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 George Reisman's Blog on Economics, Politics, Society, and Culture

October 2006  

This blog is a commentary on contemporary business, politics, economics, society, and culture, based on the values of Reason, Rational Self-Interest, and Laissez-Faire Capitalism. Its intellectual foundations are Ayn Rand's philosophy of Objectivism and the theory of the Austrian and British Classical schools of economics as expressed in the writings of Mises, Böhm-Bawerk, Menger, Ricardo, Smith, James and John Stuart Mill, Bastiat, and Hazlitt, and in my own writings.

The contents of the blog are copyright © 2006 by George Reisman. All rights reserved. Permission is hereby granted to reproduce and distribute individual articles below electronically and/or in print, other than as part of a book. (Email notification is requested). All other rights reserved. George Reisman, Ph.D., is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


Tuesday, October 24, 2006

The Green Business Racket: Con Customers, Cut Corners, Boost Profits

At the most fundamental level, environmentalism and the Green movement that represents it are hostile to business. The ethics of environmentalism and the Greens is one of human deprivation and individual self-sacrifice. Business in contrast rests on a foundation of the pursuit of happiness and the profit motive. The one represents a joyless existence devoted to selfless service to the “environment,” which is allegedly valuable in and of itself, i.e., is “intrinsically” valuable. The other represents progressive improvement in human life and well-being, i.e., the achievement of ever greater comfort, ease, and enjoyment of life, based on the recognition that human life and well-being alone are the proper sources of values for human beings.

Nevertheless, in utter disregard of their opposite natures and of the blatant contradictions involved, a philosophical monstrosity has been hatched that goes by the name “Green Businesses,” i.e., businesses infused with the spirit of environmentalism.

Not surprisingly, a so-called Green Business functions very differently than does a normal business. While a normal business seeks to add amenities to its offerings, a so-called Green Business seeks to subtract them, by means of pursuing a deliberate policy of corner cutting. Thus, for example, for some time, “Green Hotels” have been busy attempting to persuade their customers to forego the customary daily provision of fresh sheets and towels in guest rooms. And more recently, they have begun to replace the provision of fresh bars of soap each day with the installation of fixed liquid-soap dispensers, similar to those in public lavatories, even in showers and bathtubs, where they can actually be dangerous.

Of course, there are times when a normal business too cuts back on the amenities it offers, as when the cost of continuing to provide them comes to exceed what its customers are willing to pay for them. A Green Business, however, cuts back in conditions in which its customers clearly are willing to pay substantially more for the amenities being eliminated than the cost of providing them. In the case of sheets and towels in a hotel room costing two-hundred or more dollars per day, it would probably take a fairly significant deduction from the daily rate to get many people to choose to forego a daily change on economic grounds. The hotel would thus lose far more in revenue than it would save in costs. Precisely this is the reason that good hotels traditionally changed sheets and towels daily.

Green Hotels avoid this loss of revenue when they get people to accept less frequent changes. They do not offer the choice of a rate deduction great enough to induce customers to accept a less frequent change on the basis of their own self-interest. No. Instead, they prey on the ignorance, guilt, and general lack of self-confidence of many of their guests.

They tell the guests that the amenities are being reduced for “the sake of the environment” and to help “save the planet.” The guests are thus urged to think of their loss of amenities as a contribution to a noble and urgent cause, a contribution which also serves to make them personally, morally better people for having made it. Very few people in such circumstances will think of asking for a lower rate. To do so would appear to them to be asking to be compensated for behaving morally, which would be an utterly contradictory and profoundly immoral request when the morality that one accepts is precisely the morality of self-sacrifice.

Thus the Green Hotels are able to practice a racket that would be the envy of many a scam artist. They preach a morality of self-sacrifice to their guests and proceed to profit from their guests’ acceptance of that morality. For them the sacrifices of their guests are a simple cost saving, which allows them equivalently to increase their profits, since the reduction in amenities provided is not accompanied by any reduction in revenue. In other words, the Green Hotels are playing their guests for suckers and getting away with it. That is the essence of their Green Business.

In the long run, of course, the extra profit of the Green Hotels will be eroded. They will probably lose guests and may end up having to trim their rates after all, in order to stem that loss. They may also incur some additional costs, for example, in the form of having to contribute to environmentalist organizations in order to keep up recognition for their activities.

