The hallmark of good economic thinking is that it analyzes the decision-making of individuals, not of aggregates like ethnic blocks or nations. Aggregates do not think or act, but much economic nonsense comes from treating them as if they do. Looking at trade as though it was a question of nations interacting is the subject of this sharp letter by Don Boudreaux.
Editor, Economist.com Dear Sir or Madam: How distressing that you and three-quarters of your readers believe the proposition that, as you put it, "an economy cannot succeed without a big manufacturing base" (Economist Debates, June 28-July 8). While Jagdish Bhagwati argued splendidly against this proposition - and against Ha-Joon Chang's defense of it - an elementary flaw in your proposition went unmentioned, namely, the ambiguity of the word "economy" as used in your proposition. We might agree that prosperity requires that a great deal of manufacturing occur somewhere. But as long as there is "a big manufacturing base" in the WORLD economy, what need is there for "a big manufacturing base" in the economy of each political entity classified as a nation? If a nation has such a substantial comparative advantage in services that it satisfies with imports so many of its demands for manufactured goods that no manufacturing takes place within its borders, where's the harm? Answer: nowhere. What Prof. Chang, you, and most of your readers see as harmful is a mirage created by the fallacy, in a world with trade, of mistaking a nation for an economy. Consider Professor Chang's own household. It is, I'm sure, fully specialized in services; it manufactures nothing. Yet the 'Changese,' as we may call Mr. Chang and his family, consume countless manufactured goods produced by the non-Changese. The Changese acquire these manufactured goods in exchange for their services. Does Mr. Chang worry because the Changese economy has no "manufacturing base"? I'll wager not. So why does he insist that for each political entity called a "nation" to prosper it must have its own manufacturing base? Sincerely, Donald J. Boudreaux Professor of Economics George Mason University Fairfax, VA 22030