WorldSys: Austrian Home Study Course, Week 20

READINGS: Chapter 4 of Gene Callahan’s Economics for Real People; Chapter 5 of Holcombe et al.’s Fifteen Great Austrians (a chapter on French economist Frederic Bastiat)

1 What is the law of association?

It was the term given by Mises to the broader application of the ‘law of comparative advantage’ to all human cooperation, on which more below.

2 What is the law of comparative advantage?

David Ricardo’s famous ‘law of comparative advantage’ states that it is still in the best interest of two people to divide labor even if one of them proves better at everything than the other. The superior person should specialize in whatever they are most best at and allow the inferior person to specialize in something else, then trade their effort.

3 If U.S. workers are more productive than Mexican workers in every good and service, will the U.S. be hurt by trade with Mexico?

No, for the reasons detailed above. Even if Americans proved better at manufacturing everything they still can’t actually manufacture everything, so it is in everyone’s best interest to let Mexico handle some of the manufacturing.

4 Suppose U.S. workers can make either 2 TVs or 10 radios per hour, while Mexican workers can make either 1 TV or 7 radios per hour. Which nation has the comparative advantage in radio production?

Mexico. Their comparative advantage lies in whatever they are comparatively best at producing, not absolutely best at producing. In this example U.S. workers are better at making both TVs and radios, but they are comparatively better at making 2 TVs — that is, they are most better at making TVs.

So let the Mexicans make radios and trade with them!

5 Continuing with this example, if we only consider unfettered trade between U.S. and Mexico, describe the likely flow of goods (I.e, describe the pattern of exports and imports for each country with respect to these two goods.)

I imagine that firms in the U.S. would make vastly more TVs than they needed and send them to Mexico in exchange for Mexican-made radios.

6 Should the U.S. government lower tariff barriers only if other governments agree to do likewise?

No, the advantages accrue to freer economies regardless.

7 What was the subject of Bastiat’s The Law?

The proper and necessary role of government in upholding worthy laws. The last adjective is imperative — senseless or outrageous laws cannot be upheld indefinitely without bad consequences. The state should therefore restrict itself to the essential function of defining and enforcing only those laws that prevent force and fraud.

8 What was the subject of Bastiat’s Economic Sophisms?

This work has been described as “…the most complete case for free trade ever constructed up to that time…”, wherein Bastiat applied concepts like the law of comparative advantage to argue forcefully for trade between nations. Drawing a historical connection between barriers to this practice and war Bastiat admonished his readers that one of the best ways to stop armed conflict is to ensure trade is ongoing.

9 What was the subject of Bastiat’s Economic Harmonies?

It was an answer to the claims made by Marx in Das Kapital to the effect that the profits of the capitalists necessarily come at the expense of the workers.

10 Describe Bastiat’s famous essay, “The Candlemaker’s Petition.”

Bastiat ridicules state-mandated protection of domestic industries by describing a fictional account of a Candlemaker’s guild petitioning to have all cracks and windows sealed off to prevent the interference of a ruinous competitor: the sun.

11 Why did Bastiat (satirically) recommend that French ships dump their goods after leaving port?

It would guarantee a ‘favorable balance of trade’ for France because it would prevent the vessel from selling its goods at a profit, buying other goods for the return trip, and then importing them. By sinking the vessel immediately after its left it has frozen the whole economic picture at a rosy frame containing only exports.

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