Irrespective of the effect on their profits in the long run, what the Green Hotels are doing is disgusting. It is part of a cultural assault on luxury and pleasure. One that works to make every day of everyone’s life one of unrelieved drudgery and sacrifice, to the point of there being no escape. Even vacations and holidays are now to be stamped with the mark of sacrifice. Sacrifice not even for other people, but for the “planet.”

The Green Hotels are becoming increasingly brazen in their racket. Until recently, it was enough to leave a card on a pillow if one wanted the sheets changed. Now it’s becoming necessary to call the hotel’s front desk. In addition, notification that sheets and towels will not automatically be changed is becoming much less prominent. Just last week, I personally experienced these things at what I would have expected to be a really first-class hotel, namely, the Hyatt Regency in Newport, Rhode Island. (This hotel also had a liquid-soap dispenser installed at the bathroom sink, though it continued to provide fresh bar soap each day. It was at the [Dis]Comfort Inn near Boston’s Logan Airport, that bar soap was entirely replaced with liquid soap dispensers.)

Hotel guests should protest vehemently against any loss in their comforts or conveniences for the alleged sake of the “environment” or the “planet.” They should demand lower rates as compensation for any sacrifices they are asked to make and tell the hotels that they resent being abused for the sake of a dishonest profit being made at their expense. Either in making reservations or at check-in, they should ask about the hotel’s policy with respect to sacrifices for the environment and have it noted that they want no part of it.

People need to tell the hotels that they’re vacationing for enjoyment, not self-sacrifice. And business travelers too should insist on their comfort. We human beings do not exist for the sake of the “planet.” We are not “stewards” of the planet. We are the lords of the planet. We have the ability to make it exist for our benefit—for our pleasure. And that is what we can and should do.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


Tuesday, October 17, 2006

Saving Versus Hoarding

Saving is the use of revenue or income by a business or individual for purposes other than expenditure on consumers’ goods (or consumers’ services). It is revenue or income that is not consumed.

Because what is saved is not spent by the saver for consumption, a popular fallacy has grown up that saving is synonymous with hoarding—i.e., with the retention of money in the manner of a miser. This fallacy is not so difficult to understand when committed by people with limited education, who thus know little beyond their own personal experience. Most such people are wage earners, who normally do not personally make any kind of expenditures but consumption expenditures. In the absence of wider knowledge, it is easy for such people to confuse consumption spending with all of spending and thus to conclude that what is not spent for consumption is simply not spent. But the fallacy is also prevalent in the press, which persists in equating an increase in the rate of saving with a decrease in the spending for goods. For example, whenever it is reported that some increase in the rate of saving has taken place, the press concludes that the effect must be economically dampening at the very least.

Worse still, the fallacy that saving is hoarding is prevalent among professional economists—notably the Keynesians and neo-Keynesians—who routinely describe saving as a “leakage” from the “spending stream.” (Such economists have taught the fallacy to the members of the press.)

Indeed, so complete has been the intellectual severance of saving from spending that for several decades it has been routinely taught in college and university classrooms not only that what is saved simply disappears from spending and depresses the economy, but also that what is invested virtually comes out of nowhere and financially stimulates the economy. This is a state of confusion that would be comparable to believing that the seeds a farmer scatters simply disappear, and that the crop that later comes up, comes out of nowhere. Yet such a state of confusion is the corollary of believing that saving is hoarding. If one recognized that investment comes from saving, one would have to recognize no less that saving goes into investment—that the two are merely different aspects of the same phenomenon. In that case, one would not view saving as depressing, nor investment as stimulating.

The Hoarding Doctrine as an Instance of the Fallacy of Composition

It should be realized that while any particular individual might save in the form of adding to his cash holding—that is, in the form of “hoarding”—it is not possible for the economic system as a whole to do so. Indeed, the belief that the economic system as a whole can save by means of hoarding is an instance of the fallacy of composition—the same fallacy encountered in connection with the belief that not only an individual industry or group of industries can overproduce, but that the economic system as a whole can overproduce.

The reason that an individual can save by means of hoarding cash, while the economic system as a whole cannot, is because whatever cash an individual adds to his holding, some other individual has had to subtract from his holding. If I sell my goods for $1,000, say, and decide to retain that sum in the form of cash, it is true that I increase my savings in the form of cash by $1,000. But in the very same period of time, the individuals to whom I have sold my goods have had to reduce their cash holdings, and thus their accumulated savings in the form of cash, by that very same $1,000. I have $1,000 more in savings in the form of cash, but they have $1,000 less in savings in the form of cash. Adding up the change not only in my position, but in theirs as well, it thus turns out that in the economic system as a whole there is no increase whatever in savings in the form of cash holdings. What some individuals save by means of adding to their cash holdings other individuals have had to dissave.

