Buchanan’s latest protectionist article is begging for a refutation. I am certain that his fallacy is that of ‘post hoc ergo propter hoc’ i.e. ‘after this, therefore, because of this’. In other words, the fallacy of false cause. In the context of the article, he argues that because of US free trade policy, it declined, whereas China’s ascendancy may be attributed to China’s currency manipulation and low wages simply on account that one proceeded the other.
I am approaching the argument regarding the US with the fact that US regulatory burden has hindered industrial output and its economy, whereas China has adopted a pro-business environment. The logic is that capital goes where it is most welcome, so it went overseas.
Do you think my approach is correct? No matter how I go about this, the evidence must be concrete and the argument must be supported with cited data for it to be credible as purely abstract or theoretical arguments will likely not hold water.
if the approach is correct, can you suggest any data sources or other information regarding US regulation of industry and the Chinese business environment?
Thanks in advance for your erudite input. I am only an initiate, but this protectionist nonsense must be refuted at all costs. When goods do not cross borders, armies do.
It’s not begging for a refutation, because when Hoppe and Rockwell were part of the same John Randolph Club to which Buchanan also belonged, they already tried.
The key to that statistic is FDI flors from the US to China, not all FDI inflows into China.
According to the World Bank, China’s FDI has steadily increased over the prior decade and recieved $148B in 2008. The US, by comparison, recieved about $320B that same year.
In either case, it seems the ‘capital’ theory is proven bunk likely because doing business in China can be risky despite being rewarding.
Do you have any suggestions of where to look regarding China’s ascendancy as an economic power? The article I found at Mises regarding Bastiat may provide an economic justification for free trade, but not an explanation for these economic events.
Just something to point out; It is typical of mainstream logic to think of things in terms of zero sum games. If china wins, the US loses, when in reality we can both win. Simply because investment in china is growing faster does not mean “we’re” slowing down. Even if it were true, the chinese economy still benefits everyone when it gets more efficient…
This ‘us’ and ‘them’ crap is the first step to nationalist protectionism. They took our jobs!
Well put; that is the logic Buchanan is using. Thus why it is pro hoc ergo propter hoc as such trade is not zero-sum. There are other reasons for the US’ decline, free trade not being one of them, and if low wages caused economic growth, one would expect Malawi to be growing at triple digits.
It’s typical mercantilist logic. Trade producers winners and losers. Trade deficits are bad; trade surpluses are good. Exports are better than imports, which destroy jobs. Manufacturing is somehow more holy than other industries. Point out his economic fallacies along with his logical ones.
My concern is that pointing out the fallacy is not enough to be persuasive; rather, to point out the true casues of the decline and ascendancy respectively would be more effective.
Buchanan’s interest really isn’t in economics, so much as a political purpose.
Another of Buchanan’s fellow protectionists, Tom Piatak, basically pushes for it because he wants to see everything that he buys be American. That’s all there is to it. He wants to drive American cars, eat American food, and use American utilities, and that’s that. Anybody who doesn’t is a “Japanese lover”.
It’s very typical of certain mentalities. My grandmother used to rebuke my father for eating food that wasn’t grown in India, the homespun cloth thinking. Back when they sent food aid to India in the 1960s, my father had gotten his hand on some delicious porridge from abroad sent during food emergency. It embarassed grown-ups who didn’t like seeing people be “subjected” to having to eat foreigner’s food.
The true causes are the inflationary policies of the central banking system.
Manufacturing involves a lot of capital assets in production. These assets need to be replaced regularly, and with more money set aside for future investment in them.
When the central bank increases the money supply through credit expansion and increase in reserves from buying of government securities - the effect of this change would obviously be in price-level changes, but not in easily visible way.
Purchase of raw materials at higher prices is accepted much more easily when it comes in the form of lower quality. Thus, lower quality of all factors of production, from labour to power supply are purchased at roughly the same levels of pricing.
As earnings are somehow squeezed without much increase from the previous year, or even decrease from the previous year, they are charged with depreciation, so that the manufacturer makes up for the cost of replacement of assets by setting aside profits.
However, depreciation is charged on capital goods on the historical cost concept. Thus, they do not reflect the increased prices of capital goods. The manufacturer would not set aside enough money; in fact, inflation has cheapened the value of capital reserves in earnings so much, that the manufacturer has in fact ended up consuming capital in real-terms, not saving it.
The manufacturer then finds less money with which it can purchase capital goods for replacement, and thus productivity suffers as more of variable inputs have to be used for less outputs.
First, China’s price inflation rate is quite high; around 6%, though it has been lower beforehand. Presupposing your argument, companies would have to set aside more money to cover future capital expenditures. As the US’ rate has been lower than the Chinese rate, that would give the US a competitive advantage.
Second, the artificially low Yuan currency peg makes raw material prices higher, not lower, thus a competitive disadvantage if a competitor is operating under a floating currency regime. Then again, if raw materials are denominated in dollars and sold in dollars, it may well be a wash.
Besides low wages, I do not know of anything that would give China a competitive advantage unless its business environment was better than that of the US.