Trade’s Costs Are Not Losses

In my previous column, I argued that job losses and other downsides typically associated with international trade aren’t unique to international trade. Such downsides are associated with any and all instances of economic competition and change. Improvements in prepared foods at supermarkets destroy jobs in neighborhood restaurants. Better automotive engineering destroys auto-mechanic jobs. Ditto for better road maintenance. Airbnb destroys hotel-maid jobs. Netflix destroys movie-theater jobs. Women entering the workforce destroy jobs for men.

This list is long and ever-growing. And, especially in a country as large as the United States, the portion of these downsides brought about through that specific manifestation of competition that we call international trade is tiny. Therefore, to say that trade has downsides — or, as is more commonly said, that trade has losers — is to wrongly imply that job destruction and other downsides of economic competition are unique to international trade.

But an even-deeper flaw infects the assertion that trade has losers, which is this: the economic consequences of trade that are commonly labeled losses aren’t really losses. They are costs. The difference between losses and costs is fundamental. More widespread recognition of this difference would go far toward making trade freer.

There’s no doubt that anyone who loses a job suffers a burden — a cost. But this cost — or, more accurately, the prospect of having to pay this cost — is the price of admission to the riches of a market economy.

To understand why destroyed jobs are costs but not losses first requires an appreciation of the centrality to market economies of what W.H. Hutt labeled “consumer sovereignty.”

Consumers Reign

Inseparable from a market economy’s capacity to offer enormous prosperity to its denizens is the expectation that each of us in their role as producer will adjust to the demands expressed by each of us in their role as consumer. Consumers do not adjust their consumption in order to please producers; producers adjust our production in order to please consumers. In a market economy, consumption is the end while production is the means.

Production, of course, is a means of enormous magnitude. Without production, there would be no consumption. But the value of production is properly assessed by how well it enables us to consume. Unlike consumption, production is not its own justification.

If I spend my money on a slice of apple pie, there’s no further need to justify my action. I want a slice of apple pie. I spend my money to acquire a slice. My desire, expressed with my money, justifies my consumption of a slice of apple pie. End of story.

And it’s my (and other consumers’) demand for apple pie that alone justifies the use of the baker’s time and other resources to produce that pie. If no one wants apple pie intensely enough to pay for it, any baker who uses time, apples, and other resources to bake apple pies wastes her time and resources no less than she would if she had instead baked sawdust-and-maggot pies. Using resources to produce outputs that consumers value less than the costs of producing these outputs diminishes society’s prosperity.

When production is guided by the demands of consumers, society prospers. In contrast, when production is guided by the demands of producers, all choices by producers to transform inputs into outputs are regarded as productive simply because those particular choices are made by producers. Whether consumers value the outputs is irrelevant. An economy guided by the demands of producers would be one in which, if bakers prefer to bake sawdust-and-maggot pies rather than apple pies, consumers are stuck eating pies made of sawdust and maggots. Clearly, such a society would waste resources on a grand scale. Its denizens would be mired in poverty that to us is unimaginable.

No One Wants to Live Under the Reign of Producers

It’s safe to conclude that no one this side of sanity wants to live in a society governed by “producer sovereignty.” Wanting access to the abundance of valuable goods and services made possible only when consumers reign, each of us agrees — if only implicitly — to abide by the rules of consumer sovereignty. Each of us earns their income by doing their best to please consumers. And if consumers don’t value that which we do today, we as producers adjust. We do something else rather than force consumers to purchase that which they don’t value.

In short, the price that each of us pays to participate in a market economy is their agreement to abandon their current source of income if consumers don’t like whatever it is they’re currently producing.

Paying this price is undoubtedly costly. No one enjoys paying it. But because agreeing to pay this cost is the price of admission to a market economy of abundance, whenever this price must be paid it is not a loss.

Costs Are Not Losses

To better see why paying this cost is no loss, consider an ordinary car loan under which you today agree to send (say) 48 monthly payments of $500 each to your bank in exchange for your bank lending you money to buy a new car. You get a new car today that you would not get without your agreeing to repay your bank over a series of tomorrows.

Fast forward one year. Your monthly car-loan bill is due. Obviously you’d prefer not to have to send $500 to the bank. Your doing so is a cost to you. But no one — not even you — would describe this $500 payment as your loss. The bank receives from you nothing that you’re entitled to keep. The bank inflicts upon you no harm that you’re entitled to avoid. Indeed, if you don’t make this payment — if you don’t pay the cost that you agreed to pay — you inflict a loss on the bank. And if you successfully enlist government to excuse you from repaying your loan, you unfairly escape your moral obligation to play by the rules.

If no debtors other than you are excused from fulfilling car-loan commitments, the loan market would continue. Yet this fact doesn’t justify the state’s arbitrarily relieving you of your obligation. If the state generalized to all society the privilege that it bestows on you, the net harm would be huge and obvious, and the car-loan market would be annihilated.

When Everyone Plays by the Rules, No One Loses Anything to Which He or She Is Entitled

Identical logic applies to the obligation of each of us in market economies to adjust their actions as producers to the demands of consumers. Making such adjustments is unquestionably costly, sometimes enormously so. But the making of each such adjustment is no more appropriately described as a loss than is the making of a payment on a car loan.

Words matter. The popular practice of calling producers’ adjustments to consumers’ changing demands “losses” imparts the mistaken impression that competition, or trade, takes from producers something — particular jobs, profits, businesses — to which producers are entitled. The inaccurate notion is conveyed that producers suffer an injustice.

But because no one in a market economy is entitled to his or her particular source of income, whenever competition obliges producers to adjust to the demands of consumers, producers — while paying the costs of participating in a market economy — suffer nothing that ought to be described as losses.

Sign up here to be notified of new articles from Donald J. Boudreaux and AIER.

Donald J. Boudreaux

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.