WEBVTT

NOTE Free Trade

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We're going to be going over free trade, and I think it's important to go over free trade, especially at this point in time, because of what's happening with the Japanese.

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I don't know if you people have been aware of this or not, but there's a Buy America crusade now going on in the US.

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There are companies offering bonuses to workers who buy American automobiles.

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There are gas stations offering a special deal to on gas prices if you come in with an ornamental deal that's made in America.

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Municipalities, cities and states are engaging in bi-local activities, especially if it's something that is made in Japan, they're against it.

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There is even a lawmaker who suggests that if there are any layoffs necessary in the state university system of Florida, that the professors who should be fired are the ones with foreign cards.

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Now I take personal insult with this because I just bought a Toyota, and I'm in trouble if they apply that here, but I'm opposed to this not only on a personal basis, but on an economic and philosophical basis as well.

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One of the problems that I have with this, and this includes, there are stores opening now that they say that they only sell stuff in the U.S. and they have American flags all over the place. It's really disgusting.

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One of the things that I have against this is the sheer racism. You know, there's Japan bashing, the yellow menace, slandered people and all that.

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It's very dangerous, it's got all sorts of negative repercussions. There are even cases on record where some automobile workers in Detroit killed a Chinese person on the grounds that he was Japanese. They couldn't tell the difference. They took baseball bats and just killed him because they were against Japanese automobile incursions into this country.

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And this, I suggest, could just be the tip of the iceberg.

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Imagine if instead of Japan having a so-called favorable balance of payments with the U.S., it was a black country, such as Nigeria.

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And people started attacking, you know, blacks or whatever, black men instead of the yellow men.

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Well, then it would be seen clearly as the racism that it is.

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Now it's somehow not because Japanese Americans are not at the bottom of the economic totem pole here, but still it's as racist as if it were attacking blacks or women or Jews or whoever.

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I'm not in favor of political correctitude, but I wonder where are the politically correct people now that we need them on this Japanese thing? They've been strangely silent.

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What I'm going to do is speak about the case of free trade in general, and specifically I'm going to speak about the U.S.-Canada free trade agreement, that is, the political economic debate that took place in Canada two years ago.

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Why do I want to do this? Well, one is to get you out of your mindset of thinking as U.S. citizens or Americans.

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Another is that Canada is a country close to us and we can perhaps try to put our minds into them thinking in terms as if we were Canadian, because Canada to the U.S. is similar to U.S. to Japan.

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The Japanese is seen by Americans as evil and an abomination. Well, in Canada, the U.S. is seen in that role, so it will be a bit of a role reversal for you.

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This debate over the free trade agreement between US and Canada wasn't very important in the US.

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People in the US hardly even know that Canada exists.

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But in Canada, this debate was just tremendous importance.

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The entire last election was fought over little else than this debate.

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This is typical because Canadians know a lot more about Americans than Americans do about Canada.

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Canada. As you may know, I spent the last 12 years of my life in Canada. But when I first moved, I didn't know I lived in Vancouver, which is near Seattle. I thought it was near Buffalo. And you know, I'm a reasonably intelligent person to miss that. And it's not just me. What I did after moving there is I wrote to friends saying, well, now I'm in Canada, in Vancouver, and you know of any people I can interact with. And they gave me addresses in Toronto and Quebec, which is near Buffalo. So it was like 2,000 miles away.

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Most people think in terms of Canada, in terms of igloos and dog sleds, and the reality is very different.

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So I thought this would be a very good case and point example to look at free trade.

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The way I'm going to address it is through this book, which is called Canada is not for sale, the case against free trade.

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Is that good now?

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The bottom part reads, why you may lose your job, how the quality of your life will deteriorate, why you may lose your cultural heritage, and how Canada may disappear as a country if Brian Mulroney has his way.

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Brian Mulroney was running for Premier, Prime Minister of Canada, and it's lucky for the forces of free trade in Canada that the bifurcation was as follows.

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Brian Mulroney and the Progressive Conservative government was for free trade. The Liberals and the NDP, the New Democratic Party, those, there were three major parties, those were the three major parties in Canada, two of them were against free trade.

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More Canadians voted against free trade than for free trade. That is, more Canadians voted for the Liberals and the NDP than for the Conservatives.

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However, the anti-free trade forces were spread out over these two parties. They split them in half, roughly.

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Say, with roughly 30% of the vote, and the Conservatives got 40% of the vote.

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So, they got a majority government because of the way the political situation is shaping up in Canada.

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So 60% of the people roughly voted against it and yet we got it, which is another problem of the political system compared to the economic system.

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What is free trade? Trade, as we all know, is I give you something, you give me something.

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We've gone over this case where I take my tie and I want to trade it for your pen, and I think that's readily understandable.

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If we engage in trade and we both benefit, and that's the bottom line of trade.

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I see your pen is more valuable than my tie, so I'm getting a valuable pen and giving up a lousy tie.

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No comments about my tie here.

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You, on the other hand, weirdos that you are, think that the tie is better than the pen.

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So you gain in the ex-ante sense of anticipation, because you get the more valuable thing by losing the less valuable thing.

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You gain the difference to you between these two things. I gain the difference to me between these two things. It's just that we rank them in inverse order. That's why we both benefit from trade.

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Contrary to many people, trade is not a loss situation. It's a positive sum game where all parties who take part in trade benefit.

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I would expand it to say that all parties who engage in the market benefit because the market is just trades, just individual trades.

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By the way, even though I seem to be lecturing at you as opposed to my usual sort of a give and take, if you have questions or problems, please feel free to pipe up.

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Free trade means that government makes no laws abridging or prohibiting trade. People are treated as an adult, not as a kid.

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What I have in mind when I'm favoring the case of free trade is the typical commercial goods and services, you know, like line of beans or TV sets,

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I'm not talking about military secrets or selling computers to, who's that, in my lecture notes I have the Soviets but I can't use them anymore, who was the guy that had the mother of all wars, the middle eastern guy?

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Hussein.

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Hussein, right, so I have to use Hussein because you can't use the Soviets anymore.

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So I'm not talking about computers or selling atomic secrets to Hussein, I'm not talking about military secrets, I'm not talking about drugs or pornography or prostitution.

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Those items have different implications.

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I'm just talking about the ordinary chairs and books

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and sweaters and pens and ties and things like that.

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And in my view, the case for free trade

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can be made in two parts.

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One is the moral, one is the economic.

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I'll spend just a few minutes on the moral

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because most of it will be on the economics,

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which is, I suppose, appropriate

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since this is a class in economics.

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But yet I think we ignore the moral dimension at our peril.

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And the moral dimension of free trade is an important part.