The situation of students in a classroom provides an excellent illustration of this proposition. At any given time, the members of the class have just so much cash in their possession. If the doors to that classroom were locked and that class became a “closed economic system” for an hour or so, with its members carrying on some form of production and buying and selling from one another, any individual student might increase his savings by adding to his cash holding over that interval of time. But then the rest of the class must decrease its savings in the form of cash holdings to exactly the same extent. There is no way that the class as a whole can increase its savings by increasing its holding of cash.

It follows that if there is to be saving in the economic system as a whole—that is, an increase in the savings of some or all members of the economic system that is not compensated for by a decrease in the savings of other members of the economic system—the only way it can take place is in the form of an increase in assets other than cash. The increase in the savings of the economic system as a whole must take the form of an increase in its capital assets, such as business plant, equipment, and inventories.

The only exception to the principle that the economic system cannot save by means of adding to its cash holdings exists insofar as there is an increase in the quantity of money. If, over a period of time, the quantity of money in the economic system increases, then, to that extent, there can be an increase in the holding of cash that does not imply an equivalent decrease in the holding of cash by others. But this is the only exception, and it obviously does not reduce spending. Moreover, it is inescapable inasmuch as the new and additional money must be added to the cash holdings of someone and in that capacity will constitute part of their savings.

This article is adapted from pp. 691-693 of the author’s Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). The article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is Pepperdine University Professor Emeritus of Economics.


Tuesday, October 10, 2006

A Root Cause of the Failure of Contemporary Education

Ask yourself if the following paragraph would seem believable to you if you were to read it a in a newspaper:

Washington, D. C., Oct. 10. Following in the footsteps of “No Child Left Behind,” the Department of Education is considering new requirements applicable to all colleges and universities benefiting in any way from federally financed programs, such as student loan and dormitory-financing programs. Continued eligibility for participation in the programs would require graduates receiving a baccalaureate degree to demonstrate at least a 9th-grade level of reading ability and a 7th-grade level of ability in mathematics.

I think that the deplorable state of contemporary education that is indicated in that paragraph is essentially accurate and that the paragraph would probably be accepted by the majority of informed people without challenge, as a straightforward news report.

In my book Capitalism, I explain a root cause of the collapse of contemporary education in terms of its essential, guiding philosophy. Here is my explanation. It begins with a quotation from W. T. Jones, a leading historian of philosophy. The quotation describes the philosophy of Romanticism, which appeared as a hostile reaction to the Enlightenment:

To the Romantic mind, the distinctions that reason makes are artificial, imposed, and man-made; they divide, and in dividing destroy, the living whole of reality—“We murder to dissect.” How, then, are we to get in touch with the real? By divesting ourselves, insofar as we can, of the whole apparatus of learning and scholarship and by becoming like children or simple, uneducated men; by attending to nature rather than to the works of man; by becoming passive and letting nature work upon us; by contemplation and communion, rather than by ratiocination and scientific method. (W. T. Jones, Kant to Wittgenstein and Sartre, vol. 4 of A History of Western Philosophy, 2d ed. (New York: Harcourt, Brace, and World, 1969), p. 102.

The Romantics held that “we are nearer to the truth about the universe when we dream than when we are awake” and “nearer to it as children than as adults.” (Ibid., p. 104.) The clear implication of the philosophy of Romanticism is that the valuable portion of our mental life has no essential connection with our ability to reason and with the deliberate, controlled use of our conscious mind: we allegedly possess it in our sleep and as children.

In its essentials, the philosophy of Romanticism is the guiding principle of contemporary education. Exactly like Romanticism, contemporary education holds that the valuable portion of our mental life has no essential connection with our ability to reason and with the deliberate, controlled use of our conscious mind—that we possess this portion of our mental life if not in our sleep, then nevertheless as small children.

