Competition and Capital; D. Russell

Dean Russell Competition and Capital SEVERAL of Frederic Bastiat's para bles or satires deal with the thenle of unfair foreign competition, usu ally based on wage differentials (cheap foreign labor) but sometimes on other "unfair" advantages en joyed by foreign producers, e.g., nat ural resources, capital formation, and so on. In one of his stories, "The Candle makers' Petition," Bastiat picked the ultimate example of unfair compe tition-a foreigner with such low costs of production that he actually gave his product away free. Ob viously that price is difficult for do mestic producers to meet, and is thus unfair. So Bastiat argued (tongue-inDr. Russell, recently retired from a full schedule of academic work, continues freelance consulting, lec turing and writing from his home in Westchester County, New York. This is one of a series of articles examining current interventions of the welfare state in the light of warn ings from the French economist and statesman, Frederic Bastiat (1801-1850).

cheek) that his government should pass laws to protect national indus try against such an unscrupulous foreign competitor. Bastiat's 1844 "petition" on behalf of the candlemakers and other pur veyors of artificial lighting was ad dressed "To the Honorable Members of the Chamber of Deputies" in France, a group he himself joined in 1848. "We candlemakers are suffering from the unfair competition of a for eign rival. This foreign manufac turer of light has such an advantage over us that he floods our domestic markets with his product. And he of fers it at an absurdly low price. The moment this foreigner appears in our country, all our customers desert us and turn to him. As a result, an entire domestic industry is rendered completely stagnant. And even more, since the lighting industry has countless ramifications with other 25 26 THE FREEMAN January national industries, they too are in jured. This foreign manufacturer who competes with us without mercy is none other than the sun itselfl "Here is our petition: Please pass a law ordering the covering of all windows and sky lights and other openings, holes, and cracks through which the light of the sun is able to enter houses. This free sunlight is hurting the business of us deserving manufacturers of candles. Since we have always served our country well, gratitude demands that our country ought not to abandon us now to this unequal competition.

"We hope that you gentlemen will not regard our petition as mere sat ire, or refuse it without at least hear ing our reasons in support of it. "First, if you make it as difficult as possible for people to have access to natural light-and thus create an increased demand for artificial light-will not all domestic manu facturers be stimulated thereby? "For example, if more tallow is consumed, naturally there must be more cattle and sheep. As a result, there will also be more meat, wool, and hides. "Next, if more oil is consumed for lighting, we shall have to plant ex tensive olive groves and other oil producing crops. This will bring prosperity to agriculture. "In addition, our waste lands will soon be covered with pines and other resinous trees. As a result of this, there will be numerous swarms of bees to increase the production of honey. In fact, all branches of agri culture will show an increased development.

"The same applies to the shipping industry. The increased demand for whale oil will require thousands of ships for whale fishing. In turn, that will provide a myriad ofjobs for ship builders and sailors. In a short time, we will also have a navy capable of defending our country. And that, of course, will gratify the patriotic sen timents of us candlemakers and other persons in related industries. "The manufacturers of lighting fixtures will be especially stimu lated-candlesticks, lamps, cande labra, chandeliers, crystals, bronzes, and so on. The resulting warehouses and display rooms will make our present shops look poor indeed. "The resin collectors on the heights along the seacoast, as well as the coal miners in the depths of the earth, will rejoice at their higher wages and increased prosperity. In fact, gentle men, the condition of every citizen in our country-from the wealthiest owner of coal mines to the poorest seller of matches-will be improved by the success of our petition."* This argument for restrictions *I've done my own translating, and I've slightly condensed Bastiat's story to the essen tials needed to fully explain his brilliant point, Complete Works of Bastiat, Guillaumin, Paris, 1878 edition, vol. 4, pp. 57-62.

1985 COMPETITION AND CAPITAL 27 against foreign competitors because of their presumed cost advantages (usually, but not always, cheaper la bor) is the basic argument for tariffs, quotas, and other restrictions and prohibitions against international trade. Sometimes lip-service is paid to national defense arguments, health arguments, and a few others. But those arguments don't really carry much weight; our arms man ufacturers are the world's best, and no one seriously objects to sound rea sons for keeping infectious diseases and destructive bugs out of our coun try. The basic argument advanced by Bastiat in so many of his parables and explanations is the only argu ment the protectionists can really depend on, i.e., protection against unfair foreign competition that's de stroying American jobs. These "unfair" practices are sel dom spelled out in advance, since it would be difficult to know what they are until they happen. They are pos itively identified only after a domes tic producer loses business to a for eign competitor. When that happens, a "peril point" has been reached-always due to some unfair foreign practice, of course-and laws are passed (or called into action) to pro tect the domestic producer against the foreign producer. As a result of this "magician's tactic" of drawing our attention elsewhere, we never know the real reasons for the high costs of the domestic producer. Behind his protective law, there's no fi nal incentive for him to improve his operations.