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I think there's a human right to engage in commerce.

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I think that trade rights are part and parcel

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of property rights.

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They're a basic building block of a free society.

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There was this philosopher, Ludwig Wittgenstein,

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who went through the following example.

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He says, look, I'll give you this car.

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See, it's parked on the street there, I'll give it to you.

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But under two conditions. One, you don't sell it. And two, you don't prevent the previous owners from doing with it whatever they want.

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Well, in what sense can you be said to own that car if you can't sell it and you can't tell the previous owner not to use it anymore? You want to use it.

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The point is you don't really own it if you can't sell it or use it. Well, if you can't sell it, if you can't trade it, to that extent your property rights over it are bridged.

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Another moral reason for favoring free trade is peace. Historically, countries either trade or they fight. They rarely do both. Rarely has there been war between trading partners, because when you're a country, you don't have the right to own property.

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are commercially intertangled with another country, there are all sorts of vested interests against fighting.

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Integrated economies, fighting is the exception, not the rule.

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So if we want peace and we want prosperity and we want human rights, that would pretty much be the moral case in favor of free trade.

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But the economic case, I think, is more appropriate for this class.

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And as we've said that you benefit, utility-wise, in the ex-ante sense as opposed to the ex-post sense from trade.

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You might later regret the trade of the tie and the pen, but at least in the anticipation sense, that's the reason you engage in the trade.

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I mean, there's nothing perfect. I might get your pen and say, oh, what a lousy pen it is, the tie was better, and vice versa for you.

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But still, the motivating force and the presumption is that trade benefits both parties.

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Can trade harm people? Can an offer to trade harm somebody? I say no. Let me take a possible objection as a case and example.

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Suppose I offer a penny for your house. Now, your house has worked lots more than a penny. I don't care where you live.

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Even in a chicken coop, it's worked more than a penny. Have I harmed you by only offering a penny?

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I might have insulted you, but you don't have to accept that you're free to reject the penny.

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If you accept my monetary offer for your house, it must mean that the money I offered you is worth more than the house or whatever it is you're giving up. Therefore, you benefit. We can deduce this.

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I therefore say there is no such thing as a hostile takeover in the market. I mean, there are hostile takeovers. I come at you with a gun and I say, look, I'm taking over your wallet. Give it to me. That's a hostile takeover. But that's not part of the market. That's just a theft.

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In the case of trade or takeovers, if I take over your house, it's not hostile to you because I'm paying you $50,000 and you decide that $50,000 is worth more to you than your house.

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There's no hostile takeover.

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Now it might be that your neighbor doesn't like me. He says, oh boy, Block is moving in, he's going to ruin the neighborhood.

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So it might be hostile in his view, or her view, but between the two training partners there cannot be any hostility.

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Let me give you the next cartoon here to illustrate that point.

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This is one of the best cartoons in the book.

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What it says is a big fat kid who is labeled USA and a little skinny kid with a label of Canada that's a maple leaf on his sweater.

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And the little Canadian kid says, I got two marbles, what do you got? He wants the trade.

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And the big fat US kid sort of bops him over the head and says, I got two marbles.

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Now, that's the view of trade of people who are opposing free trade. What they think of free trade is that it's grabbing, it's stealing.

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But I appeal to you a sense of logic and common sense. It isn't. Trade must be voluntary between both parties, otherwise it's not trade. It's theft.

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What that is, is just expropriation. One kid, a big fat one, grabs the little skinny kid's marbles, and what that has to do with trade, I can't understand.

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I think it has nothing to do with trade. It's a perversion of trade.

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Now let's consider the objection that was on the first cartoon that Canada is not for sale.

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Somehow it's awful if Canada is for sale. You can put it in your own terms, is the U.S. for sale?

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Wouldn't it be awful if we sold the US to Japan and they ran it?

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That's the objection.

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Well, in my view, it wouldn't be, because we would only

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sell the US to Japan if we got a price that made it worth it to us.

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For example, if they, well, let's take an example.

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What could we get for the entire US that would make it worthwhile to give up

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the entire US?

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Well, if we got all of Africa, Asia, Europe, Japan,

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the rest of the world, that might be better for us.

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Instead of being confined to an acre or two or three or 10,

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we could have 10,000 acres each.

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We'd be fabulously rich.

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Well, what's true on the macro level

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is true on the micro level as well.

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Whether it's US or Canada for sale on the macro level,

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now let's take a little bit of the US.

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Suppose it's your house.

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And suppose the best opportunity for your house is $50,000, and some Japanese person comes along and says, I'll give you $100,000.

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Are you willing to sell you a little bit of New York? Sure. It's a great deal. We can't possibly lose.

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The only objection to this is if we think that you're really stupid. It's paternalism.

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In other words, if we have the idea that you're just a dummy and you don't know what your house is worth and you're going to sell it to the Japanese for a price way below its value, that's the only possible objection to the claim that we would benefit if we sold the US or Canada on a voluntary basis.

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is not going to offer us enough to buy the US,

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so it's just sort of a hypothetical example.

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But the objection shows that this paternalism

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is profoundly undemocratic.

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Because if we can't trust you, you little slob,

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to sell your house at an appropriate price,

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how can we trust you to vote?

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On the other hand, if we can't trust you to vote,

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you're a citizen, then surely we can trust you

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Let me run another cartoon at you. Here is a picture, you can see it's a little bit dated. Ronald Reagan was president then, and Brian LaRoni has got one of the biggest chins in the history of civilization. It sort of sticks out to here. It's just a tremendous, immense chin. So whenever he's depicted by cartoonists, it's with a gigantic chin.

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So here's another way of articulating free trade. Ronald Reagan is eating the free trade turkey, and Brian Mulroney is like a little doggy. He's labeled Canada, and he's going arf, arf, pan, pan, give me a few crumbs off the table.

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Again, it's very similar to the two little boys or the big fat boy and the little skinny boy with the marbles. It's a perversion of what free trade is.

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Another objection is that we'd be tenants in our own houses if we had free trade.

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This is a variant of don't sell Canada.

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But what's wrong with being tenants?

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Suppose you think that your house is worth $50,000, and I say I'll give you $100,000,

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and I buy it, and then I turn around and say,

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hey, by the way, I have no use for this house, so I'd like to rent it to you.

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And now you're a tenant in your own house.

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But you've got lots of money in the bank that you didn't have before.

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Well, you could buy two or three other houses if I give you enough money.

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Do you get the point?

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There's nothing, yes?