This doctrine is clearly present in the avowed conviction of contemporary education that creativity is a phenomenon that is separate from and independent of such conscious mental processes as memorization and the use of logic. Indeed, it is an almost universally accepted proposition of contemporary pseudoscience that one-half of the human brain is responsible for such conscious processes as the use of logic, while the other half is responsible for “creativity,” as though, when examined, the halves of the brain revealed this information all by themselves, perhaps in the form of bearing little labels respectively marked “Logic Unit, Made in Hong Kong” and “Creativity Unit, Made in Woodstock, New York.” Obviously, the view of the brain as functioning in this way is a conclusion, which is based on the philosophy and thus interpretative framework of the doctrine’s supporters.

Now, properly, education is a process by means of which students internalize knowledge: they mentally absorb it through observation and proof, and repeated application. Memorization, deduction, and problem solving must constantly be involved. The purpose is to develop the student’s mind—to provide him with an instantaneously available storehouse of knowledge and thus an increasingly powerful mental apparatus that he will be able to use and further expand throughout his life. Such education, of course, requires hard work from the student. Seen from a physiological perspective, it may be that what the process of education requires of the student through his exercises is an actual imprinting of his brain.

Yet, under the influence of the philosophy of Romanticism, contemporary education is fundamentally opposed to these essentials of education. It draws a distinction between “problem solving,” which it views as “creative” and claims to favor, and “memorization,” which it appears to regard as an imposition on the students, whose valuable, executive-level time, it claims, can be better spent in “problem solving.” Contemporary education thus proceeds on the assumption that the ability to solve problems is innate, or at least fully developed before the child begins school. It perceives its job as allowing the student to exercise his native problem-solving abilities, while imposing on him as little as possible of the allegedly unnecessary and distracting task of memorization.

In the elementary grades, this approach is expressed in such attitudes as that it is not really necessary for students to go to the trouble of memorizing the multiplication tables if the availability of pocket calculators can be taken for granted which they know how to use; or go to the trouble of memorizing facts of history and geography, if the ready availability of books and atlases containing the facts can be taken for granted, which facts the students know how to look up when the need arises. In college and graduate courses, this approach is expressed in the phenomenon of the “open-book examination,” in which satisfactory performance is supposedly demonstrated by the ability to use a book as a source of information, proving once again that the student knows how to find the information when he needs it.

With little exaggeration, the whole of contemporary education can be described as a process of encumbering the student’s mind with as little knowledge as possible. The place for knowledge, it seems to believe, is in external sources—books and libraries—which the student knows how to use when necessary. Its job, its proponents believe, is not to teach the students knowledge but “how to acquire knowledge”—not to teach them facts and principles, which, it holds, quickly become “obsolete,” but to teach them “how to learn.” Its job, its proponents openly declare, is not to teach geography, history, mathematics, science, or any other subject, including reading and writing, but to teach “Johnny”—to teach Johnny how he can allegedly go about learning the facts and principles it declares are not important enough to teach and which it thus gives no incentive to learn and provides the student with no means of learning.

The results of this type of education are visible in the hordes of students who, despite years of schooling, have learned virtually nothing, and who are least of all capable of thinking critically and solving problems. When such students read a newspaper, for example, they cannot read it in the light of a knowledge of history or economics— they do not know history or economics; history and economics are out there in the history and economics books, which, they were taught, they can “look up, if they need to.” They cannot even read it in the light of elementary arithmetic, for they have little or no internally automated habits of doing arithmetic. Having little or no knowledge of the elementary facts of history and geography, they have no way even of relating one event to another in terms of time and place.

Such students, and, of course, the adults such students become, are chronically in the position in which to be able to use the knowledge they need to use, they would first have to go out and acquire it. Not only would they have to look up relevant facts, which they already should know, and now may have no way even of knowing they need to know, but they would first have to read and understand books dealing with abstract principles, and to understand those books, they would first have to read other such books, and so on. In short, they would first have to acquire the education they already should have had.

Properly, by the time a student has completed a college education, his brain should hold the essential content of well over a hundred major books on mathematics, science, history, literature, and philosophy, and do so in a form that is well organized and integrated, so that he can apply this internalized body of knowledge to his perception of everything in the world around him. He should be in a position to enlarge his knowledge of any subject and to express his thoughts on any subject clearly and logically, both verbally and in writing. Yet, as the result of the miseducation provided today, it is now much more often the case that college graduates fulfill the Romantic ideal of being “simple, uneducated men.”

The bulk of this article is an excerpt from pp. 107-109 of the author’s Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). The article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is Pepperdine University Professor Emeritus of Economics.