Well, let's take a look at some of the possible reasons (at home and abroad) that have a direct bearing on this entire problem of competition and capital formation, e.g., "unfair" foreign competition, the effects of capital formation (machines) on jobs and wages, the differences between domestic and foreign trade, and the effect of laws against foreign capital. Since all of these issues are inex tricably mixed, I'll not here try to compartmentalize them but will use them as they come along. First, cheap foreign labor. Cheap Foreign Labor The most persuasive argument I ever heard for protection against competition from foreign labor didn't concern cheap labor at all but pro tection against expensive foreign la bor. You may be as surprised as I was when I encountered that argument while I was a doctoral student at the University of Geneva, where I'd made friends with a student from Egypt.

I knew his country had one of the highest tariffs in the world. As a "free trader," I sometimes chided him about it and suggested that since labor was already so cheap in Egypt, surely they didn't need laws to protect them against foreign com petition. He said I was wrong, that 28 THE FREEMAN January I was missing the real point entirely, that protection against cheap labor is indeed absurd, that the problem is competition from expensive labor, and that Egypt most definitely did need protection against that type of foreign labor. Here's how he ex plained it. He correctly pointed out that the low production of Egyptian workers was due primarily to their primitive tools, i.e., the absence of capital or machines. As a result of this, he said, the cost of labor in Egypt is one of the highest in the world when cor rectly measured, i.e., labor cost per unit of production. He then used the chalkboard to show me a mathematical compari son between the $25 an hour paid to the operator of a bulldozer moving sand-and the 25 cents an hour paid to 200 fellahin with shovels moving the same amount of sand. Even after the low cost of capital (the bulldozer) is paid, the real cost of labor in Egypt is almost double what it is in the United States.

He then argued that the workers in undeveloped nations simply can't compete against industrial workers with their efficient machines and the resulting high production. Always, he said, the cost of labor is lower (much lower) in nations with much capital than it is in nations with lit tle capital. If it weren't for laws pro tecting our high -cost Egyptian labor against your low-cost American labor, you'd move in and most of our low-paid laborers would soon lose their jobs to your high-paid workers with machines. He's right, you know, as far as he went. And in any case, it was a most refreshing argument which should (but most definitely won't) end that fallacious "cheap foreign labor" ar gument that's responsible for so many of our disastrous laws. In reality, of course, it's the trad ing itself (not the relative wage scales) that causes real wages to rise in all nations that participate. In or der to understand this better, let's start with a statement that's not subject to argument: No person in Egypt or the United States will vol untarily trade with a person in an other country (or even next door) un less he puts a higher value on what he gets than on what he gives up.

And thus both parties in any trade (domestic or foreign) necessarily benefit (or at least expect to benefit) from the trade. Trading Across Borders Actually, when all is said and done, there's no exclusively economic or theoretical justification for discuss ing domestic and foreign trade sep arately; they're identical in all re spects-except for the purely arbitrary and artificial interven tions of government. For example, in the United States, a manufacturer in southern California has no par1985 COMPETITION AND CAPITAL 29 ticular difficulties in trading with a company in northern Maine, some 4,000 miles away. But when the same manufacturer tries to trade with a company in Tijuana, Mex ico-perhaps four miles away-he encounters all sorts of frustrating, noneconomic, and cost-increasing prohibitions and compulsions that have been devised by the two governments. The problems of transportation and distance (as such) are not some thing peculiar to international trade.

Nor do differences of language and religion constitute special prob lems in trading across national boundaries. For example, a Catholic manufac turer who speaks only Italian in Lu gano, Switzerland, has no problem at all in trading with a Protestant retailer who speaks only German in Zurich. But when he attempts to trade with his Italian cousin just across the border (both speaking the same language and belonging to the same church), he encounters prob lems that are often insurmountable. All of these problems are created by government and are thus completely artificial, unnecessary, and cost increasing. Canada offers an example of how vast distances, different wage scales, different languages, different reli gions' and different cultural back grounds present no real trade prob lems at all. But let a Canadian try to buy an automobile from Detroit just across the border! Even different monies (yen, peso, dollar, whatever) present no real problem to any trader-if the var ious monies can be freely bought and sold. But when this is forbidden or restricted, problems do indeed ap pear. Again, however, they are ar tificial problems and are due en tirely to governmental rules and -regulations.