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On a larger level, let's say

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there's been complaints against some of the Japanese firms who've come in

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that they set up shop here, they buy American buildings, I don't know,

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and they start an industry and the problem is that they hire their own people

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and that they're controlled by Japanese and that they don't,

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Unlike American firms who go to other countries, we tend to integrate our firms, whereas there's arguments that they don't do that.

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They sort of deal just with each other and they're creating sort of their own network.

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Well, I don't think it's true. I think it's very expensive to get Japanese over here.

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Typically what would happen is they'd get a few Japanese executives and they'd buy a car brand.

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They wouldn't fire them. You know, they wouldn't bring in 3,000 Japanese workers.

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What they do is bring in 30 Japanese executives, fire all the American executives who are in many cases overpaid and very inefficient compared to them, and they run it a lot better.

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So there'd be 30 unemployed executives. But I would say even if they fired all 3,000 and started producing it, it would still be in our benefit, in our interest, but I'm not going to be able to show that to you until I get 10 minutes further into the lecture when I talk about bananas.

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Let's talk about bananas.

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So when I get to the banana industry, I'll try to answer your question, okay?

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Take it on faith for a few minutes.

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Maybe I'm up to that now.

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The next point is that in order to see the benefits of trade more clearly, let's assume that there was no trade.

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Let's assume that some maniac, Gephardt used to be running for Senate on this basis,

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but Clinton now is running and he seems to be running on an anti-Japanese plank.

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Let's suppose that Clinton got in and he was really tough, none of these wimpish things, and he had the death penalty for trade, and nobody traded.

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This would mean self-sufficiency, economic self-sufficiency, and many people were in favor of economic self-sufficiency.

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But if we really took this to its logical conclusion of self-sufficiency, what it would do is make sure that we had no specialization,

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No specialization, no division of labor, no specializations in skills.

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We could not cooperate with the Japanese or with anyone else.

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A better way to see it is if instead of thinking of the whole country,

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we think of it in terms of the individual.

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In other words, if trade is bad, why should it just be that international trade is bad?

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Why not trade between states? Massachusetts and Connecticut, for example, or cities?

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Why should Worcester trade with Boston?

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Should we allow those Bostonians to come in here and buy our things and maybe fire us local wisterians?

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No. And we can even take a dance at the individual level.

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Why not have individuals be self-sufficient? Not trade with anyone, because God forbid they could do something we could do.

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Well, if we did that, probably 98 or 99% of the entire population of the Earth would die.

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Because we are all dependent for productivity for our lives, and our lives and our productivity depends upon specialization and trade.

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See, these things all work together. If you can't have trade, there's no sense in having specialization.

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Why should I produce 10,000 shoes? I only need two or three pairs of shoes or sneakers or what have you.

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To produce 10,000 is ludicrous, right? Unless I can trade it, there's no reason for me to do it.

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But the only way I'm going to get good at it is to produce 10,000 of them. That's the only way I'm going to get the benefits of scale, the economies of scale.

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If I have to produce two or three pairs of shoes for myself, and I have to produce my own food, and I have to produce my own Mozart symphonies,

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and I have to produce my own medical services, because you can't go to a doctor, that's trading medical services for money,

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Well, I'm going to be a pretty poor boy. I'm going to be pretty inefficient because I can't possibly be skilled at all of these things. I'm going to be pretty lousy at about everything.

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So, my standard of living will plummet. So will yours because you're in the same position. We'll all be miserably poor.

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This Earth, which can now support six, seven million people, probably will be able to support six or seven million, which means that 98% of the people will die.

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So we really depend for our very lives on free trade, or our trade, and the more of it the better.

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And this attack on it is really an attack on life itself.

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The next cartoon shows, again, how the anti-free traders see free trade.

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Free Trade is a big apple and we have, who is it that shoots apples at somebody?

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William Tell? William Tell, right.

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And naturally it's a very dangerous thing. You stick a little apple on your head and you say,

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okay, shoot an arrow and if he misses you're in trouble. It goes right up your nose and then what?

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So the way these people see free trade is that it's a very dangerous thing.

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It's a kid standing there with an apple on your head and probably they should have made the apple smaller to drive home the point.

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This was the vision of Adam Smith and the classical liberals, that if economic self-sufficiency

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is good for the U.S., then it's good for Massachusetts, if it's good for Massachusetts, it's good for Worcester, if it's good for Worcester, it's good for Elm Street, and if it's good for Elm Street, it's good for you, who live on Elm Street, but the point of the matter is that it's not good for any of these people.

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Self-sufficiency sounds good. Oh, you're self-sufficient, you're noble, you're able to take on old jobs.

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Well, maybe it'll go over well if you don't think about it in a movie or something, but if you think about it carefully, self-sufficiency is like a death penalty for the masses of people.

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The next cartoon also illustrates free trade in a very negative way.

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The caption reads, it's a little small for you to read, so I'll say it to you.

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The U.S. Senate, the big fat guy is talking and he's got a cigar and he's got lots of money and he's got lots of cards and the little guy with the maple leaf on his hat is Canada and the big fat slob from the U.S. says, the game is called five card free trade poker, everything is wild, six card draw, it's my deal, my cards, my rules, my game and we play with your money.

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Another way of depicting it.

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Okay, what I'd like to do now is to get into a bit of economic theory.

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And here's where we get into the bananas.

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What I'm going to try first to do is to illustrate the law of absolute advantage.

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And what I've got here is a situation with two countries and two goods, Canada and Costa Rica.

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And we've got bananas and maple syrup, and I'm assuming that a unit of bananas is worth the same as a unit of maple syrup, whether it's a pan of bananas and a quart of maple syrup, or whatever it is that equates the two.

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And if we have two person days, or two man hours, or whatever it is, or women hours, and we're going, each country is going to devote one day to one product, and the other day to the other product.

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So, if Canada produces bananas, we're so inefficient in Canada in banana production, by the way we could produce bananas in Canada even though there's a lot of English and ice. How can we produce bananas in Canada?

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Can anyone? Sorry? Greenhouses. Greenhouses, hot houses, right. It's very expensive because you have to first build a hot house or a greenhouse.

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Macle syrup can be done easily in Canada, which shows that for a day's work you can produce 10,000 units of maple syrup and only 5 bananas.

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In Costa Rica, things are inverted. There they can produce 15,000 units of bananas per day, but only 20 units of maple syrup.

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By the way, how could they produce maple syrup in Costa Rica, which is very hot, and you need coal for a maple tree?

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Well the idea that I had was gigantic refrigerators. Refrigerator 100 feet tall and you stick a tree in it. And that's how you do it.

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I mean it would be very expensive, it would take a lot of electricity to keep that tree cool, but you could do it.

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There'd be no purpose in it, unless you were really fanatically opposed to pre-trade, but you could do it.

