This week in Ethics & Economics Challenge, we read part of Frederic Bastiat’s satirical essay, “The Candlemakers’ Petition.” In it, the French “petitioners” seek a new law forcing everyone to block sunlight out of buildings. As a result of the law, people will have to buy lots of candles and candelabras, creating a “multiplier effect” that will result in more cultivation of oilseed plants, more raising of livestock for tallow, more metallurgy for candelabra manufacturing, and so on. So there you have it: blocking out the sun would be good for the economy.
The conclusion seems absurd, and it is. But what’s amazing is that present-day arguments for “buying American” and “buying local” depend on precisely the same fallacious economic reasoning that the candlemakers employ. Take this piece in Time magazine a few years ago on how buying local “boosts the economy.”
The author claims that “when you buy local more money stays in the community.” Suppose that’s true. Does circulating money in the local community make us better off? I proved that it did not in class by passing around a $20 note. “Feel your standard of living growing,” I quipped, as the bill made its way around the classroom. Why didn’t passing a dollar bill around the classroom make us all better off? Because we weren’t getting anything in exchange!
When you buy from a retailer, local or not, you’re getting something in exchange. Suppose you are in the market for plastic storage bins. You can buy your bins from Wal-Mart, where they cost $1 each, or you can buy them from a local retailer, where they cost $2 each. Buying from the local retailer makes you worse off, relative to buying from Wal-Mart, but you make the local retailer better off. So what’s the net effect on the local economy?
To answer that question, we first need to explode one fallacy: that money equals wealth. At the individual level, having lots of money relative to other people means you can command more goods and services, so you’re more wealthy. But at the community level, having lots of money doesn’t make the community wealthier. Imagine you’re stranded on a desert island with some friends and no hope of rescue for many months. Which would you rather discover: a chest full of dollar bills or a chest full of seeds for planting crops? The dollar bills are virtually useless and therefore worthless. The money doesn’t increase your standard of living, but the crops (goods) sure do.
So that’s one error the “buy local” crowd makes, and the candlemakers make the same mistake when they talk about how much spending will increase as a result of blocking out the sun. Sunlight actually boosts our standard of living. Having more money circulating in the economy doesn’t boost our standard of living. The government of Zimbabwe printed trillions of dollars a few years ago; did that make them trillions of times wealthier? To the contrary, their economy collapsed.
The other mistake the “buy local” crowd and the candlemakers both make is what’s often called the “broken window fallacy,” after another Bastiat essay. (Henry Hazlitt adapts it for Economics in One Lesson, which the MVHS students are reading for tomorrow.) In the broken window parable, townsfolk console a shopkeeper whose window is broken on the grounds that breaking windows benefits the economy, by causing the shopkeeper to spend on replacing it. What the townsfolk ignore is that the resources put toward fixing a broken window could instead have been put toward creating and exchanging something new, like a new pair of shoes.
The candle-makers commit the broken window fallacy by focusing on the boost to candle-making production that blocking out the sun would create. But they ignore the lost opportunities that more candle-making would necessarily involve. If we merely accepted the free gift of sunlight, we could direct our work, our land, and our investments toward new factories and new products rather than candle-making and all the rest.
So return to the example of the plastic bins. If I buy them from Wal-Mart, I save $1. I can use that dollar to buy other things or to invest in producing things (by saving). I am better off than if I buy the bins at $2 each from the local retailer, Wal-Mart is better off, and whoever would benefit from my spending or saving that extra dollar is also better off. Only the local retailer is worse off.
Do the gains from buying from Wal-Mart rather than the local retailer in this example outweigh the losses? Yes. To see this, imagine that everyone bought local, all the time. Cars, airplanes, software, clothing, food… everything would have to be made and exchanged in the town where you live. What would happen to everyone’s standard of living? It would fall dramatically. (How many skilled airplane manufacturers does your town have?) The same principle applies at the national level, or any other geographic level you choose. If you buy everything within that circumscribed area and exclude everything outside it, your community will be worse off than it would be if it bought from any willing seller.
Now, that’s an extreme example, but it illustrates the principle. Some things are impossible to make locally (airplanes). Other things are difficult and costly to make locally (shipping and retailing of plastic bins). A few things will be most efficiently and affordably made locally, and you will want to buy them locally without having to be goaded into doing so – they’ll simply be the best products for the price. Goading your community into buying shoddier or more costly products just because they’re local or American or whatever just makes your community poorer.
Let’s bring this back to the candle-makers’ petition. In that example, it was intuitively obvious that accepting the free gift of sunlight was better than blocking it out and trying to compensate by making a bunch of candles. Let’s apply it to international trade. Imagine that Chinese manufacturers want to send Americans a bunch of free clothes of reasonably good quality. Should we accept them? Yes, of course. They’re free. We can use them. We won’t need to make them here anymore, just as 1845 France wouldn’t need to make so many candles anymore after letting in the sun.
Now imagine that Chinese manufacturers want us to pay for the clothes, but much less than we would have to pay for equivalent American-made clothes. Should we still accept them? Yes, of course. It’s not as good as free clothes, but they’re still cheaper. We’re better off. We can spend the extra money on other things, and the workers and land and investments that went into making clothes here in the U.S. can be redeployed to other, better uses. Of course, that means that some people will lose jobs and be worse off for that reason, but in the end we’re all better off being able to buy all sorts of things from China and the rest of the world than we would be if we bought only American-made stuff. Even the workers who lose their clothing factory jobs…and move on to do something else productive that improves lives within the community. We should all expect our jobs to change as growth in trade and innovation makes certain tasks obsolete and opens up new opportunities.