Consider the fictional little country of Dynamia. Although, strictly speaking, this place is a product of my imagination, my imagination here sticks closely to essential facts of reality. Dynamia is very much like a real-world country in a modern market-oriented society.
The citizens of Dynamia are secure in their property and contract rights, and they have among their numbers several entrepreneurial types – individuals with creative ideas about how to earn profit by offering attractive deals to their fellow Dynamians and, increasingly, to foreigners. The great majority of Dynamians admire hard work and entrepreneurial gumption and grit.
The Dynamian currency is the dynam. When the people of this country import goods, they pay in dynams, and when they export goods, they are paid in dynams.
In 1985, Dynamians had relatively little trade with foreigners. In that year, a large number of Dynamians worked in the country’s two lumber mills, Westside Lumber and Universal Lumber. These workers, and others, spent much of their income at the movie theater, Phillips’s Hardware Store, Buddy’s Diner, and Boo’s Tavern. Things weren’t perfect – they never are – but Dynamians today who can recall their nation of forty years ago remember it as peaceful, prosperous, and happy.
Around 1990, one of the Dynamanians, Alex, invented a material – Woodlike© – that serves as an excellent substitute for plywood. Alex opened a factory in Dynamia to produce this product. Largely because the production of Woodlike uses less labor than does the production of actual plywood, to produce one sheet of Woodlike costs about half of what it costs to produce a sheet of actual plywood. Alex therefore charged lower prices for his product than were charged by the lumber mills for theirs. Dynamians who were building or refurbishing their homes switched heavily from using actual plywood to using Woodlike.
Losing business to Woodlike, the lumber mills downsized. Some of the former mill workers found new jobs immediately, but most of them took several weeks or months to find new employment. For many of them, the times were difficult. (Yet one of these former mill workers, Ron, eventually converted an abandoned part of a mill into a potato-chip factory and, as result, made a fortune as a potato-chip entrepreneur!) Some workers retired. Some searched for opportunity by moving to other parts of Dynamia.
Some of the money that Dynamians saved by buying Woodlike was spent on more evenings dining out. Several new upscale restaurants opened in Dynamia. These new venues enjoyed a brisk business as Buddy’s Diner and Boo’s Tavern served fewer and fewer customers. Buddy’s and Boo’s eventually went bankrupt, with Buddy himself finding a new job as assistant manager of one of the new restaurants.
The buildings that housed Buddy’s Diner and Boo’s Tavern were torn down, as were several other nearby structures, and in their place was built a Home Depot. The Phillips family, who had operated their hardware store in Dynamia for three generations, were understandably worried. They knew that they couldn’t possibly match Home Depot’s low prices. Sure enough, Phillips’ Hardware soon went the way of Buddy’s Diner. These two once-beloved Dymanian establishments exist today only in older Dynamians’ memories.
By the year 2000, one of the lumber mills, Universal Lumber, had gone out of business while Westside Lumber survived by switching to producing specialty woods, much of which was sold in Dynamia’s Home Depot. As with the still-thriving Woodlike Corporation – which expanded and branched out into producing two-by-four studs and other products that substitute for wood – Westside by 2000 was producing its output using far fewer workers than it used fifteen years earlier. Many of the mill’s tasks that in 1985 were done manually came to be done by machine. In 2000, workers at both Woodlike and Westside produced more value per hour for their employers than did workers in 1985 at the older mills. With each company fearful of losing its workers to the other, the real wages of these workers were bid up to reflect their higher productivity.
The low prices and high quality of the products manufactured by Westside and Woodlike attracted the attention of foreigners, whose demand for these companies’ outputs skyrocketed. Dynamia became a major exporter of specialty wood and faux wooden products. But this increase in Dynamia’s exports was made possible only because Dynamia’s government followed a policy of free trade: Producers in Dynamia could export more only because foreigners had more dynams to spend on goods produced in Dynamia – and foreigners acquired this greater number of dynams by selling more of their wares to Dynamians. (Economics students at Dynamia University learn that this connection between exports and imports is sometimes called “Lerner symmetry.”)
The innovations that gave rise to Woodlike, that prompted Westside to change what it produced, and that increased the productivity of workers at both firms made these Dynamian workers more prosperous. These workers and their families increased their demands for the likes of health care, entertainment, and household furnishings. Dynamian entrepreneurs took advantage of these higher demands to create firms that supplied what these consumers, with rising incomes, wanted. Some of the former mill workers – and especially many of their children – found employment with these new enterprises. Competition ensured that these new firms operated efficiently, using the latest, economically feasible production and distribution techniques.
Dynamia’s growing wealth also attracted immigrants. These new denizens of Dynamia increased not only the supply of labor but also (because they spend and invest their incomes) the demand for goods and services. And as the demand for particular goods and services rises, so, too, does the demand for labor to produce those goods and services. This increased supply of labor encouraged and enabled Dynamian producers and merchants to make their workers more specialized. For example, as Dynamia’s population and wealth grew, that little country soon could afford physicians with narrower specialties. Whereas in 1985 Dynamia had only a few family-practice physicians, at the dawn of the 21st century it had not only pediatricians, dentists, and gastroenterologists, it had a pediatric gastroenterologist, a pediatric dentist, and a doctor specialized in sports medicine.
As Adam Smith correctly taught, when the market incents workers to become more specialized, they become more productive. This increased specialization of Dynamia’s labor force – again, fueled by Dynamia’s rising population of hard workers – further raised Dynamians’ wealth.
Some of the higher wages earned in Dynamia were invested in pension plans, but most were spent on goods and services – larger and larger amounts of which were imported – that enriched the lives of Dynamian families. (Some professors at Dynamia U. publicly scorned the new consumption habits of their fellow citizens, calling this consumption “frivolous” and “wasteful.” Most Dynamians ignored these intellectual scolds.)
Today, Dynamia – although still not without problems, some serious – remains prosperous and entrepreneurial. As a result, foreigners are more eager than ever to invest in Dynamia. Because these investments are made using dynams, large numbers of the dynams that Dynamians spend on imports return to Dynamia, not as demand for Dynamian exports, but as investments in Dynamia.
Of course, these investments enlarge and improve the capital stock of Dynamia no less than do investments made in Dynamia by native Dynamians. And also like investments in Dynamia made by her own citizens, these foreign investments destroy particular jobs and create others. Nevertheless, pundits at a new Dynamian thinktank – Dynamian Sextant – are forever warning that, because these foreign investments in Dynamia bring about a situation that accountants call a “Dynamian trade deficit,” Dynamian trade with foreigners is stripping Dynamia of its wealth.
Dynamian Sextant calls on the Dynamian government to severely restrict Dynamians’ freedom to purchase imports.
To bolster their case against free trade, the pundits at Dynamian Sextant remind their fellow citizens of the Dynamia of 1985. Nostalgia for those seemingly simpler, happier times prompts some Dynamians to join with Dynamian Sextant in supporting high tariffs as a means of restoring the Dynamia of the past. Yet serious Dynamians know that even if, contrary to fact, high tariffs could transform the Dynamia of 2025 into the Dynamia of 1985, Dynamians of 2025 would, upon finding themselves with the economic opportunities and standard of living of their forebears of 40 years ago, clamor for an immediate and complete return to 2025.
After all, the country’s name is Dynamia, not Stagnatia.