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So, if there's no trade, how many bananas are produced? Well 15,005, you just add up down the column.

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How many units of maple syrup are produced? 10,020. What is world production? The world now consists of Canada and Costa Rica. You add up 15,005 and 10,020 and you get 25,025.

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The 10,005 is Canadian National Income or GNP and the 15,020 is Costa Rican GNP.

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So that's the no trade scenario. That's the top three lines. But if we have trade, what will happen is instead of Costa Rica spending one day efficiently producing 15,000 bananas and the other day very inefficiently producing 20 bananas, they'll spend both days producing bananas and they'll get a total of 30,000 bananas. Right? You all see that.

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On the other hand, Canada, or the northern country, instead of spending one day reasonably well producing 10,000 units of maple syrup and the other day just wasting on 20 units of 5 units of bananas, they'll spend both days on maple syrup production and they'll be able to produce 20,000 in 2 days. That's the bottom row.

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And if you add up the 20 and the 50,000, you get 50,000. So GNP for the world practically doubles. It just slightly less than doubles. It goes up from 25,000 and 25 units to 50,000 units.

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And presumably, this shows that there are benefits to free trade. I mean, isn't it stupid for both countries to produce both goods? Isn't it more sensible for each of them to specialize in what it does best and then trade?

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They'll be much richer.

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Right?

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At least that's the way it makes sense to me.

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Well, this is absolute advantage, and I think it very clearly shows that there are benefits to free trade.

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Now, to answer Chris's question, but what about the Canadian banana manufacturers?

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Well, the Costa Rican maple syrup manufacturers, if we have free trade, won't they lose out?

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The answer is yes. They will lose out. There will be a personal tragedy in the Canadian banana industry.

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And here's where we get to your case where there's this factory in Tennessee that's producing cars.

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Well, that's producing bananas. In other words, if they're producing in such a way that the Japanese can afford to buy them out,

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they're not producing what they should be or how they should be.

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It's the equivalent to the banana industry in the northern country or the maple syrup industry in the southern country.

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Yes, it's a personal tragedy. I told you the other day about this friend's father who was an engineer and he became technologically unemployed.

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Well, there will be people, and these are personal tragedies, I'm not trying to deprecate that, who will lose out.

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But that's economic progress. I mean, when Henry Ford came in with the automobile and thousands of people who you find in the western movies

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So, good horse breakers and horse trainers and bridle makers and carriage makers, they all went like that, economically speaking.

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But that's progress. If we didn't have that, we'd still be back in the horse and buggy days.

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And not only the horse and buggy days, but how about the wheel?

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Do you know how many people got unemployed by the wheel?

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All those people who were carrying stuff on their backs?

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So, I mean, if you look at it that way, we'd be back to the Stone Age, or before that, because, you know, why should we have oil? Why should we have fire? It just makes life easier. We wouldn't want that, would we? No.

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Okay. This is the risk that all investors in the market take. Their products are no longer needed. Previously, they earned profit by satisfying consumers, but now things change and

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They can no longer do so. But am I not caught in a contradiction? Didn't I just get through saying that the market benefits all participants and now what about all these banana people?

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The way I squirm out of this attempt to capture me in a contradiction is as follows. The market consists of voluntary trades.

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At one time, the horse and buggy industry was part of the market. Henry Ford came along and they weren't part of the market anymore, because nobody wanted their bloody horses and buggies or very few people there.

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So they're not part of the market anymore. So I can still claim that the market benefits all participants, but now I have to concede that some people need not be part of the market.

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Canadian banana manufacturers, Costa Rican maple syrup producers, the people that made the Edsel, the people in the horse and buggy industry, the people that had mom and pop restaurants before the advent of Burger King and McDonald's and Wendy's and Pizza Hut and all those people who went broke.

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But that's the way we improve our standard of living. The consumer is supreme in our society. The consumer gives a thumb up or a thumbs down.

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And woe betide the producer who doesn't get in line with what the consumer wants.

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What about poor words? Here's another point that I went over briefly, but let me reiterate.

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Remember when I distinguished between general training and specific training?

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And I said that general training is that sort of training or skills that is useful in pretty much anything.

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Where specific training is specific to the industry itself.

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Now let's get back to the Canadian banana manufacturers.

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What I want to say is that the people with general training, namely the guy that sweeps out the hot house,

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He can get a job pretty easily sweeping out the maple syrup place, where they refine the maple syrup.

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He doesn't really lose, he just gets out of bananas and in a maple syrup.

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The people that really lose are the people with specific training, specific to banana production.

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Namely, hothouse engineers or banana theorists or biologists of bananas or something, if they distinguish between the two goods.

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But these people are much more likely to be rich.

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The more training you have, the more likely it is to be specific, and the more specific end or training you have, the richer you are.

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Well, these are entrepreneurs. Only instead of investing in physical goods, they're investing in themselves.

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And their investment, you know, came unglued. But they are the rich people.

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So if you worry about the poor people in free trade, worry no more, or at least worry a lot less than you were worrying before,

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The poor people are less likely to lose out from a loss of a Canadian banana industry than the rich.

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And similarly with the horse and buggy industry.

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The guy that swept out the stables can sweep out the automobile manufacturing plant without any loss of anything.

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The guy, or the woman, or the person who is in charge of a highly skilled bronco busting,

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that skill doesn't translate too easily into automobiles.

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The next cartoon, that wasn't a cartoon. If you're paying attention, you noticed that.

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Yes, question.

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So, like, ideally, if you were engaged in free trade, like the President of the United

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States, rather than being judged a good president by, I don't know, like, unemployment statistics,

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would he all of a sudden now be, like, judged by the fact that, you know, milk and sweaters,

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the consumer cannot buy them for so much less of a price?

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Yeah, oh yes, I would judge George Bush not by barfing on the Prime Minister of Japan in order to get him to buy more of these lousy rotten cars, you know.

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I would judge him on free trade. I would say the more free trade he's for, the more I'm in favor of.

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Very much so because free trade means we can get those Toyotas and Hondas and VCRs and Nintendos for a lot cheaper than other ones.

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The next cartoon is one of my favorites. That's Brian Mulroney, remember with the big chin, and you notice that he's sort of bending down like this, so you can sort of see, and he's got his lips puckered up.

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I have to explain this stuff to you. And guess who he's kissing? And the caption reads, Canada, America, just like cousins, kissing cousins.

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and, obviously, he's kissing Reagan's backside because that's what free trade is.

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It puts one person over the other, one person is superior, the other person is inferior in the view of these anti-free traders.

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Needless to say, I think that's nonsense, but that's the way they characterize free trade.

