Carpe Diem

Classic 1978 Milton Friedman lecture on international trade

In this 1978 lecture at Kansas State University, Milton Friedman discusses free trade, and explains why trade protection and interference in international trade are so widespread, despite the almost universal condemnation of such measures by the economics profession.

Professor Friedman also addresses the political obsessions with: a) increasing exports (e.g. President Obama’s goal to double exports by 2015) and b) achieving a “favorable balance of trade.” Here’s a quote from Friedman’s lecture, demonstrating the timeless nature of his economic wisdom, which is as relevant today as it was in 1978:

In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports. And if we buy from abroad and import, that’s bad.  But surely that’s upside-down.  What we send abroad we can’t eat, we can’t wear, we can’t use for our houses. The goods and services we send abroad, are goods and services not available to us. On the other hand, the goods and services we import, they provide us with TV sets we can watch, automobiles we can drive, with all sorts of nice things for us to use. The gain from foreign trade is what we import.  What we export is the cost of getting those imports.  And the proper objective for a nation as Adam Smith put it, is to arrange things, so we get as large a volume of imports as possible, for as small a volume of exports as possible.

This carries over to the terminology we use.  When people talk about a favorable balance of trade, what is that term taken to mean?  It’s taken to mean that we export more than we import.  But from the point of view of our well-being, that’s an unfavorable balance.  That means we’re sending out more goods and getting fewer in.  Each of you in your private household would know better than that.  You don’t regard it as a favorable balance when you have to send out more goods to get less coming in.  It’s favorable when you can get more by sending out less.

MP: Here’s a formula summarizing Milton Friedman’s insights:

1. The stuff we import

MINUS

2. The stuff we export =

3. Our standard of living

In other words, in economic terms, our standard of living is highest when we maximize imports and minimize exports, which is exactly the opposite of the political thinking and policies, which generally seek to maximize exports and minimize imports.

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