Tuesday, October 03, 2006

Stiglitz in The Times: A Study in Confusion

In today’s New York Times, Joseph Stiglitz, a Nobel prize winner in economics, has an article titled “How to Fix the Global Economy.” Judging from his article, Stiglitz appears to believe that the main problem of the global economy is ”global financial imbalances.” By this, he means “America’s enormous trade deficits,” which he states are close to $3 billion a day, and “China’s growing trade surplus of almost $500 million a day.”

An indication of the level of analysis to expect in the article is given in its second paragraph, when he says that while the United States blames China’s undervalued currency for its trade deficit, “the rest of the world singles out the huge American fiscal and trade deficits.” The meaning of this statement, and of its acceptance by Stiglitz without challenge, is that it is legitimate to argue that what is to be blamed for America’s trade deficit is America’s trade deficit—at least in large part. Whether or not this is Stiglitz’s own view is irrelevant here. What is relevant is that he’s willing to let it go by as though it were legitimate and required no comment.

In typical Keynesian fashion, Stiglitz confuses saving with hoarding, as when he says, “No one seriously proposes that businesses save money instead of investing in expanding production simply to correct the problem of the trade deficit . . . .” How can saving itself not mean investment, unless the savings are hoarded? How can saving be an alternative to investment, unless saving means simply non-spending, i.e., hoarding? Indeed, Stiglitz makes no secret of his Keynesianism. He concludes his article by urging the imposition of an updated version of Keynes’ scheme for global credit expansion based on a new global currency. Only that will allegedly solve the “fundamental structural problems with the global reserve system” and end the “imbalances that threaten the financial stability and economic well-being of us all.”

Until then, the best that we can do, according to Stiglitz, is impose a Keynesian-inspired scheme of government “expenditure cuts combined with an increase in taxes on upper-income Americans and a reduction in taxes on lower-income Americans. The expenditure cuts,” says Stiglitz, “would, of course, by themselves reduce spending, but because poor individuals consume a larger fraction of their income than the rich, the `switch’ in taxes would, by itself, increase spending. If appropriately designed, such a combination could simultaneously sustain the American economy and reduce the deficit.”

The content of this last paragraph needs to be gone over carefully. The government will cut its spending. (Amazing that Stiglitz would even consider this.) This will not reduce overall, economy-wide spending, however, because it will be accompanied by tax reductions. As the result of reduced taxes, the taxpayers will spend more while the government spends less. So much is true, and good for Stiglitz for recognizing so much as the possibility of this happening. But Stiglitz thinks it’s essential that the taxpayers be poor, low-income tax payers, because only such taxpayers, he believes, engage in significant spending. What do the richer, higher-income tax payers do with their funds? All they do, Stiglitz thinks, is hoard them. That’s why, when their taxes are increased, Stiglitz sees no fall in spending anywhere. All he sees is funds coming into the hands of the government and reducing its deficit—funds that allegedly would otherwise have been hoarded.

The fact is, of course, as John Stuart Mill pointed out in the middle of the 19th Century, that what is saved, i.e., not spent in purchasing consumers’ goods, is spent. But it is spent productively, i.e., in buying capital goods and in paying the wages of workers employed by business firms. These workers, of course, then consume their wages.

Moreover, some significant part of the funds that are saved is lent to consumers. It should be realized that it is only on a foundation of savings, partly their own, but mainly those of others, which they borrow, that most people can afford to buy expensive consumers’ goods. In this category are major appliances, automobiles, and, above all, homes. Such consumers’ goods, which cost the income of months or years, could not be purchased in any other way except on a foundation of savings—either those of the purchasers themselves or those from whom the purchasers borrow.

Because their funds are spent in these ways, taxing the rich to reduce the government’s deficit actually means reducing the spending of business firms for capital goods and labor, the spending of business’s employees for consumers’ goods, and the spending of all consumers for expensive consumers’ goods.

Because what is saved is spent, simply reducing government spending, and thus the government’s need to borrow, makes correspondingly more funds available to business firms and consumers to be spent in these ways. The savings the government would have absorbed through its sale of securities are instead available for these vital purposes. There is no need to complicate matters with accompanying tax decreases and tax increases, especially when the tax increases have the negative effects that I’ve shown.