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But it's got a certain charm, you know, I have to admire it even though I don't agree with that.

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Okay, the objection to the absolute advantage case is, all right, okay, wise guy, it's well and good if, you know, we're better at one thing and they're better at the other thing.

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Yes, I can see, maybe reluctantly, but I can see, yes, it's not such a great idea, it is a good idea to have free training.

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Because we'll specialize in what we do best, they'll specialize in what they do best, then we'll train.

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And for every job lost in the Canadian banana industry, we'll get one in maple syrup.

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Okay, no big deal, no problem, right?

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But, and here's the super objection of the protectionists,

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suppose the other country is better at both things than we are.

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Would that be a bad situation?

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Well, here is the situation, and the answer to that is the law of comparative advantage, not absolute advantage.

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And here is a very simplistic, but I think reasonable way to depict the comparative advantage doctrine.

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Now, we have Canada and Japan, two countries, and now I'm assuming that not only is Japan better than Canada

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in producing one good, namely TV sets, which is reasonable, but they're better at producing the other good also, wheat.

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So notice, again, we have this two-person day scenario, where each country has two days and they can produce either one or the other or both, half day or one day each.

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They can put two days in one, two days in the other, or one day in each.

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Well, let's take the one day each scenario first.

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If Canada produces wheat, it can produce 35 units of wheat. If it produces a TV, it can produce three.

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Japan is much better. It's twice as good as Canada in wheat. It can produce 70. But Japan is 33 and a third times more productive than TV sets. It can produce 100, while the Canadians can only produce three.

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So again, we go through the same scenario. If there's no trade, then total wheat production is 105. If there's no trade, then total TV production is 103. World production is 208.

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Canada's GNP is 38, 35 wheat plus 3 TVs is 38. Japan's wheat is 70 plus 100 or 170.

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But if there is trade, then what happens is that each will specialize in what it has as its comparative advantage.

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Now remember, Japan has got an absolute advantage in both.

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But Japan does not have a comparative advantage in both.

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Rather, Japan has a comparative advantage in TVs, because it's 33 times better than we are, we Canadians, in TVs, but it's only twice as good at wheat.

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So they have a comparative advantage in TV sets. We have a comparative advantage in wheat, because while we're only 3% as effective as the Japanese in TV, we're full 50% as effective in wheat.

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So notice what happens when we trade. Now Canada, instead of spending one day doing 100 TVs and another day wasted on 70 weeds, does two days at 100 for a grand total of 200. That's the bottom line.

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And we in Canada, instead of spending a good 35 wheat production day in wheat, and wasting our time with TV's, we spend both of our days in wheat, and we produce seven of them.

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And now world trade or rather world GNP rises from 208 to 270.

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Notice that the world is richer. The world now consists of Canada and Japan.

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And out of that extra 62 units comes the benefit to both parties.

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So again, even if one country is better than the other in both things,

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it still does not follow that trade should be stopped.

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This is the nightmare of the protectionists.

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The way they envision it, they say,

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well, my God, it's okay if we're better at one thing

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and they're better at the other,

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but if they're better than us at both,

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what will happen is they'll start producing both

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and we'll go broke in both.

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And we'll end up, we'll all be on welfare,

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only there'll be no money for welfare

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because the Japanese won't give it to us.

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Oh, wait, I just gotta check your name.

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I know you're the birthday boy, but,

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What happens when Japan has the entire TV market and now they move into weed?

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The reason they wouldn't move into weed is because they would lose.

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Let me give you another example, a different numerical example to try to answer that.

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I figure if one doesn't get you, the other one will.

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This example shows a lawyer and a typist.

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And the lawyer...

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I had to rearrange my notes because you took me out of order.

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Here we go.

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The lawyer can make $1,000 a day, the typist can make $150 a day.

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Now remember, you're asking, why doesn't Japan do both?

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Well, I'm translating into, why doesn't the lawyer do both?

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But let me explain further.

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If there is trade, what happens is that the lawyer can work two days as a lawyer and he can make $2,000.

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and the typist can work two days a typist and make $300.

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So total GNP between the two of them is $1,700.

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If there's no trade, just looking at it from the lawyer's point of view,

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one day he or she spends as a lawyer making $1,000,

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and the other day is spent making just $150 for a grand total of $1,150.

358
00:41:54.940 --> 00:42:01.940
You see, if the lawyer trades, he or she will make $2,000, make $1,000 a day.

359
00:42:01.940 --> 00:42:10.940
I should have had a third category for that. His or her, the lawyer's fee is $2,000 if he trades.

360
00:42:10.940 --> 00:42:12.940
If he doesn't trade, he only makes $1,000 a day.

361
00:42:12.940 --> 00:42:16.940
So to answer your question, he's got the lawyer market covered.

362
00:42:16.940 --> 00:42:22.940
Why doesn't he branch into wheat production or why doesn't he branch into typists?

363
00:42:22.940 --> 00:42:28.940
And he can make more by specializing in the thing that he's got a comparative advantage in.

364
00:42:28.940 --> 00:42:35.940
But if he's such a good lawyer, if he gets done by three o'clock with all his law work, he can send the typist home.

365
00:42:35.940 --> 00:42:37.940
He doesn't have to pay her. He can do the typing.

366
00:42:37.940 --> 00:42:38.940
Oh, I see.

367
00:42:38.940 --> 00:42:39.940
And now he's into the typing work.

368
00:42:39.940 --> 00:42:45.940
Yeah, well, I'm assuming that there's plenty of lawyer work for him, and I'm assuming that there are plenty of TVs to be made.

369
00:42:45.940 --> 00:42:49.940
Remember that list I went over last time? I don't know if I did it in this class.

370
00:42:49.940 --> 00:42:50.940
I did.

371
00:42:50.940 --> 00:42:57.940
I did. See, what you're assuming is we've got to the bottom of our list, there's no more need for TVs, right?

372
00:42:57.940 --> 00:43:05.940
Then it'd go into a weed or something. But I'm assuming that there are plenty of people out there that want TVs, it's just expensive to get them.

373
00:43:05.940 --> 00:43:14.940
Hasn't it kind of been demonstrated, practically, that the Japanese have dominated markets like VCRs, radios, those kind of things, and now they go into other markets?

374
00:43:14.940 --> 00:43:25.940
Other markets, mainly Nintendos and lawn mowers and things, but in terms of wheat, it's just ludicrous to think of them doing wheat.

375
00:43:25.940 --> 00:43:39.940
They've got no room in the bloody country. Wheat takes a lot of area, and Japan is about the size of California, more or less. California's got about 25 million people.

376
00:43:39.940 --> 00:43:46.940
Japan is close to that size, maybe even a little smaller, in a lot of its mountainous, and they've got about 90 million people.