Why Some Are Hungry In short, I'm convinced that any argument for free trade within a na tion is automatically and necessar By an argument for free trade inter nationally. If a person advocates free trade domestically to increase our level of material living, he can't log ically advocate protective tariffs and other similar measures to prevent goods and services from moving freely across national boundaries; for that would contradict his argument that free trade within a nation is good for all. It's simply not true that a nation and a people are made more pros perous by compelling themselves to pay twice as much as they need to pay for goods and services they want. I'm convinced that these policies stem more from lack of understand ing than from evil intentions. For example, hunger is a fact of life all around the world. And since we all want to help, we identify the 30 THE FREEMAN January problem as "hungry people" and send food. You see the touching ap peals for more food (money to buy food) quite frequently on your TV set or in your newspaper. But this hun ger is the symptom of a problem, not the problem itself. Why are those people without food? Is their inabil ity to produce food (or to produce goods and services to exchange for food) due to their stupidity or lazi ness? I think not. Then just what causes their continuing hunger, gen eration after generation?

I suspect the following personal ex perience goes far in identifying the real problem that causes so much hunger and human misery: I have a small amount of liquid capital, i.e., dollars that can be converted by la bor into the real capital of machines, raw materials, and finished prod ucts. For various reasons, I would like to use this modest supply of cap ital in India. I'd like to take advan tage of the unemployed (and under employed) labor found there, to improve my own material well being, and (since I'm a reasonably compassionate person) to also im prove the material well-being of sev eral Indian families who are now ac tually hungry. Over the years, I've made the fol lowing proposal to several acquaint ances in India, including two gov ernment officials. If you will permit me to come in, I said, I'll immedi ately hire at least ten people at better wages than they are now earn ing. Their working conditions will be more pleasant-and their employ ment will be steadier-than is now the case for any of them.

It's self-evident I would have to fulfill those promises before I could possibly persuade anyone to use my machines; fDr obviously, no one would work for lower wages than he's already earning. Even so, I al ways include in my offer the posting of a performance bond. Solving the Problem What I propose to do is to try to solve the cause (the real problem) by showing a few hungry people how to produce enough goods and services to feed themselves and their families on a continuing basis. And please note that I propose to back my judg ment with my own capital, not the taxpayers' money. So why don't I do it? The answer is shocking. The Indian government refuses to let me in. "No foreign im perialist is ever going to exploit us again," they proclaim in various words and tones. And they mean it; they're firmly convinced that India was once a prosperous nation, and then the imperialist British came in and took it all back to the British Isles, thus leaving India poor again.

I sure do wish someone would iden tify that "it" for me. Anyway, I once visited India and lectured at four universities there.

1985 COMPETITION AND CAPITAL 31 And I was fortunate enough to get interviews with the prime minister of India, the vice president, and two ministers. They were all nice people, even though not one of them under·· stood what I was talking about. They think only in terms of applying to the United States Department of State for more government-to-government grants-in-aid. And they almost al·· ways get them. Their threat to turn to Russia is a sure-fire way to get us to agree. And thus they continue to treat the consequences of the prob·· lem (not enough food to feed starving Indians) instead of the problem itself (government intervention in the market place). True enough, two of those Indian acquaintances informed me that I can enter India with my machines, under certain conditions. First, I must produce what the government wants produced; I'm not permitted to make the decision alone. And I must locate where the government specifies; I can't make that decision for myself. Further, I can't just rush out into the street and hire whom I please at whatever wages we agree on; those are important matters that must be cleared with the proper gov·· ernment official.

While I will be permitted to try to earn a profit, it must be "reasona·· ble"; the figure of a four-to-eight per cent return on my invested capital was mentioned. But in return for all this, the Indian government is also willing to sacrifice a bit; it will guar antee not to nationalize my company for at least ten years. And then the leaders of the Indian government wonder why (private) foreign capital doesn't flow in! And the empty bellies continue to mul tiply far faster than any "green rev olution" can possibly increase the rice and wheat yields. And our gov ernment officials (as well as the of ficials of the Indian government) continue to treat the symptoms of the problem rather than to face up to the problem itself. In all fairness, I sus pect the fault is lack of understand ing, not joy in observing hungry people. Dntil quite recently, I taught a graduate course in International Business Problems. Naturally there were several lectures dealing with the material covered in this arti cle-foreign competition, foreign in vestments, how to measure and com pare wage rates, the effects of capital formation on standards of living, the effect of governmental intervention on capital formation, and so on. At the end of the course, however, stu dents always got my "never trust a politician" lecture. Since most of those students were already work ing for companies with considerable international business, I offered them a single idea they could take back to the boss, if they wished.

