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Source link: http://archive.mises.org/7124/perpetual-trade-deficits-can-be-good/

Perpetual Trade Deficits Can Be Good

September 11, 2007 by

Notwithstanding its appeal to cynical anti-government readers, I think Schiff’s book reinforces popular “old school wisdom” that is simply false. Namely, Schiff buys into the argument (also made by Paul Craig Roberts) that a country needs a solid manufacturing base and trade surpluses to remain a dominant economic power.

Although I do agree with Schiff that the dollar is poised for a (perhaps sharp) fall — and I also endorse his advice to investors for protecting their wealth in this environment — I think his arguments don’t hold up in general. For the remainder of the present article, I’ll try to demonstrate the weaknesses in Schiff’s case.FULL ARTICLE

{ 62 comments }

Jean Paul September 14, 2007 at 4:08 pm

“At this point, if you had the ability to prevent the carnage I would hope philosophy wouldn’t get in your way.”

My philosohpy of freedom and nonaggression, far from getting in the way, empowers me and protects me from the aggression of others. I choose this philosophy of live and let live for exactly this reason – that my life and interests are best secured, for a hundred reasons, only some of which we’ve touched on here, when I respect the free choices of others within the limits of their property.

Alex MacMillan September 14, 2007 at 6:10 pm

Jean Paul: “WONDERFUL! So you concede that there is always the possibility the insane terrorist will have a change of heart a moment before flipping the switch…” Sure, but I wouldn’t want to bet people’s lives on it.

“Anyway, I still haven’t seen you defend how any of the trades this madman made -THE TRADES THEMSELVES!- are to blame for his evil actions.”

Free market trades in body bombs or nuclear devices help facilitate the possibility(increase the probability) that a madman will acquire such devices and kill.

The beauty of free market trades is that they benefit both sides to the transaction. Generally, there is a low probability of bad effects on people not directly associated with the trade. This needs to be explained over and over again to socialists and, in fact, the general population. For example, I have bugged our public education authorities to have this and other basic market concepts taught in school. However, such authorities, and the unionized teachers seem loathe to let this cat out of the bag, for fear it would interfere with their left wing indoctrination program.

However, to deny the harm that can be readily predicted from some free market transactions plays right into the hands of the left, as does the attempt to try and defend such a position by saying that if governments didn’t exist free markets would solve all of our problems in a peaceful, non-coercive way.

I think it’s most enlightening to discuss how free markets would solve most of the problems governments deal with (especially since many of these problems are invented by governments in the first place), but I also think that it is going overboard to suggest that there are no problems in economics that could not be solved by just getting rid of government.

Alex MacMillan September 14, 2007 at 6:12 pm

Jean Paul: Darn, misspelled loath.

Juan September 14, 2007 at 6:43 pm

Alex MacMillan
Free market trades in body bombs or nuclear devices help facilitate the possibility(increase the probability) that a madman will acquire such devices and kill.

Maybe. On the other hand, the collective organization for the purpose of so-called national defense has caused disguting mass murdering. How many civilians where mass murdered by western government, using conventional and nuclear weapons ?

What’s going on in the middle east ?

I also think that it is going overboard to suggest that there are no problems in economics that could not be solved by just getting rid of government.

I thought that even conservatives knew that government is not the solution, but the problem ?

Anthony September 14, 2007 at 6:47 pm

JP and Alex, I think you are both discussing an issue that has long been addressed in libertarian theory. We say that if someone poses a direct and overt threat to us, we may use defensive force against them. Forbidding the transaction would be wrong (unless the interdiction was achieved via voluntary restrictions), yet as soon as that person puts the “goods” to use, and they become a threat, they may be dealt with.

Alex MacMillan September 15, 2007 at 10:14 am

Juan: I agree wholeheartedly with your comments directly following the first item of mine you quoted.

Regarding the second statement of mine you quoted and your response, I think you misread that remark. Much of government is self serving, creating more economic problems than it solves. Getting rid of government entirely may or may not be a good idea; I’m not debating that at present.

Juan September 15, 2007 at 4:56 pm

Regarding the second statement of mine you quoted and your response, I think you misread that remark

I apologize if I did so.

Bill September 16, 2007 at 8:08 am

The fatal flaw in Murphy’s article is his reliance on the gold standard. If the dollar was still based on the gold standard his argument might be more plausible, but since it is not the pillar of his argument crumbles.

Stefan October 11, 2008 at 1:05 pm

you totally ignore services.
schiff’s point isn’t that a service industry is bad and inherently causes a trade deficit. services are part of trade.
so in your counter-example the american would sell the service of discovering good fishing spots and would NOT have a trade deficit.

I also think schiff is of the opinion that a large industrial economy can’t consits of mostly services, because services are hard to export.
but that’s not the point of his island example.

Jaycephus May 20, 2010 at 5:50 pm

Well, it’s now 2010. I doubt that Murphy would edit his statements based on events since 2007, but I know, with the recent release by Peter Schiff of Crash Proof 2.0, that he has not altered his stance either.