377
00:43:46.940 --> 00:43:57.940
It's a sponge city. You know, to think of them doing wheat, and to think of that being sensible, it just sort of boggles the mind.

378
00:43:57.940 --> 00:43:59.940
But if you move away from wheat.

379
00:43:59.940 --> 00:44:00.940
I'm sorry?

380
00:44:00.940 --> 00:44:03.940
If you move away from wheat, so we have the agrarian market all to ourselves.

381
00:44:03.940 --> 00:44:06.940
But you see, if you push me that way, then I have to get a third good.

382
00:44:06.940 --> 00:44:14.940
I'm willing to concede that yes, they have a comparative advantage in weed and TV sets, but then there's got to be a third good.

383
00:44:14.940 --> 00:44:19.940
These are very artificial models of only two goods. They can only illustrate so much.

384
00:44:19.940 --> 00:44:23.940
So if you're going to push me that far, then I have to come up with another good.

385
00:44:23.940 --> 00:44:30.940
They can't do everything. There's got to be something that we can do that will have a comparative advantage over them.

386
00:44:30.940 --> 00:44:56.940
If the United States has the comparative advantage in wheat, and say Japan did want to start producing wheat, would we still be able to produce it for less so that their market, people would still want the American wheat because it's less expensive, even in Japan, to demand that import?

387
00:44:56.940 --> 00:45:03.940
Is that right? If we have the comparative advantage, then ours would be less expensive even if they started making it?

388
00:45:03.940 --> 00:45:12.940
Yes, because you have to think of costs in terms of alternative costs. Japan's wheat is very expensive, not because they can't produce wheat.

389
00:45:12.940 --> 00:45:18.940
They can, twice as good as wheat, but because they do it at the cost of giving up stuff they can produce even more.

390
00:45:18.940 --> 00:45:28.940
So if you just look at it, what does it take them to produce wheat? What does it take us to produce wheat?

391
00:45:28.940 --> 00:45:37.940
Based on the other diagram, conceding that we're so inefficient that they can do wheat better than us.

392
00:45:37.940 --> 00:45:41.940
Remember, this is a comparative advantage. They can do everything better than us, absolutely.

393
00:45:41.940 --> 00:45:44.940
But they can't do everything better than us comparatively.

394
00:45:44.940 --> 00:46:10.940
Let me try another one at you, see if I can't convince you in another way. Try this example. Suppose that there's a made-in-Canada TV set that costs $500, or made in the U.S. if you want, if you can't get your minds into being Canadians.

395
00:46:10.940 --> 00:46:19.940
The TV set made in America costs 500 bucks. The Japanese are so efficient that they can produce them for $100, $400.

396
00:46:19.940 --> 00:46:25.940
Okay, so we open up free trade and the first thing that happens is that there's no more U.S. TV industry, right?

397
00:46:25.940 --> 00:46:31.940
We don't produce anymore. We're all knocked out of the box. We're bankrupt, belly-up.

398
00:46:31.940 --> 00:46:35.940
But remember, we're getting the same quality TV. We'll assume they're equal quality.

399
00:46:35.940 --> 00:46:46.940
We're getting the same quality TV for $100 where we used to spend $500. What are we going to do with the extra $400?

400
00:46:46.940 --> 00:46:53.940
Well, maybe we'll buy five TVs, or maybe we'll buy two TVs and three sweaters or something.

401
00:46:53.940 --> 00:46:58.940
Well, that will create jobs for the unemployed TV, US TV people.

402
00:46:58.940 --> 00:47:03.940
What are the Japanese going to do with the $100 we give them?

403
00:47:03.940 --> 00:47:12.940
Well, there are only three things they can do with it. They can either buy stuff here, and what are they going to buy? TVs from us? Don't be ridiculous. They'll buy wheat.

404
00:47:12.940 --> 00:47:21.940
And if they're too busy producing wheat too, they'll buy something else, because they've got to give us that money, because the other two alternatives are way worse.

405
00:47:21.940 --> 00:47:26.940
The second alternative for them, what they're going to do with their hundred, is burn it.

406
00:47:26.940 --> 00:47:31.940
Well, if they burn it, then it's in effect a gift and a free TV.

407
00:47:31.940 --> 00:47:36.940
And the third thing is they can spend it in another country, say, Italy.

408
00:47:36.940 --> 00:47:40.940
But what is Italy going to do with U.S. dollars?

409
00:47:40.940 --> 00:47:44.940
They'll have to buy stuff from us, which will be weaved again.

410
00:47:44.940 --> 00:47:47.940
Or whatever. It doesn't matter.

411
00:47:47.940 --> 00:47:55.940
So no matter how you slice it, this bogeyman of the other country being more efficient than us at both things

412
00:47:55.940 --> 00:48:05.940
is just that it's a bogeyman, it's a tale concocted to scare unsophisticated people in economics.

413
00:48:05.940 --> 00:48:12.940
It's not something that we should worry about.

414
00:48:12.940 --> 00:48:18.940
Well, I still see some puzzled looks and, oh boy, he's full of it today.

415
00:48:18.940 --> 00:48:22.940
Usually he's a little weird, but today he's just going on a deep end.

416
00:48:22.940 --> 00:48:26.180
This maniac, what is he telling us?

417
00:48:26.180 --> 00:48:29.460
All I can say is, read the Haslett chapter.

418
00:48:29.460 --> 00:48:33.180
I mean, this lecture or these notes here

419
00:48:33.180 --> 00:48:36.620
are an attempt to help you out with the Haslett.

420
00:48:36.620 --> 00:48:38.500
I think that chapter is very important.

421
00:48:39.500 --> 00:48:43.040
And I've still got some more shots in my gun here,

422
00:48:43.040 --> 00:48:44.620
so let me go on.

423
00:48:44.620 --> 00:48:47.180
We go from two to 3.15, right?

424
00:48:49.180 --> 00:48:50.860
Okay, it's time for a cartoon.

425
00:48:50.860 --> 00:49:07.860
Here is another way of depicting U.S. Canada free trade. The fat guy, Simon, is naked, except for a maple leaf held in a critical position there.

426
00:49:07.860 --> 00:49:15.860
And Peter Murphy is the U.S. person. I don't know if you can see it clearly, but Peter Murphy is wearing two sets of clothes.

427
00:49:15.860 --> 00:49:24.860
He's wearing two clothes. He's wearing two ties, he's wearing two suits, he's wearing two shirts. He's got two of everything.

428
00:49:24.860 --> 00:49:37.860
Namely, what the free trade deal is between Canada and the U.S. is that the U.S. took all of our clothing and we're just sort of hanging out there naked, letting it all hang out.