If you are ever involved in select ing a foreign country in which to 32 THE FREEMAN January build a new plant or distribution center for your company, I advised them, begin by ranking the "candi date countries" according to the ex tent of controls imposed by the re spective goverments on their own domestic economies. Since this is the most important measurement of all, do it first, before any other criteria are applied. The leaders of any gov ernment can logically be expected to lean internationally in the same di rection they deliberately follow in ternally. You can depend on it. Thus before you commit your company's capital (the final security for your own job) to an enterprise in another country, know what's likely to hap pen to it politically. Ephemeral Promises I'm increasingly astonished at how many leaders of private business in the United States ignore the clear evidence of what the leaders of for eign governments choose to do in their own countries, and believe in stead in their ephemeral promises.

What's the attitude of the Russian leaders toward private capital? Well, that's their attitude toward your capital, whatever they may say to you. Since private capital is not per mitted in Russia, what causes you to imagine your capital can be safely invested there? "But they promised .... ," you say. Yes, I know. And they can "unprom ise" just as quickly and sincerely. "But my own government leaders promised me that if.... ," they con tinue. Again, yes I know. I also know that the old American axiom "Never depend on political promises" is not just ajoke; it's based on hard reality, long observed. There's another "old saw" I rec ommend to your attention: Look at what they do, not what they say. That applies to the leaders of all governments. I frequently use just· two countries to illustrate my point - both close to home and reasonably well known, Mexico and Canada. When I exam ine the attitudes of those two gov ernments (their laws and traditions) toward private domestic capital, I have a reasonably good guide con cerning what's likely to happen to my own capital. I don't much care what promises the leaders of the re spective governments make. Even if they're sincere (they may well be), I put no faith at all in their promises.

They simply can't be trusted. It's not that they're bad people; they're just ordinary people who earn their liv ings being politicians. If the leaders of a "controlled econ omy" offer you great tax conces sions, beware. If the leaders of a free economy don't offer you any tax concessions at all, put that down as a plus, not a minus. Always look at the real picture, not the postcard; look at the internal controls over do mestic capital, which is what your 1985 COMPETITION AND CAPITAL 33 own capital becomes when you send it there. Do you really believe that the lead ers of a foreign country will favor you above their own people? If you're that gullible, I would say to my stu dents, this "investment advice" isn't for you; the odds are you don't have any capital anyway. Why should they offer concessions to get your money in, when all they need do to raise large amounts of capital is to repeal the restrictions on domestic capital? I'm baffled as to why our banking leaders (who may well rank higher in "intelligence tests" than any other group of leaders) didn't ask themselves that ques tion years ago.

Not too many of the students took my advice, of course. They mostly wanted to know if that idea would appear as a question on the final exam. I can't fault them for that; it's always good thinking when you try to find out as much as you can about events that can be profitable to you. Whatever, when I finished with that particular lecture on "capital for mation and international invest ment," I always felt they had at least gotten something for their tuition money in addition to an A or B in my gradebook. ® THE LAW by Frederic Bastiat The law, it has been said, is nothing more than the will of tyrants. So it has been many times in history. But just laws depend upon a law which underlies the law passed by legislatures or declared by rulers. It is a law which provides the framework of liberty. Emancipation from the doleful theories of the compulsive state awaits discerning readers of this brief treatise.

This remarkable volume, translated in 1950 by Dean Russell, has been a best seller since then-one of the most clear and concise ar guments of the case for limiting government in the cause of freedom. 76 pages Cloth $3.50 Paperback $2.00 Special offer: 60 cents each for 100 or more copies (paperback) to a single address. Order from: The Foundation for Economic Education, Inc. Irvington-on-Hudson, NY 10533 (Postage paid on prepaid orders; otherwise $2.00 per order for billing.) Ernest G. Ross Let's LiberateMoney ALTHOUGH the idea of returning to a gold standard has received consid erable attention in recent years, the general focus has been to return to some sort of government managed standard. For instance, there has been a great deal of talk about rein stating a variant of the Bretton Woods gold standard-which proved to be a terrible failure. (For details, see Henry Hazlitt's latest book, From Bretton Woods to World Infla tion, reviewed by Bettina Bien Greaves in the June 1984 issue of The Freeman.) The difficulty with any state-over seen approach to revitalizing and protecting the monetary system is Mr. Ross is an Oregon commentator and writer es pecially concerned with new developments in human freedom.