Buzz Words in 2020 Will Be Same as in 18th Century. At Least Economically-Speaking.

BY Paul Solman  January 19, 2011 at 11:22 AM EDT

Paul Solman answers questions from NewsHour viewers and web users on business and economic news most days on his Making Sen$e page. Here’s Wednesday’s query:

Name: Sam

Making Sense

Question: I immensely enjoy your segments on PBS. I am intrigued by the concept of trade, and the argument presented by many economists that it raises the standard of living in a country’s economy even if it appears suicidal to non-economists like myself.

I do not have a problem envisioning how a country, such as China, can export to the rest of the world and accumulate a huge amount of wealth and create jobs at home. It makes sense that with money flowing in, the standard of living will rise.

However, how does a country, such as the United States, gain by trade when it runs up a large trade deficit with China and others, who are a strategic threat to its well being, if not its very survival?

Recently, India and China signed trade deals worth billions of dollars, mainly in China’s favor. I am puzzled as to why India, which is suspicious of Chinese political and military policies relating to its strategic interests, would be willing to part with so much of its hard earned wealth? After all, why help your enemy to build a stronger military to threaten you with at a later date?

However, economists say trade creates wealth and they are all for improving trade, even between enemies. Unfortunately, all I have seen is evidence of increasing poverty and a sharp decrease in the standard of living of average middle-class Americans, and a gradual transfer of wealth and military power to China since the early 1980s. Over the last two decades, economists assured us that it was OK to export our manufacturing jobs since we were becoming a “service” economy, and they threw around words, such as “new” and “old” economy to convince us that trade with China and others was good thing, even if there was a huge trade imbalance. I thought it was nonsense then, and I think it is nonsense now.

I am not an economist but I do know as a Midwesterner that there is no such thing as a free lunch! Events are proving me to be correct considering our large budget and trade deficits. Today, we are told we are “resilient” and we are “creative” to console us during the present economic downturn. Really! I wonder what buzz words will be floating around in 2020.

Paul Solman: I have two new grandchildren, ages 2 and 1. They are constantly outgrowing or wearing out their clothes. Happily, their parents can replace them at affordable cost because of low-price imports from China and beyond. That is the argument for free trade — as it applies to our family, at least.

President Obama welcomes Chinese President Hu Jintao during a State Arrival ceremony on the South Lawn of the White House in Washington, DC, Jan. 19, 2011. (Photo: Saul Loeb/AFP/Getty Images)

Adam Smith elaborated the argument 232 years before either of the kids were born. Wealth is created by the propensity of humans to trade and compete via the division of labor, he wrote (actually, dictated to an amanuensis). We specialize in order to produce more efficiently and effectively than our rivals, thus attracting customers. The more we specialize, the more effective we get at producing what our fellow humans want and will trade for. The larger the area over which this division of labor and trading takes place, the better because the more we specialize, the more we can produce. This is the result of his “Inquiry into the Nature and Causes of the Wealth of Nations.” It is also the argument for free trade.

Of course, there’s no such thing as truly “free” trade. Special interests are always angling for laws that favor them. Indeed, the purpose of Smith’s tome was to free the British economy from the stranglehold of the merchant class — an early instance of “crony capitalism,” if you will.

Furthermore, Smith acknowledged the cost to those who lose in the trade game and allowed for many of the protections anti-free traders support today: retaliatory tariffs, the cultivation of “infant industries,” and compensation for the losers among them.

But if you drop out of the trading game entirely, won’t the rest of the world keep specializing and eventually pass you by?

But the bottom line, as Matt Ridley eloquently argued in his new book updating Smith — “The Rational Optimist” — and on the NewsHour during a grand tour show-and-tell in and around Manhattan, trade and economic growth are inextricable.

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions _Follow Paul on Twitter._