Bastiat on Why Protectionism Fails: Money is Not Wealth

One of the fundamental flaws of protectionism have been to mistake money, which is a medium of exchange, for wealth. Thus, the obsession by the mainstream for inflationism-protectionism as popular political solutions to economic predicaments.

The great classical liberal Frédéric Bastiat explodes this myth more than a century back. (From Mises Institute/The Bastiat Collection) [bold emphasis mine]

Do you desire to be in a situation to decide between liberty and protection? Do you desire to appreciate the impact of an economic phenomenon? Inquire into its effects upon the abundance or scarcity of commodities, and not upon the rise or fall of prices. Distrust nominal prices; they will only land you in an inextricable labyrinth.

Mr. Matthieu de Dombasle, after having shown that protection raises prices, adds:

"The enhancement of prices increases the expense of living, and consequently the price of labor, and each man receives, in the enhanced price of his products, compensation for the higher prices he has been obliged to pay for the things he has occasion to buy. Thus, if everyone pays more as a consumer, everyone receives more as a producer."

It is evident that we could reverse this argument, and say:

"If everyone receives more as a producer, everyone pays more as a consumer."

Now, what does this prove? Nothing but this, that protection displaces wealth uselessly and unjustly. In so far, it simply perpetrates spoliation.

Again, to conclude that this vast apparatus leads to simple compensations, we must stick to the "consequently" of Mr. de Dombasle, and make sure that the price of labor will not fail to rise with the price of the protected products. This is a question of fact that I remit to Mr. Moreau de Jonnes, that he may take the trouble to find out whether the rate of wages advances along with the price of shares in the coal mines of Anzin. For my own part, I do not believe that it does; because, in my opinion, the price of labor, like the price of everything else, is governed by the relation of supply to demand. Now, I am convinced that restriction diminishes the supply of coal, and consequently enhances its price; but I do not see so clearly that it increases the demand for labor, so as to enhance the rate of wages; and that this effect should be produced is all the less likely, because the quantity of labor demanded depends on the available capital. Now, protection may indeed displace capital, and cause its transference from one employment to another, but it can never increase it by a single farthing.

But this question, which is one of the greatest interest and importance, will be examined in another place. I return to the subject of nominal price; and I maintain that it is not one of those absurdities that can be rendered specious by such reasonings as those of Mr. de Dombasle.

Put the case of a nation that is isolated, and possesses a given amount of specie, and that chooses to amuse itself by burning each year one-half of all the commodities that it possesses. I undertake to prove that, according to the theory of Mr. de Dombasle, it will not be less rich.

In fact, in consequence of the fire, all things will be doubled in price, and the inventories of property, made before and after the destruction, will show exactly the same nominal value. But then what will the country in question have lost? If John buys his cloth dearer, he also sells his corn at a higher price; and if Peter loses on his purchase of corn, he retrieves his losses by the sale of his cloth. "Each recovers, in the extra price of his products, the extra expense of living he has been put to; and if everybody pays as a consumer, everybody receives a corresponding amount as a producer."

All this is a jingling quibble, and not science. The truth, in plain terms, is this: that men consume cloth and corn by fire or by using them, and that the effect is the same as regards money, but not as regards wealth, for it is precisely in the use of commodities that wealth or material prosperity consists.

In the same way, restriction, while diminishing the abundance of things, may raise their price to such an extent that each party shall be, pecuniarily speaking, as rich as before. But to set down in an inventory three measures of corn at 20s., or four measures at 15s., because the result is still 60s. — would this, I ask, come to the same thing with reference to the satisfaction of men's wants?

It is to this, the consumer's point of view, that I shall never cease to recall the protectionists, for this is the end and design of all our efforts, and the solution of all problems. I shall never cease to say to them: Is it, or is it not, true that restriction by impeding exchanges, by limiting the division of labor, by forcing labor to connect itself with difficulties of climate and situation, diminishes ultimately the quantity of commodities produced by a determinate amount of efforts? And what does this signify, it will be said, if the smaller quantity produced under the regime of protection has the same nominal value as that produced under the regime of liberty? The answer is obvious. Man does not live upon nominal values, but upon real products, and the more products there are, whatever be their price, the richer he is.

In writing what precedes, I never expected to meet with an anti-economist who was enough of a logician to admit, in so many words, that the wealth of nations depends on the value of things, apart from the consideration of their abundance. But here is what I find in the work of Mr. de Saint-Chamans (p. 210):

If fifteen million worth of commodities, sold to foreigners, are taken from the total production, estimated at fifty millions, the thirty-five million worth of commodities remaining, not being sufficient to meet the ordinary demand, will increase in price, and rise to the value of fifty millions. In that case the revenue of the country will represent a value of fifteen million additional.… There would then be an increase of the wealth of the country to the extent of fifteen million, exactly the amount of specie imported.

This is a pleasant view of the matter! If a nation produces in one year, from its agriculture and commerce, a value of 50 million it has only to sell a quarter of it to the foreigner to be a quarter richer! Then if it sells the half, it will be one-half richer! And if it should sell the whole, to its last tuft of wool and its last grain of wheat, it would bring up its revenue to 100 million. What a way of getting rich, by producing infinite dearness by absolute scarcity!

Again, would you judge of the two doctrines? Submit them to the test of exaggeration.

According to the doctrine of Mr. de Saint-Chamans, the French would be quite as rich — that is to say, quite as well supplied with all things — had they only a thousandth part of their annual products, because they would be worth a thousand times more.

According to our doctrine, the French would be infinitely rich if their annual products were infinitely abundant, and consequently, without any value at all.

