Monday, November 5, 2007

The Illusion of International Trade

JEDDAH, 13 September 2004 — There is no one who in exchanging his own productions (assets) for the productions of another man, would think that the more he “gave” and the less he “got”, the better off he would be. Yet to many men, nothing seems clearer than the more of its own productions a country sends away (exports), and the less of the productions of other countries it receives in return (imports), the more profitable its trade.
When we say that a country increases in wealth, we mean that the amount of resources, productions and other valuable physical assets, increase faster than its population. What, then, is more repugnant to a reason than the notion that the way to increase the wealth of a country is to promote exports and to prevent imports.
So widespread is this belief that today all civilized countries are conditioned to discourage imports while regarding with satisfaction the increases in their exports. What is the reason of this?
Men are not apt to apply to the transactions of countries principles opposite to those they apply to individual transactions. The natural tendency is to personify countries and to think and speak of them as driven by the same motives and governed by the same laws as the human beings of whom they are made up.
What man disposes of to others we term their sales; what they obtain from others we term their purchases. Hence we become accustomed to think of exports as sales, and of imports as purchases. And as in daily life we habitually think that the greater the value of a man’s sales and the less the value of his purchases the better his business; so if we don’t stop to fix the meaning of the words we use, it seems a matter of course that the more a country exports and the less it imports the richer it will become.
In our civilized society, buying and selling, as our daily life familiarizes us with them, are not the exchange of commodities for commodities (trade), but the exchange of money (paper-money) for commodities or of commodities for money.
It is exactly to confusions of thought growing out of this use of paper-money that we may trace the belief that a country profits by exporting and losing by importing.
The primary form of trade is “barter” — the exchange of commodities for commodities. The difficulties of adopting standard measures (quality, weight, volume) for barter trade, contributed to the adoption by common consent of some commodity as a “medium of exchange”. In primitive society, merchants used cattle, skins, shells and many other things to fulfill the function of medium of exchange. As society advanced and exchanges flourished, gold and silver (widely-used currencies) were gradually being replaced as medium of exchange by “credit” in its various forms.
The fact that the value of money is more certain and definite than the value of things (productions) measured by it, and the further fact that the sale or conversion of commodities into money completes those transactions upon which we usually estimate profit, easily leads us to look upon the getting of money as “the objective and end of trade”, and upon selling as more profitable than buying. This habit of illogical thought have strong support to the “protective-tariffs policy” thru imports and exports’ controls (quotas & taxes).
Being accustomed to measure the profits of businessmen by excess of their sales over their purchases, leads easily to the conclusion that the greater the amount of exports and the less the amount of imports, the more profit a country gets by its trade. This misleading assumption involves a confusion of ideas. When we say a merchant is doing a profitable business because his sales exceed his purchases, what we are really thinking of as sales is not the merchandise he sells, but the money he receives in exchange for it; what we are really thinking of as purchases is not the merchandise (goods) he receives, but the money he pays for them. However, it is only where the trade of a merchant is carried on by the exchange of commodities for commodities, that the commodities he sells are analogous to the exports, and the commodities he buys are analogous to the imports of a country. Therefore, a country’s wealth increases when the more value of its commodities (imports) it takes-in exceeds the value of the goods it gives out (exports).
The fact is that all trade is simply what it is in its primitive form of barter, the exchange of commodities for commodities. The carrying on of trade by the use of paper-money does not change its essential character, but merely acts as a medium of exchange. When commodities are exchanged for money, but half a full exchange is completed.
The trade between countries, made up of its numerous individual transactions which separately are parts or steps in a complete exchange, is in the aggregate, like the primitive form of trade, the exchange of commodities for commodities.
Money plays no part in international trade, and the world has yet to reach that stage of civilization which will give us international money whose value is constant, solid that does not regularly lose its purchasing power.

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