The Iowa Car Crop

 
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“Looks like the Subarus are coming in great this year.”

According to an argument popularized by Steven Landsburg in The Armchair Economist, we have just discovered an amazing new technology. Some brilliant engineers have designed a big black box with secret, patented machines inside. This machine eats corn, and — after enough corn is consumed — it spits out a brand new car, like magic. You can even choose what kind of car you want: the color, engine, everything. The value of the corn the machine consumes is always less than value of the car it produces, so every time it is used, the wealth of society increases.

Would you want such a machine? Or would you lobby to have it destroyed for fear that it will put other car manufacturers out of business? Would you admit that it also creates jobs for farmers and, with the added wealth coming into society from the machine, it would probably allow for the creation of new jobs elsewhere? My guess is that most people would be very happy to see this machine. The auto workers would hate it, but everyone benefits who gets a new car for a lower price than they otherwise would have. Now, call that machine “Japan.” Or “China.” Now do you want it? If not, why not? That’s exactly what happens with free trade. We load a barge with grain — send it over the horizon, wait for a while — and back comes a barge loaded with cars. Isn’t that fantastic?

Once you think of trade as a black box, a lot of issues become clearer. For example, what happens if Japan “dumps” cars in the US? Well, isn’t that the same as if an engineer tweaked the box and made it even more efficient so it uses less corn per car? Why in the world would we complain about that?

On the other hand, what if they slap a tariff on grain imports? Well, that’s like the box getting a little less efficient. If the efficiency is bad enough that it requires more value in grain than the value of the car, we’ll stop using it. But even if the efficiency of the box goes down, it’s still valuable to use it so long as the net value it produces is greater than zero.

This is why free trade is always a good idea. Either it produces positive value, or the trade will stop. It doesn’t matter whether one country “dumps’ goods or puts tariffs on goods, although we might want to negotiate with them to stop doing it so that the markets stay maximally efficient. But even if they refused, we’re still better off with the trade than without it.

Of course, real trade policy can be messy, and there are considerations such as national defense that need to be worked into trade policy. But at its core, the fundamental principle is that when markets are free, they become more efficient. Capital flows where it has the most impact. Jobs are created where they add the most value, and destroyed when they no longer add value at all.

Another way to look at this thought experiment is that trade is no different than automation. Building a robot call center is functionally no different than building a call center in India: both are simply ways of making a process more efficient. Reducing the labor in a factory by 20% through automation is functionally no different than losing 20% of the labor force because the Japanese have 20% of the auto market. In both cases, the reduction happened because we found a better, cheaper way of achieving the same goal.

It seems to me that the fundamental difference is that with trade there is another human on the other end or the transaction. That potentially opens up issues of “fairness,” jealousy, racial intolerance, and tribalism. But should it? Why should we care whether our corn was ground up for energy in a machine or wound up on a plate in Tokyo?

Try to separate such issues from the economic argument, and many fallacies regarding trade become easier to deal with.

There are 42 comments.

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  1. Barkha Herman Inactive
    Barkha Herman
    @BarkhaHerman

    Great post, Dan.

    This kind of reading should be made popular in mainstream reading; AND I am going to create a lesson plan based on this for my Young Entrepreneurship club.

    • #1
  2. Dan Hanson Thatcher
    Dan Hanson
    @DanHanson

    Thank you!   I wish I could take credit for the idea,  but it’s totally Landsburg’s.

    • #2
  3. Ward Robles Inactive
    Ward Robles
    @WardRobles

    Nicely done and timely, too. With all the protectionist rhetoric floating around, we free-traders need all the ammunition we can find.

    • #3
  4. PHCheese Inactive
    PHCheese
    @PHCheese

    The principle is stated very well Dan, it’s the pratice where the devil is in the details.

    • #4
  5. Randy Weivoda Moderator
    Randy Weivoda
    @RandyWeivoda

    Good article, Dan.  Whether it will persuade anyone to change their mind, who knows, but it makes a good point.  A number of people seem to think whether we’re doing the buying or the selling, somehow those sneaky foreigners are always taking advantage of us.

    • #5
  6. Foxfier Inactive
    Foxfier
    @Foxfier

    Dan Hanson: The value of the corn the thing consumes is always less than value of the car it produces, so every time it is used the wealth of society increases.

    This assumption is the big problem; if it’s not true, then the entire thing falls apart.

