Economics in One Lesson

Economics in One Lesson
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would think it insane to apply in domestic business. A typical example
is the belief that the government should make huge loans to foreign
countries for the sake of increasing our exports, regardless of whether
or not these loans are likely to be repaid.
American citizens, of course, should be allowed to lend their own
funds abroad at their own risk. The government should put no arbi-
trary barriers in the way of private lending to countries with which we
are at peace. We should give generously, for humane reasons alone, to
peoples who are in great distress or in danger of starving. But we
ought always to know clearly what we are doing. It is not wise to
bestow charity on foreign peoples under the impression that one is
making a hardheaded business transaction purely for one’s own self-
ish purposes. That could only lead to misunderstandings and bad rela-
tions later.
Yet among the arguments put forward in favor of huge foreign
lending one fallacy is always sure to occupy a prominent place. It runs
like this. Even if half (or all) the loans we make to foreign countries
turn sour and are not repaid, this nation will still be better off for hav-
ing made them, because they will give an enormous impetus to our
exports.
It should be immediately obvious that if the loans we make to for-
eign countries to enable them to buy our goods are not repaid, then
we are giving the goods away. A nation cannot grow rich by giving
goods away. It can only make itself poorer.
No one doubts this proposition when it is applied privately. If an
automobile company lends a man $1,000 to buy a car priced at that
amount, and the loan is not repaid, the automobile company is not
better off because it has “sold” the car. It has simply lost the amount
that it cost to make the car. If the car cost $900 to make, and only half
the loan is repaid, then the company has lost $900 minus $500, or a
net amount of $400. It has not made up in trade what it lost in bad
loans.
If this proposition is so simple when applied to a private company,
why do apparently intelligent people get confused about it when
applied to a nation? The reason is that the transaction must then be
The Drive for Exports
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traced mentally through a few more stages. One group may indeed
make gains—while the rest of us take the losses.
It is true, for example, that persons engaged exclusively or chiefly
in export business might gain on net balance as a result of bad loans
made abroad. The national loss on the transaction would be certain,
but it might be distributed in ways difficult to follow. The private
lenders would take their losses directly. The losses from government
lending would ultimately be paid out of increased taxes imposed on
everybody. But there would also be many indirect losses brought
about by the effect on the economy of these direct losses.
In the long run business and employment in America would be
hurt, not helped, by foreign loans that were not repaid. For every extra
dollar that foreign buyers had with which to buy American goods,
domestic buyers would ultimately have one dollar less. Businesses that
depend on domestic trade would therefore be hurt in the long run as
much as export businesses would be helped. Even many concerns that
did an export business would be hurt on net balance. American auto-
mobile companies, for example, sold about 10 percent of their output
in the foreign market before the war. It would not profit them to dou-
ble their sales abroad as a result of bad foreign loans if they thereby
lost, say, 20 percent of their American sales as the result of added
taxes taken from American buyers to make up for the unpaid foreign
loans.
None of this means, I repeat, that it is unwise to make foreign
loans, but simply that we cannot get rich by making bad ones.
For the same reasons that it is stupid to give a false stimulation to
export trade by making bad loans or outright gifts to foreign coun-
tries, it is stupid to give a false stimulation to export trade through
export subsidies. Rather than repeat most of the previous argument,
I leave it to the reader to trace the effects of export subsidies as I have
traced the effects of bad loans. An export subsidy is a clear case of
giving the foreigner something for nothing, by selling him goods for
less than it costs us to make them. It is another case of trying to get
rich by giving things away.
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The Drive for Exports
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Bad loans and export subsidies are additional examples of the
error of looking only at the immediate effect of a policy on special
groups, and of not having the patience or intelligence to trace the
long-run effects of the policy on everyone.
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1
S
pecial interests, as the history of tariffs reminds us, can think of
the most ingenious reasons why they should be the objects of spe-
cial solicitude. Their spokesmen present a plan in their favor; and it
seems at first so absurd that disinterested writers do not trouble to
expose it. But the special interests keep on insisting on the scheme. Its
enactment would make so much difference to their own immediate
welfare that they can afford to hire trained economists and “public
relations experts” to propagate it in their behalf. The public hears the
argument so often repeated, and accompanied by such a wealth of
imposing statistics, charts, curves, and pie-slices, that it is soon taken
in. When at last disinterested writers recognize that the danger of the
scheme’s enactment is real, they are usually too late. They cannot in a
few weeks acquaint themselves with the subject as thoroughly as the
hired brains who have been devoting their full time to it for years; they
are accused of being uninformed, and they have the air of men who
presume to dispute axioms.
This general history will do as a history of the idea of “parity”
prices for agricultural products. I forget the first day when it made its
appearance in a legislative bill; but with the advent of the New Deal
in 1933 it had become a definitely established principle, enacted into