Another Key to Higher Standards of Living
by Jacob G. Hornberger
In my blog post of yesterday, “The Reason for America’s Economic Decline,” I wrote about the critical importance of savings and capital to achieving a high standard of living, especially for those people at the bottom of the economic ladder. Today, I’d like to point out another key factor in raising people’s standard of living—trade.
But before I do that, I’d like to first amplify on what I said yesterday.
Statists have long asserted that the public (i.e., government) sector and the private sector operate in tandem to produce economic prosperity. They suggest that the federal government is just another participant in the economy, along with private firms. They say that federal government contributes to economic prosperity with its dominant role in the economy — jobs, contracts, expenditures, etc.
Nothing could be further from the truth.
There are two sectors in the economy — the public (i.e., government) sector and the private sector. The private sector produces the wealth. The government sector is parasitic. It thrives by confiscating (i.e., taxing) a portion of the wealth produced by the private sector. If there was no wealth in the private sector, the government sector would have no wealth to seize (i.e., tax) to fund its welfare-warfare state operations.
So, a society must first produce wealth within the private sector before statists can give serious thought to establishing a welfare-warfare state. Savings and capital are key to the wealth-producing process. That’s what begins to raise and continues to raise people’s standard of living. The more that economic enterprise is free of government control and regulation (i.e., free enterprise) and the more that people are free to keep everything they earn, the faster will be the growth in people’s standard of living.
The problem is that as that foundation of wealth increases over time, statists decide to interrupt the process. They hate it that there are people who have more when others have less, even though those who have less are living significantly better lives than they otherwise would. The statists begin using the government to confiscate the wealth of those who have more to give it to those who have less (or to foreign dictatorships, such as Egypt, or to other privileged people) or to fund military adventures as part of warfare-state operations. That inevitably causes the wealth-producing process to slow or stop. If the taxing and spending get out of hand, the society can end up very impoverished. (See Greece.)
Thus, the private sector is the wealth-producing sector. The government sector is the wealth-destroying sector.
Another point: One of our supporters emailed me yesterday, saying that one of his statist relatives had said that the government can do the same things as savers by injecting newly printed paper money into the banks. Not so! If that were the case, every country would have a high standard of living, including Zimbabwe, whose government flooded the nation several years ago with newly printed money, or Argentina, where people are currently suffering the economic ravages of inflation.
All that inflation does is create economic chaos. It sends false signals to both producers and consumers, inducing them to take steps that they otherwise wouldn’t take. Today, we describe that process as creating a bubble, one that ultimately bursts, such as what happened with the housing crisis.
History has shown, time and time again, that inflation (and stimulus plans) does not and cannot serve as a substitute for the accumulation of real savings and capital in a society. Instead, inflation, like income taxation, destroys savings, capital, and wealth.
Now, onto trade.
In every trade, both sides benefit, from their own individual perspective. If both sides didn’t perceive a benefit from the trade, they obviously wouldn’t enter into the trade.
Moreover, value is subjective. Like beauty, it lies in the eyes of the beholder. In every trade, each person gives up something he values less for something he values more.
Let’s assume that Peter owns 10 apples and Paul owns 10 oranges. They enter into a trade in which Peter gives Paul 9 apples and Paul gives Peter 1 orange.
One might be tempted to say, “That’s not a fair trade. A fair trade would be 5 apples for 5 oranges.”
Not so, however. Remember: value is subjective. It lies in the eyes of the beholder. One might say, “I’d never give up 9 apples for 1 orange.” That’s because his scale of values is different from that of other people. In our example, Peter places a higher value on 1 orange than he does on 9 apples. We know that by virtue of the fact that he entered into that trade with Peter.
Therefore, people’s standard of living can rise through the simple act of trade. Notice something important here: We’re not talking here about factories, jobs, income, savings, or capital. We are talking simply about the process of trade. When people are free to trade, they can increase their economic well-being and standard of living by giving up things they value less for things they value more.
A corollary to this principle becomes obvious: To the extent that government interferes with people’s ability to freely trade with others, to that extent government is impeding people’s ability to raise their standard of living.
Notable examples include the U.S. embargo on Cuba and the sanctions on Iran, North Korea, and other countries. Other examples include tariffs, import quotas, and other restrictions on the ability of the American people to trade with others. All those constitute restrictions on the freedom of the American people to trade with others.
There are also domestic restrictions on trade. One of the best examples involves governmental attacks on the poor through minimum-wage laws. They prevent people from freely entering into mutually beneficial labor exchanges involving whatever wage rate people agree on. If there were no minimum-wage laws, there wouldn’t be a chronic unemployment rate of 40 percent for black teenagers. There also would be a multiplicity of new businesses opening up in which employers were free to hire people at less than the governmentally established minimum.
Of course, statists would say, “But that would be an unfair wage.” But keep in mind that value, like beauty, is subjective. In every voluntary exchange, the traders are giving up something they value less for something they value more. By entering into an exchange, both sides are benefiting from their own personal, subjective perspective.
What should the American people do to raise their standard of living? They should demand that the U.S. government unilaterally lift all restrictions on the ability of the American people to trade with each other and with everyone else around the world. No negotiations are necessary. No trade agreements are necessary. No reciprocity is necessary. Just lift the embargoes, sanctions, tariffs, import quotas, minimum-wage laws, and all other restrictions on trade. Just liberate the American people to trade with anyone and everyone, regardless of what other governments do to impede the ability of their citizens to trade with others.