For my money, the most telling and yet succinct critique of Murphy’s post is:

Mayhaps RPM is not moron, but what would you call someone who insists on talking about ‘trade deficits’ in a hypothetical philosophic sense rather than THIS TRADE DEFICIT and the underlying fundamentals surrounding it?

Irrelevant? Insensitive? Academic Masturbation?

How can an Austrian confuse Dollar Hegemony with Capital Surplus?

Jaycephus May 20, 2010 at 6:35 pm

It’s now 2010. I doubt Murphy would alter what he has said, but would he really go down this, in my view, utterly irrellevant path, were he to take up the task of addressing Schiff’s “Crashproof 2.0″, a modified second edition of “Crashproof”?

Certainly, Schiff has not altered his views: the new book is essentially the un-edited text of the original book, with new content at the end of each chapter. Just to be clear for those who are unaware, the crash in Crashproof wasn’t the housing bubble and crash, but the future collapse of the dollar, and thus the new book is still addressing this future event. Murphy’s post implies that Schiff has clearly stated that a service can NOT serve as an ‘export’, or that there can be no successful service economy, but Schiff’s point is simply that the American service economy is not doing the job. Schiff himself works in the ‘service’ and ‘information’ sectors of the U.S. economy, and he has apparently done some exporting himself. I believe he is in the process of opening a Canadian office, and has taken calls from Europe, Canada, South America, and the Middle East during his weekly shortwave radio broadcast, as well as given speeches outside of America. From this, I am fairly certain he already has some clients that live outside the borders of the U.S. He would therefore never claim services couldn’t be exported or purchased by foreigners, or that there couldn’t, theoretically, be a successful service economy. On the other hand, he does argue that a lot of US manufacturing has been lost, and that the actual US service economy is not an adequate substitute.

Thus Murphy’s excursion to Rothbard Island is irrellevant. Schiff’s island describes an aspect of the US economy. Murphy’s island describes nothing that currently exists in the world. That doesn’t make him wrong, just irrelevant.

I personally like listening and reading both Schiff and Murphy. But it was painfully embarrasing to read Murphy’s modification of Schiff’s island, in which the American provides ‘info’ on where the best fishing spot is. Such an economy is indeed ‘possible’. Rich Asians might travel to a small island and engage the American fishing guide’s services, thus providing a day or two’s worth of food for the American’s table. But on the days when rich Asian’s don’t appear, the American is going to have to go out and fish for himself. And it’s doubtful he would be able to afford the computers, cell phones, home theater systems, or the many other goods produced by the Asian economies. On the other hand, Murphy is whacked in the head if he thinks that Asian workers are going to perpetually feed the American for the one-time fishing tip.

For my money, the most telling critique of Murphy’s article, in the least amount of words:

Mayhaps RPM is not moron, but what would you call someone who insists on talking about ‘trade deficits’ in a hypothetical philosophic sense rather than THIS TRADE DEFICIT and the underlying fundamentals surrounding it?

Irrelevant? Insensitive? Academic Masturbation?

How can an Austrian confuse Dollar Hegemony with Capital Surplus?

– quincunx

cavalier973 June 22, 2010 at 1:51 am

I found this article looking for support for an argument I’m having on another website. I would say that Dr. Murphy is definitely not an imbecile, but addressing a particular argument on trade and using Schiff’s book as a framework for structuring his own argument.

I think that Schiff is a little harsh on the American in his example; as of today, June 2010, the U.S. still manufactures more than any other nation, around 20% of the world’s goods. China is close behind, manufacturing around 18% of the world’s goods, but the thing that strikes me is that China has three times the population as the U.S. It is inevitable that, as they move toward freer markets, that the Chinese people acquire skills and tools to improve productivity enough to overtake the U.S. rather handily. So those who criticized Dr. Murphy for not addressing “THIS trade deficit” should have saved some of their scorn for Schiff and his original analogy. Schiff should have talked about an American with a tanning bed boutique, but also a pineapple orchard, a delivery service, and a manufacturing workshop that matched the production capacity of the other five Asian islanders. Then he could have discussed the possibility that, in exchange for coupons for free pineapples and tanning bed sessions from the American, the Asians gave the American stuff they made. But then, the Asians never cashed in their coupons for free American-made goods and services, but traded them for promises of extra coupons for free stuff in the future.

Since I haven’t read Schiff’s book, I’m unaware of what policy recommendations he makes to address the problem of the U.S. service economy being destroyed by a Chinese manufacturing economy. Usually, from my experience, someone who frets over trade deficits usually want the U.S. government to step in with mercantilist policies in order to prop up domestic manufacturing in some way. Is this what Schiff recommends, or is he merely using the trade deficit as a springboard for discussing bad monetary policy?

As to the argument that a services based economy lacks viability, one could easily imagine an island of master architects, engineers, accountants, actors, authors, playwrites, musicians, psychologists and on and on, who could trade their services for the manufactured goods of other nations, incurring a “trade deficit” according to conventional methods of measuring trade, but experience the reality of ever-increasing wealth.

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