Think of it, if you alone have been stranded in a remote and inaccessible island inhabited by primitive tribes, what will your bag filled with $10 million buy (if they should accept your greenbacks at all)?

The Homeless and Nomad Billionaire: Burger King Boss Nicolas Berggruen

From the Daily Mail (hat tip Sovereign Man)

Like most nomads, Nicolas Berggruen travels light.

He doesn't own a house, car or even a watch and the few belongings he does have are carried around in a paper bag.

Possessions have 'zero appeal', he says. It's our actions that have real value.

But what sets the 50-year-old apart from nearly all other homeless people is the small matter of his £1.5billion fortune.

Berggruen got rid of his New York pad and private island 12 years ago. Home is far more transient nowadays.

Life for him is a jet-set one - trotting the globe, hanging out with beautiful women and staying in luxury hotels, sometimes in 14 different cities in a month as he builds his enormous business empire.

His most recent acquisition has been a £881million stake in Burger King.

But in spite of his wealth, the Franco-German tycoon insists he doesn't need, or want, material goods.

'Possessing things is not interesting,' he told the Daily Mirror. 'Living in grand environments to show myself and others that I have wealth has zero appeal.

'Whatever I own is temporary, since we're only here for a short period of time. It's our actions that will last for ever. That's real value.'

A billionaire with no house, car, watch and a few belongings but hangs out with different beautiful women exhibits unique values and priorities.

Mr.Berggruen’s life philosophy seem to revolve around the non-attachment creed of Buddhism. Yet where he says ‘our actions’ signifies as the ‘real value’ then his penchant for many chicks must be his ‘real’ non-attachment value.

Since like Mr. Berggruen, I only rent my home, don’t have a car, watch and only have a few treasured belongings (yeah books), and used to desire traveling, he should be my idol.

Unfortunately, I am nowhere near being like him (in money, women, and importantly, in philosophy).

Shrinking American Millionaires

This is not about increasing number of Americans fleeing the US. Instead this about Americans enduring sharp losses from stock market investments.

From CNBC.com

America’s millionaire population declined last year for the first time since the financial crisis, according to a new report.

The population of U.S. millionaire households (households with investible assets of $1 million or more) fell to 5,134,000 from 5,263,000 in 2011, according to The Boston Consulting Group’s Global Wealth study.

Total private wealth in North America fell by 0.9 percent, to $38 trillion.

The ultra-rich were the largest losers in dollar terms. Households in North America with investible assets of more than $100 million saw their wealth decline 2.4 percent. Their population declined slightly to 2,928 from 2,989.

The main reason for all this wealth loss? Stocks.

With the wealthy today increasingly dependent on stocks for wealth, last year’s stalled stock market shrunk the population of millionaires and nicked the fortunes of existing millionaires. According to BCG, the amount of wealth held in equities declined 3.6 percent last year.

Globally, the picture looked a little brighter. Virtually all of the growth in global millionaires came from emerging markets last year. While the United States lost nearly 130,000 millionaires, the rest of the world added 175,000 millionaires. There are now 12.6 million millionaire households globally, according to BCG.

That’s a study made last year.

Before yesterday’s stock market rout, US equities have been performing relatively better than the world.

Chart from Bespoke Invest

The S&P has been gradually reclaiming dominance and has outperformed the MSCI World index in late 2011 until May 30th.

This means that if emerging market millionaires are exposed to stock investments too, then the above dynamic may have partly been reversed.

And I think that with many global stock markets entering bear market territory, the number of shrinking millionaires could be a global phenomenon.

Paper money ‘wealth’ is being extinguished.

Quote of the Day: Wealth is about Value

Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers…

The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

That’s from Adam Gurri (hat tip Don Boudreaux). We should emphasize on providing values and not just jobs.

Wealth Makes Health And Intelligence

The Economist shows a study associating intelligence with incidences of infectious diseases.

The Economist writes,

"HUMAN intelligence is higher, on average, in some places than in others. And researchers at the University of New Mexico have come up with an explanation, published in the Proceedings of the Royal Society. Comparing the average IQ in a particular country with its disease burden (based on the reduction in life expectancy caused by 28 infectious diseases) reveals a striking correlation. At the bottom of the IQ list is Equatorial Guinea, followed by St Lucia, with Cameroon, Mozambique and Gabon tied for third last. These countries also have among the highest burdens of infectious diseases. At the opposite end of the scale, Singapore, South Korea, China and Japan show the highest intelligence scores and relatively low levels of disease. America, Britain and a number of European countries also place in the top left-hand corner of the chart."

Well, correlation doesn't imply causation. Besides, not all education can be treated as equal, as education can represent political or religious indoctrination. In addition, some people can finish traditional academic requirements but they may remain "inadequately" educated.

Instead, what we suggest as a meaningful causal link behind education and disease is capitalism.

Where capitalism allows people to generate wealth, wealth allows the financing of education and the preservation of health or disease avoidance.

The Gapminder chart above shows of this strong correlation.

As Matt Ridley writes in The Rational Optimist: How Prosperity Evolves (hat tip Mark Perry)

``The availability of almost everything a person could want or need has been going rapidly upwards for 200 years: years of lifespan, mouthfuls of clean water, lungfuls of clean air, hours of privacy, means of traveling faster than you can run, ways of communicating farther than you can shout, and with more access to calories, watts, lumen-hours, square feet, gigabytes, megahertz, light-years, nanometers, bushels per acre, miles per gallon, food miles, air miles, and of course dollars than any who went before."