    There’s other problems– what if it turns out that the cows can make the cars if they are getting baby-corpse supplements?

    • #6
  7. Foxfier Inactive
    Foxfier
    @Foxfier

    More realistically, there’s the “hidden cost” problem– start up costs tend to be obvious, while maintenance costs are less so, and you can (heck, farmers must) go for years on the seed corn stored up from before.

    Sort of like how you can get Printer A for $100…but the ink costs that much each time you have to refill it, while you can get Printer B for $200, but the ink prints twice as  much as costs half as much, or a quarter as much if you buy generic.

    • #7
  8. Foxfier Inactive
    Foxfier
    @Foxfier

    If you can swing it, it’s worth it to sell at a loss, if it will drive your competition out of business and the start up costs for them would be high enough that you can make a decent profit without them being able to get going again.

    Your customers would be paying the extra, of course, but if they’re all looking at a short term basis and your government is willing to subsidize you to drive the competition out of business…….

    • #8
  9. Mike H Coolidge
    Mike H
    @MikeH

    In video form:

    • #9
  10. John Hendrix Thatcher
    John Hendrix
    @JohnHendrix

    Excellent post!

    This sort of post is just another reason why a Ricochet membership is worth its price.

    • #10
  11. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    Aren’t all economists armchair economists? Are there some frontline economists I/we didn’t know about?

    Agree on the content of the post. We also get capital back, not just cars. They are sending us a lot of money, buying treasuries, real estate etc.

    • #11
  12. BThompson Inactive
    BThompson
    @BThompson

    The competition and creative destruction described here are all great in theory, but the manner and pace of the change and destruction matter a great deal. Conservatives like to make these academic, theoretical arguments but don’t seem to understand the fear that creative destruction induces in the real human lives effected.

    Yes, comparative advantage and specialization in the long run are great things, but conservatives need to have answers to the legitimate concerns of the people getting swatted to the side by the invisible hand. Simplistic metaphors are cold comfort to a 50 year old manufacturing worker losing his job and who doesn’t have the money or luxury of youth to just retool and start over.

    • #12
  13. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    BThompson:The competition and creative destruction described here are all great in theory, but the manner and pace of the change and destruction matter a great deal. Conservatives like to make these academic, theoretical arguments but don’t seem to understand the fear that creative destruction induces in the real human lives effected.

    Yes, comparative advantage and specialization in the long run are great things, but conservatives need to have answers to the legitimate concerns of the people getting swatted to the side by the invisible hand. Simplistic metaphors are cold comfort to a 50 year old manufacturing worker losing his job and who doesn’t have the money or luxury of youth to just retool and start over.

    50  is the new 40. Get off the couch and learn a new skill. Start a small business. Not too late at all.

    • #13
  14. BThompson Inactive
    BThompson
    @BThompson

    Yeah, that’s the type of compassionate rhetoric I’m talking about.

    • #14
  15. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    BThompson:Yeah, that’s the type of compassionate rhetoric I’m talking about.

    Well boohoo!  Why does this person need compassion? They are 50, not 80.

    • #15
  16. Owen Findy Member
    Owen Findy
    @OwenFindy

    BThompson:Yeah, that’s the type of compassionate rhetoric I’m talking about.

    I don’t expect compassionate rhetoric, nor think I’m owed it.  I think it’s my responsibility to keep up.

    • #16
  17. BThompson Inactive
    BThompson
    @BThompson

    And people wonder why the democrats get away with demonizing conservatives so easily.

    • #17
  18. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    BThompson:And people wonder why the democrats get away with demonizing conservatives so easily.

    Maybe it is because of wobbly conservatives who can’t wait to shed a tear when instead a little wherewithal, a little personal initiative would fix an issue.

    • #18
  19. Owen Findy Member
    Owen Findy
    @OwenFindy

    BThompson:And people wonder why the democrats get away with demonizing conservatives so easily.

    It’s true.  I don’t think the world owes me a living.  What am I supposed to say?  I’m sick of trying to tiptoe around the categories the Left has set up for us.

    • #19
  20. Western Chauvinist Member
    Western Chauvinist
    @WesternChauvinist

    Foxfier:

    Dan Hanson: The value of the corn the thing consumes is always less than value of the car it produces, so every time it is used the wealth of society increases.

    This assumption is the big problem; if it’s not true, then the entire thing falls apart.

