Question: Is it better to “buy American”, than from a foreign producer?
To answer this question, we have to look at the basics of economics and it starts with the concepts of wealth and money.
What is the basis of wealth? Production, which is a result of time, resources and energy/labor.
What is money? A universal medium of exchange, a wealth storage mechanism.
If a person buys something from a foreign producer for $100, is that person and the related domestic economy losing their wealth? Only if that person is foolish enough to exchange $100 in cash for a product or service worth less than what that $100 can otherwise purchase.
If I buy $100 worth of wheat from a domestic producer or foreign producer, that transaction doesn’t change the net wealth of the nation with which I reside, nor the wealth of the nation from where it is purchased. It does not even change my personal wealth. Keep in mind however; If that wheat is in my possession, any consumption or destruction (theft, fire, degradation) of that wheat does reduce my wealth. Taxation of that wheat also reduces my wealth, but that deals with the price of government as another topic.
Note: This is assuming prices include all necessary transportation costs.
Let’s take a look at the two possibilities and respective balance sheets of a domestic and foreign purchase. Keep in mind, the cash in these examples should be looked at as previous production. Money is a wealth storage mechanism, wealth was produced or a service rendered and exchanged for money.
1. I buy $100 worth of wheat from the foreign producer:
Before the transaction:
Domestic producer has $100 worth of wheat, I have $100 in cash.
— US balance sheet = $200
Foreign producer has $200 in wheat.
— Foreign balance sheet = $200
After transaction:
Domestic producer has $100 worth of wheat, I now have $100 in wheat.
— US balance sheet = $200
Foreign producer has $100 in cash and $100 in wheat.
— Foreign balance sheet = $200
2. I buy $100 worth of wheat from the domestic producer:
Before the transaction:
Domestic producer has $100 worth of wheat, I have $100 in cash.
— US balance sheet = $200
Foreign producer has $200 in wheat.
— Foreign balance sheet = $200
After transaction:
Domestic producer has $100 worth of cash, I now have $100 in wheat.
— US balance sheet = $200
Foreign producer has $200 in wheat.
— Foreign balance sheet = $200
There is no difference in wealth. In both cases the beginning and ending result was $200 for both the US and foreign balance sheets. If simply selling your product (converting it to cash) doesn’t make you rich, what then makes you more wealthy? Wealth production!
How can both countries become more wealthy? They can increase their production of wheat or other forms of wealth. Money isn’t wealth itself. It is only a wealth storage mechanism. This is the most common misconception regarding money. Money only has value because of the goods and services it can be exchanged for. If nothing is being produced, that money is worthless. What good is money if there is no bread to buy?
Production, which is the combination of time, resources and energy/labor is the basis of real wealth.
Buying Less for More
Take the dogma of nationalism out of it. Let’s change the geographic boundaries, since they are only relative in this debate. Is it somehow more prudent for you to buy a product that is made in your State or even local community regardless of quality or value? Does this make your community better off? No, it makes your preferred economy poorer by subsidizing the producer of low quality/value goods or services and deprives you and the community of either more value or higher quality, in other words, the ability to maximize the return on your own wealth production.
Notice, the question above is under the premise that we are buying locally regardless of quality or value. If the local producer happened to provide the highest quality or value, it would be by accident that your local economy is not suffering a loss.
Let’s put this in terms of wheat again for consistency. If I buy a certain product from my preferred economy as a matter of geographical bias, but I happen to be buying that product which is of lesser quality/value. Can we agree that it is the same as buying a lesser amount of wheat for the same $100 as before?
So, let’s say that outside of my preferred economy I could receive 10 bushels of wheat for $100. But, my neighbor is offering me only 5 bushels of wheat of otherwise comparable quality for $100. Why would it make me or my community better off if I were to implement a geographical bias toward my neighbor’s wheat?
My neighbor would be better off because he could then take that $100 and buy other products and services truly worth $100, but as for me and the rest of the community. We’d be the poorer for it, because it would require us to produce twice as much in wealth in order to overpay for our neighbor’s crummy deal. We would have produced $100 in wealth, only to receive $50 in return or produce $200 in wealth, only to receive $100 in return.
Let’s look at this in terms of the balance sheet:
I buy $50 worth of wheat from a local producer for $100
Local producer has $50 worth of wheat, I have $100 in cash.
— Local balance sheet = $150
Foreign producer has $200 in wheat.
— Foreign balance sheet = $200
Regardless of whether I buy from the foreign or local producer does not change either community’s balance sheet. While I personally will be better off if I buy from the foreign producer, the single transaction itself is not what makes the local community poorer. The lack of production is making it poorer.
Notice that in the 1st set of examples the “local/US” balance sheet was $200. With the latest example, it is $150. Why? Because the local producer is producing $50 less in wheat (wealth). If the local community subsidizes this lack of value by over paying for their product or service, versus promoting producers that produce at full value, the community will be the poorer for it. The rest of the community will have to produce more wealth in order to subsidize the lack of production quality/value of the local producer, or simply go without that additional wealth and be the poorer for it. However, if the community is going to increase its wealth production, it is best if they buy from the better supplier outside of town or only buy from the local producer if he lowers his price to reflect the actual quality/value they are creating. The extra wealth that was produced can then be used to buy from the foreign supplier, which will maximize the value of that extra wealth generated.
If the local/domestic producers provide the highest quality product/service at the least cost, there is no reason to buy elsewhere, but biased protectionism that argues that we should buy local/domestic products and services for no other reason than geographic preferences, destroys the wealth of that economy, even if it is a value loss of $1, there is no gain for the community, there is a net loss in wealth relative to buying from the another producer that is either providing the same product or service for less money, or a higher quality/value product for the same amount of money.
For further consideration, what if the foreign producer moved to your local community, who would you buy from now? Why would it change? It is always to your advantage and to that of your relative economy to make the highest use of your wealth and that necessarily involves maximizing the value of your wealth in exchanges (purchases).
A Perverted Conclusion
Keep in mind, in the example that the local producer was not producing to their maximum potential, some Statists come to the conclusion that we should force that producer to increase their production. Not only would this violate the Liberty of that individual or company (property of the individual[s]). It has been shown that force does not increase economic productivity. To the contrary, the promotion of economic freedoms provides for the most productive environment to maximize prosperity.
