Saturday, March 26, 2016

Countervailing Economic Misunderstanding

Don Boudreaux responds to an email:
Mr. Lee Gomez
Dear Mr. Gomez:
Thanks for your e-mail.  Many people ask, in one form or another, the question you ask.  That question – if I may put it into a more general form – is this: ‘How can we possibly gain from trade when producers in other countries sell stuff to us at prices made too low by subsidies or when governments in other countries prevent their denizens from buying freely from us?’
There are many different answers to your question.  Each one starts with the recognition that nothing about political borders alters the essential nature of trade.
Suppose that your neighbor is a brilliant and incredibly hard-working restaurateur – and also a miser who cares not a whit about material goods beyond what are minimally necessary to keep herself alive and working fast and efficiently.  Each day at the restaurant that she owns in town she produces a cornucopia of spectacular meals that she sells at incredibly low prices.  She’s able to keep her menu prices much lower than those of her competitors because she chooses to operate at a rate of profit much lower than other restaurateurs demand.  Even though her profit rate is unusually low – it’s well below market – consumers’ demand to dine at her restaurant is so high that she still manages each year to clear about $50,000 in absolute accounting profit from her restaurant.  But she spends almost none of these profits.  Every year, year after year, she spends only about $5,000 to satisfy her meager personal needs.  She invests the bulk of her earnings in long-term bonds, blue-chip stocks, and real-estate – all of which she will keep on hand until she dies.
Should you stop dining at this woman’s restaurant?  Are you made worse off by dining at her restaurant?  Should your other neighbors stop dining at her restaurant?  Is your neighborhood or town impoverished or otherwise harmed by the manner in which this woman operates her restaurant and by the way that she lives?  Would other restaurant owners in town be justified in hiring an armed street gang to stand at the entrance to her restaurant to demand from each of her customers a payment for the privilege of dining at her restaurant – a payment that the street gang asserts is meant to “countervail” this woman’s “unfairly low prices”?
Unless you think that this woman makes you, your neighbors, and your town worse off, you should stop fretting about producers in other countries selling to us goods and services at low prices and not buying from us as much as we buy from them.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
The above originally appeared at Cafe Hayek 

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