429
00:49:37.860 --> 00:49:43.860
So certainly this is a very bad way of seeing free trade.

430
00:49:43.860 --> 00:49:50.860
Why is it difficult for economists to make the case to non-economists of the benefits of free trade?

431
00:49:50.860 --> 00:49:55.860
I think it has to do with what Hassen says about the seen versus the unseen.

432
00:49:55.860 --> 00:50:06.860
We all see the jobs being lost. We all see the closures of automobile plants or whatever.

433
00:50:06.860 --> 00:50:09.860
That's obvious. It's explicit.

434
00:50:09.860 --> 00:50:18.860
What we don't see, the unseen, is all the jobs that are created by the extra $400 that we used to spend $500 for TV, we now only spend $100.

435
00:50:18.860 --> 00:50:22.860
That extra $400 creates lots of other jobs.

436
00:50:22.860 --> 00:50:27.860
And I don't even like saying creates jobs, as if creating jobs is a good thing.

437
00:50:27.860 --> 00:50:31.860
Creating jobs is a bad thing. Creating production is a good thing.

438
00:50:31.860 --> 00:50:36.860
Creating jobs just wastes manpower, person power. It's a precious thing.

439
00:50:36.860 --> 00:50:39.500
We don't want to just spend it frivolously.

440
00:50:39.500 --> 00:50:41.860
But to put it in that other lingo,

441
00:50:41.860 --> 00:50:44.060
what you don't see are all the other jobs

442
00:50:44.060 --> 00:50:47.500
created by the extra $400 that you now have in your pocket

443
00:50:47.500 --> 00:50:50.020
that you wouldn't have had had we been dependent

444
00:50:50.020 --> 00:50:52.340
upon U.S. or Canadian TVs.

445
00:50:53.540 --> 00:50:56.300
And you also don't see the results of the $100

446
00:50:56.300 --> 00:50:58.700
that the Japanese are returning to us,

447
00:50:58.700 --> 00:51:00.860
because trade is a continual cycle.

448
00:51:00.860 --> 00:51:02.340
They don't just keep that 100 bucks

449
00:51:02.340 --> 00:51:06.620
that we bought their TV set for, they spend it here.

450
00:51:06.620 --> 00:51:10.300
The extra $400 gets spent here, we're a lot richer.

451
00:51:10.300 --> 00:51:13.060
We used to spend $500 and we just got one TV.

452
00:51:13.060 --> 00:51:15.320
Now we spend $100 and we got one TV.

453
00:51:16.500 --> 00:51:18.500
That's why we have a standard of living

454
00:51:18.500 --> 00:51:21.060
that is the envy of the whole world.

455
00:51:21.060 --> 00:51:23.420
Japan included, which is a whole other issue.

456
00:51:23.420 --> 00:51:51.420
The next cartoon is the, what is that horse? Trojan horse, that's right. Trade is a Trojan horse. I mean these are just theme and variations. Trade is bad, trade is evil, trade is disreputable, trade is no good.

457
00:51:51.420 --> 00:52:00.420
Well, now trade is a Trojan horse. Canada is looking out at the Trojan horse of free trade and they're saying, well, it looks okay to me, let it in.

458
00:52:00.420 --> 00:52:04.420
And then, of course, it's filled with enemy soldiers and they'll overrun the fort.

459
00:52:04.420 --> 00:52:10.420
So again, we see free trade on the model of battle, of conquest, of rape.

460
00:52:10.420 --> 00:52:15.420
But I put it to you that the very opposite is the truth.

461
00:52:15.420 --> 00:52:23.420
The reason these people see it this way is, I guess, because they have this bias against economic freedom.

462
00:52:23.420 --> 00:52:29.420
But the reality is that economic freedom has got to be mutually beneficial, otherwise people wouldn't engage in it.

463
00:52:29.420 --> 00:52:33.420
That is, for market participants.

464
00:52:33.420 --> 00:52:37.420
Okay, now I have a whole bunch of objections.

465
00:52:37.420 --> 00:52:42.420
Not that I haven't taken some objections, but now for the rest of my comments,

466
00:52:42.420 --> 00:52:53.420
comments, I'll just be giving objections to the free trade theory. Some of them will be in a Canadian context, and I'll have to explain the Canadian reality a bit, but most of them will be readily understandable.

467
00:52:53.420 --> 00:53:02.420
Brian, did you have a question? Somebody I didn't get? No? Got everybody? Okay.

468
00:53:02.420 --> 00:53:09.420
One objection is that unless we have interferences with free trade, we won't have a level playing field.

469
00:53:09.420 --> 00:53:14.420
You've heard of a level playing field argument? Right? Okay.

470
00:53:14.420 --> 00:53:20.420
Now, these analogies from sports are entirely illegitimate.

471
00:53:20.420 --> 00:53:29.420
Sports is a zero-sum game. Every time one team scores, it scores at the expense of the other team.

472
00:53:29.420 --> 00:53:51.420
If I score a goal on you, I'm one up, you're one down. It's not that we're both up. The way I get up in sports is by pushing you down. In boxing, it's by knocking you down. In hockey or football, it's by scoring on you. When I score on you, I push you down. I elevate myself. I'm the winner, you're the loser. In free trade, it's very different.

473
00:53:51.420 --> 00:54:01.420
Another analogy is the game Monopoly. Another sport analogy. You play Monopoly, you land on boardwalk or park place and you pay a ton of money.

474
00:54:01.420 --> 00:54:11.420
There, you lose. There's a winner and a loser. Monopoly is very different than an economy. An economy is a mutual cooperative venture.

475
00:54:11.420 --> 00:54:20.420
You know, we talk about competition, but we're really cooperating with each other. That's the essence of economics is mutual cooperation.

476
00:54:20.420 --> 00:54:31.420
Monopoly is not mutual cooperation. Monopoly is to, you know, get the other guy, poker, you know, kill him, get him, chess.

477
00:54:31.420 --> 00:54:37.420
All these things where you have level playing fields are important if you want to have a good battle.

478
00:54:37.420 --> 00:54:51.420
I mean, not only does the playing field have to be leveled but you have to change sides at the half time or whatever because the sun might be in someone's eye or who knows what or maybe the aura is different if you're into crystals or whatever.

479
00:54:51.420 --> 00:54:58.420
So you try to equate everything in sports and that's reasonable. Everyone wants a level playing field.

480
00:54:58.420 --> 00:55:08.420
The problem is when you try to take a thing that's appropriate in one area and you try to import it into another where it's not appropriate, you do great damage.

