inflation.

EDIT: I see this point was quickly raised by the other posters.

DD5,

Let's look at an ugly possibility. Maybe people would rather their own country get rich than some other country. So that saying, "What do you care if an individual in Mexico gets rich instead of an American?" is opening a whole can of worms that can be avoided, I think by Jonathan's reasoning [with my little supplement].

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It's easy to refute an argument if you first misrepresent it. William Keizer

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DD5 replied on Wed, Jul 27 2011 1:19 PM

Frederique Bastiao:

DD5:
What if the Mexican goes home with his inocome and doesn't spend it on US goods?


That's impossible since he can't spend US dollars in Mexico, he'll have to exchange these US dollars for Mexican pesos and whoever got the dollars from him will have to spend them on US goods.

This whole "shipping wealth abroad" is such an elementary economic fallacy.

 

I'm so glad you said this.  You just proved my point.    It is very much possible!   Mexicans can increase their reservation demand for US dollars.  They don't buy pesos, they just hoard the dollars indefinitely.   No what?   Will the Milton Friedman on youtube giving your explanation have to conced that this is a case of bad trade?

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I think that free trade is actually one of the easiest aspects of 'free markets economics' to explain because it can be properly explained even if we take things in "aggregates" or according to the current framework. It's much more difficult than trying to explain how law can be provided by the market.

The objection raised by SteveZissou's friend, for example, can be addressed even if we take into account the current framework. I mean, how do you steal wealth from a country by sending productive workers there (thus reducing your own productive capacity and increasing your enemy's) to create wealth and then shipping this wealth back to their native countries?

I don't see how one country can impoverish another one by doing that. This objection is really silly, to be honest.

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DD5:
I'm so glad you said this.  You just proved my point.    It is very much possible!   Mexicans can increase their reservation demand for US dollars.  They don't buy pesos, they just hoard the dollars indefinitely.   No what?   Will the Milton Friedman on youtube giving your explanation have to conced that this is a case of bad trade?

Actually that is an even better deal to Americans than if the Mexican worker had spent the US dollars he's earned, as the Mexican worker has worked for free.

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DD5 replied on Wed, Jul 27 2011 1:27 PM

 Smiling Dave,

 

Notice you have two seemingly contradicting explantions for why trade between Mexican and US citizen is good:  

1.  Mexican spends on US goods.  

2.  Mexican doesn't spend on US goods

How can this possibly be?   While it is true that both oucomes are beneficial, they cannot be both the economic explanation for why free trade is good.  They are just outcomes and not causes.

 

 

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