    ….

    Yeah, it’s always tough to talk about “value.” In this example, the expenditure of “corn” is “worth it,” or we’d find something else to do with our corn. The value of the corn is in cars.

    The real neat trick we pull off is borrowing 18 trillion dollars and still getting away with sending cash money (paper) overseas for computers, cars, and other hardware. That’s magic, baby!

    • #20
  21. Western Chauvinist Member
    Western Chauvinist
    @WesternChauvinist

    Western Chauvinist:

    Foxfier:

    Dan Hanson: The value of the corn the thing consumes is always less than value of the car it produces, so every time it is used the wealth of society increases.

    This assumption is the big problem; if it’s not true, then the entire thing falls apart.

    ….

    Yeah, it’s always tough to talk about “value.” In this example, the expenditure of “corn” is “worth it,” or we’d find something else to do with our corn. The value of the corn is in cars.

    The real neat trick we pull off is borrowing 18 trillion dollars and still getting away with sending cash money (paper) overseas for computers, cars, and other hardware. That’s magic, baby!

    Actually, it’s not even paper. It’s bits and bytes. We’re wizards, pulling this shtuff out of the ether.

    • #21
  22. BThompson Inactive
    BThompson
    @BThompson

    It’s not about being wobbly or insufficiently passionate about free markets. It’s about how to sell the ideas. Conservatives pride themselves about understanding human nature better than the left, but are totally tone deaf and blind as to how people process arguments and make decisions. Saying things like “See, free trade is just like a magic black box!” Arent persuasive to anyone but people already completely sold on the idea.

    Arthur Brooks has a lot of people to reach and convince about the conservative heart, obviously.

    • #22
  23. Man With the Axe Inactive
    Man With the Axe
    @ManWiththeAxe

    “This machine eats corn, and — after enough corn is consumed — it spits out a brand new car, like magic. You can even choose what kind of car you want: the color, engine, everything. The value of the corn the machine consumes is always less than value of the car it produces, so every time it is used, the wealth of society increases.”

    Wish I had thought of that.

    • #23
  24. Owen Findy Member
    Owen Findy
    @OwenFindy

    BThompson:It’s not about being wobbly or insufficiently passionate about free markets. It’s about how to sell the ideas. Conservatives pride themselves about understanding human nature better than the left, but are totally tone deaf and blind as to how people process arguments and make decisions. Saying things like “See, free trade is just like a magic black box!” Arent persuasive to anyone but people already completely sold on the idea.

    Arthur Brooks has a lot of people to reach and convince about the conservative heart, obviously.

    You’re probably right about my angry comment, but if people can’t reason about Dan’s simple and beautiful, Bastiat-like abstraction, we have a much bigger problem than teaching them economics.

    • #24
  25. Ed G. Inactive
    Ed G.
    @EdG

    Dan Hanson:[…..]

    Would you want such a machine? [….] Would you admit that it also creates jobs for farmers and, with the added wealth coming into society from the machine, it would probably allow for the creation of new jobs elsewhere? […..] The auto workers would hate it, but everyone benefits who gets a new car for a lower price than they otherwise would have. […..] We load a barge with grain — send it over the horizon, wait for a while — and back comes a barge loaded with cars. […..]

    […..]

    Yes, anyone would want such a machine. But by that I mean “want to own”. The profit goes to the owner. As it should.

    My limited understanding of farming labor is that it’s not a growth opportunity even if there’s more product demand. I don’t think the repurposing of labor in the modern age is smooth and efficient. I think we’ve gotten by so far by extending adolescence, sending people to college who have no real aptitude for it, debt, and government labor. Maybe this is another reason to reinstitute the draft.

    Yes, everyone who gets a car will benefit. So too everyone who consumes corn will suffer higher prices.

    If the grain is worth less than the car, then we must be sending something in addition to grain in exchange for the vehicle. Otherwise the equation is out of balance. Why would they accept something of less value than what they’re giving?

    • #25
  26. Ed G. Inactive
    Ed G.
    @EdG

    Marion Evans:…..

    Agree on the content of the post. We also get capital back, not just cars. They are sending us a lot of money, buying treasuries, real estate etc.

    These are all trades; yes we get something but we give something too. I’m not so sure them buying our treasuries is such a great deal for us; isn’t that partially what’s fueling our runaway debt and spending? Same with real estate; why are “we” better off now that “they” own real estate that used to belong to “us”?