The point here is that to reduce the government’s budget deficit, all that needs to be done is to reduce its spending, nothing more. It would be a further improvement if government spending were reduced not only to the point of eliminating its deficit, but to the point of making possible the radical reduction, indeed, complete elimination, of taxes that fall on savings and the greatest possible decrease in taxes that fall on private consumption. In that way the demand for capital goods and labor by business would be at a maximum consistent with the citizens’ degree of time preference, and everyone would enjoy as much as possible of the benefit of his own wealth and income. The effect of the rise in saving and investment would be a sharp increase in the rate of economic progress in the United States. A further, indirect effect would be an increase in the size of the American economy relative to that of the rest of the world.

It never occurs to Stiglitz that America’s trade deficit is actually benign and doesn’t need to “fixed”–by him or anyone else. In part it is the result of the fact that the US dollar is a global currency. As the supply of dollars is increased in the US, a substantial proportion of them flows abroad, where they are held by individuals and businesses who do not want to hold the more rapidly inflated currencies of their own countries. These individuals use these dollars to a considerable extent in making purchases in their own countries, from other individuals who are eager to acquire them. To the extent that these dollars leave the US in the purchase of goods and services from abroad, they represent imports. The fact that they are then held abroad and do not return, means that there are no corresponding exports. Hence, the balances of trade and payments are “unfavorable.”

Of course, there is nothing really “unfavorable” to the United States about such a situation. It exports paper dollars that cost it virtually nothing to produce in exchange for actual goods and services. It is in the position of a gold mining country under an international gold standard, with a principal difference being that it does not incur the substantial costs of gold mining.

To be sure, there is a major danger in this situation. And that is, that the United States government will increase the supply of dollars rapidly enough to deprive them of their desirability for being held abroad. In that case, the dollars that have gone out will come rushing back in. We will then have to exchange a mass of goods and services for these little pieces of paper. Our economy will be impoverished, but the goods and services leaving in exchange for the little pieces of paper flooding back in will count as “exports,” and so our balance of trade will turn from “unfavorable” to “favorable.” Then, in the midst of impoverishment and major inflation, we shall allegedly know the meaning of prosperity—Keynesian style.

It should be obvious that the present “unfavorable” balance of trade is much preferable to such a “favorable” balance of trade.

For the rest, our “unfavorable” balance of trade is the result of nothing more than the relative desirability of the United States as a country in which to invest. Despite our substantial and continuing loss of economic freedom and respect for property rights, the United States still compares very favorably in these vital respects with practically all other countries. The laws here still cannot be changed at the whim of a government official. Contracts are almost always still enforced. As a result, the United States continues to be the best country in which to invest for enough people, enough of the time so that each year substantially more capital enters the country from abroad than leaves it. This net investment of foreign capital is what mainly finances our continuing excess of imports over exports.

The way to grasp the connection between foreign investment and our trade deficit, in terms of principle, is to think back a few generations, to the time when Western geologists first discovered vast oil reserves in Saudi Arabia. At the time, that country was essentially an empty desert. Oil wells, refineries, and pipelines did not yet exist there. They first needed to be built. To do this, a mass of construction equipment and construction materials needed to be brought into the country, along with substantial supplies of consumers’ goods for the Western construction workers required. All of these goods coming in were imports. They were also the physical constituents of the capital being invested in Saudi Arabia.

Could Saudi Arabia possibly have avoided an “unfavorable” balance of trade. It could not even if it had exported all of the sheep, goats, tents, and camels in the country. In fact, of course, it did not have to export anything to pay for these imports—not until the oil began flowing, and then it exported that. Its “unfavorable” balance of trade and the accompanying foreign investment were in fact as genuinely favorable an economic development for that country as it is possible to imagine.

Like all foreign investment, the foreign investment coming into the United States today is necessarily in the form of an excess of imports over exports. It and the capital accumulation it makes possible is no more genuinely unfavorable to us than was the excess of imports over exports that came into Saudi Arabia, and the capital accumulation it made possible.

Unfortunately, today, in the United States, part of the foreign investment being made finances our government’s budget deficits. But in so doing it prevents those deficits from stripping away savings and capital from the rest of the economic system. It would certainly be much more desirable if those deficits could be eliminated. Then that foreign capital would simply add to the savings and capital invested in our country, instead of, to a considerable extent, merely maintaining it. Foreign investment and the excess of imports over exports that it makes possible also serves to make up for the lack of savings and capital accumulation on the part of the United States’ own citizens. Our economy would be vastly worse off without it.

Such global “trade imbalances” are not a problem. They are a profoundly important means of preventing problems. What will cause a problem is allowing wreckers, devoid of serious knowledge of economics, to “fix” things.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.


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