    • #26
  27. Ed G. Inactive
    Ed G.
    @EdG

    Let’s just keep in mind that we’re talking about trades and trade offs.

    Here’s a fundamental trade off that even a lowly laborer can understand, if not answer definitively: if “capital flows where it has the most impact” – i.e. return – and  “jobs are created where they add the most value, and destroyed when they no longer add value at all”, then cheap goods and the exhortation to “learn a new skill” and “start a small business” are the result for whoever is left behind the value shift.

    There are many different ways of looking at this situation. The foremost, for me, are that 1) it is morally wrong to tell someone they should avoid arranging their affairs in a profitable way simply because I would not profit or because I don’t approve, and 2) you can’t legislate value and if what I do is obsolete then we do far more damage keeping the bubble inflated than letting it pop and everyone moving on.

    • #27
  28. Ed G. Inactive
    Ed G.
    @EdG

    However, there are other ways of looking at it. 1) not everyone is as capable of moving on as was once the case; it’s no longer true that the world needs ditch diggers since we now have excavation machinery; not everyone is capable of a STEM job. 2) My job isn’t actually obsolete – it’s just that labor in China is cheaper or that Japan has protectionist policies – is it wrong to account for that difference in context? 3) I’d rather have my town’s factory automated than moved. 4) If equilibrium is inevitable (i.e. the cost of producing here will eventually match the cost of producing over there) then why is the cheap goods route preferable to the higher cost but with a job route? 5) If we’re not too careful then moving capital from here to there will produce internal rot and decay, making it hard on labor now AND losing the capital benefits down the line. 6) there is a moral component concerning manipulating foreign workers who don’t have the quality of life or liberty that we have.

    There are free market type answers for all of this. But we fool ourselves to think that a particular laborer would be stupid to choose non-free-market answers. In the long term and in the sense of “us” perhaps the stupidity is obvious, but for right now and for “me” the relative benefits/downsides of a protectionist policy are pretty obvious too.

    • #28
  29. Barkha Herman Inactive
    Barkha Herman
    @BarkhaHerman

    BThompson:It’s not about being wobbly or insufficiently passionate about free markets. It’s about how to sell the ideas. Conservatives pride themselves about understanding human nature better than the left, but are totally tone deaf and blind as to how people process arguments and make decisions. Saying things like “See, free trade is just like a magic black box!” Arent persuasive to anyone but people already completely sold on the idea.

    Arthur Brooks has a lot of people to reach and convince about the conservative heart, obviously.

    I agree with your point that the conservatives need better communication skills. Thread after thread, I have asked the question: “What is your elevator pitch”?Clearly, there is work to be done here.

    However, I work with middle school kids – and I can tell you that NO ONE is talking to them about free markets – not in a school environment.

    As for the 50 year old, chances are that having taken a entrepreneurship class in middle school, they probably have a good understanding that:

    1. They have a substantial 401k by age 50, since they “got” the value of saving starting at a young age
    2. Their house is paid off – since they understand value of owning property an started young
    3. They understand the economics enough that they know a manufacturing job in the US is not going to last – and have made alternative plans
    4. They have diversified income stream by 50.

    So, in the interest of creating those 50 year olds, we communicate this message.

    • #29
  30. david foster Member
    david foster
    @DavidFoster

    I have thought of similar analogies myself, but they have limitations.

    If the corn-to-car machine was developed and manufactured in the US, then US individuals and companies have developed the skills which will allow them to create other kinds of magical machines—a sugarcane-to-diesel-locomotive machine, for example, or an eggplant-to-structural steel machine.  But if the “machine” consists of trade with China (or wherever), this intellectual property is not gained.

    Imagine you are King of Spain in 1790.  The theory of comparative advantage suggest that instead of developing a steam-engine manufacturing capability, you would do better to focus on wine grapes, sell the wine to Britain, and get steam engines from them.  BUT, whether you know it or not, mechanical power and mechanical technology in general are about to become a lot more important.  From a niche product useful mainly for drainage of deep mines, steam engines are going to become a universal power source.  New mechanical technologies, from power looms to machine guns to automobiles, are going to emerge.  And because you decided against making steam engines, Spain may fail to develop a cadre of skilled workers to enable these industries over time.

    • #30
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