481
00:55:08.420 --> 00:55:14.420
I think what we want in the area of economics is an unlevel playing field.

482
00:55:14.420 --> 00:55:18.420
We want somebody with a great advantage against somebody with a disadvantage.

483
00:55:18.420 --> 00:55:25.420
Look, to get back to the bananas and the maple syrup, in bananas there was not a level playing field.

484
00:55:25.420 --> 00:55:30.420
Costa Rica had it all over Canada in terms of bananas. There was no level playing field.

485
00:55:30.420 --> 00:55:38.420
Any attempt to level the playing field, i.e. to make it so that it wasn't good for Canada to import bananas,

486
00:55:38.420 --> 00:55:43.420
would have violated the whole reason de et for the trade in the first place.

487
00:55:43.420 --> 00:55:52.420
What I'm trying to say is that while it makes sense to have a level playing field in sports, it's only fair,

488
00:55:52.420 --> 00:56:00.420
In trade, the very opposite is the case. What you don't want is a level playing field, because if it was a level playing field, there'd be no trade.

489
00:56:00.420 --> 00:56:06.420
But we want trade, I hope I've convinced you, certainly in the banana maple syrup case.

490
00:56:06.420 --> 00:56:14.420
So any attempt to level it up, I mean, you know, Costa Rica's got a great advantage. Costa Rica's over here. They're way up on bananas.

491
00:56:14.420 --> 00:56:20.420
So if you level that, there'd be no banana movement across barriers, and what good is that?

492
00:56:20.420 --> 00:56:26.420
So I reject the level playing field analogy, I think it's just nonsense.

493
00:56:26.420 --> 00:56:35.420
The next fallacy or the next objection, each of these objections is a fallacy because it's fallacious to object to free trade.

494
00:56:35.420 --> 00:56:38.420
The next one is dumping.

495
00:56:38.420 --> 00:56:42.420
When I first heard this one, I guess I must have been in high school,

496
00:56:42.420 --> 00:56:49.420
when I figured, you know, like the Japanese are dumping, I think it was the Germans that were dumping Volkswagens on us in those days,

497
00:56:49.420 --> 00:56:51.860
So I guess the Japanese can dump Hondas.

498
00:56:51.860 --> 00:56:52.860
And the way I picture it,

499
00:56:52.860 --> 00:56:54.980
I'm gonna get a cartoonist to draw this.

500
00:56:57.820 --> 00:57:00.260
The way I picture this is that this is a big airplane,

501
00:57:00.260 --> 00:57:02.260
you know, B-52, and it's got Hondas,

502
00:57:02.260 --> 00:57:04.580
and they sort of push the Hondas out at 50,000 feet

503
00:57:04.580 --> 00:57:05.780
and it drops on people.

504
00:57:05.780 --> 00:57:07.940
You know, people are running around

505
00:57:07.940 --> 00:57:09.460
worrying that they'll be dumped on

506
00:57:09.460 --> 00:57:12.340
and some car will crash out on top of them.

507
00:57:12.340 --> 00:57:13.740
Well, I mean, if that's dumping,

508
00:57:13.740 --> 00:57:15.100
well, you know, I'm against dumping.

509
00:57:15.100 --> 00:57:17.460
You know, it's violence, it's coercion,

510
00:57:17.460 --> 00:57:22.460
You know, instead of shooting bullets at us, they're shooting cars.

511
00:57:22.460 --> 00:57:27.460
You know, you get hit by a car from 50,000 feet and you're squashed.

512
00:57:27.460 --> 00:57:30.460
So if that's dumping, we're against that.

513
00:57:30.460 --> 00:57:36.460
But see, what they're doing is they're trading in on a word that evokes such a picture.

514
00:57:36.460 --> 00:57:41.460
But what they're really doing is they're saying, hey, fellas, you know, the cars that you're making,

515
00:57:41.460 --> 00:57:46.460
they cost 10, 20,000 dollars, we'll give you the same car for 5,000.

516
00:57:46.460 --> 00:57:53.460
for a better one for $10,000 or $15,000, and the Americans are scurrying, yes, yes, we want to get it.

517
00:57:53.460 --> 00:57:57.460
That's not dumping.

518
00:57:57.460 --> 00:58:03.460
Another objection is that what they're doing is they're charging below cost pricing.

519
00:58:03.460 --> 00:58:09.460
In other words, it really costs them $10,000 to make the car, and they're selling it to us for $5,000.

520
00:58:09.460 --> 00:58:15.460
Well, if they're such idiots, why not take advantage of them?

521
00:58:15.460 --> 00:58:23.460
But then the claim is that there's this nefarious scheme. What they'll do is first they'll charge us $5,000 for a $10,000 car.

522
00:58:23.460 --> 00:58:29.460
They'll knock our production out of the box. They'll raise it to $0.15.

523
00:58:29.460 --> 00:58:31.460
Chris?

524
00:58:31.460 --> 00:58:36.460
In that argument, I've heard something about that, about the Lexus.

525
00:58:36.460 --> 00:58:37.460
The Lexus, yeah.

526
00:58:37.460 --> 00:58:42.460
I think GM was complaining they took the car and they tried to reassemble it.

527
00:58:42.460 --> 00:58:47.460
Could you take his picture while he's smiling?

528
00:58:50.460 --> 00:58:52.460
Look at me, I just think you want it.

529
00:58:52.460 --> 00:58:58.460
No, and GM tried to reassemble it, and it was worth, and I guess they're charging $48,000 for this car,

530
00:58:58.460 --> 00:59:02.460
and GM said they can't make it for less than $60,000 in the best conditions,

531
00:59:02.460 --> 00:59:13.460
and Jim's crying that, who makes it, Toyota, is making Lexus for, as being, what do they call it, predatory?

532
00:59:13.460 --> 00:59:16.460
Predatory pricing or below-cost pricing or whatever.

533
00:59:16.460 --> 00:59:17.460
It's not fair.

534
00:59:17.460 --> 00:59:18.460
Only fair competition.

535
00:59:18.460 --> 00:59:22.460
People are struggling to buy the car though because it's almost as good as a Mercedes and it is so much cheaper.

536
00:59:22.460 --> 00:59:23.460
Right.

537
00:59:23.460 --> 00:59:25.460
Aren't those Japanese a bunch of rats?

538
00:59:25.460 --> 00:59:28.460
Imagine, it cost them 60, now it's certainly...

539
00:59:28.460 --> 00:59:33.460
Keep your eye on whoever is talking.

540
00:59:33.460 --> 00:59:37.460
They're a bunch of rats. They're a bunch of fakes. They're a bunch of bad guys.

541
00:59:37.460 --> 00:59:41.460
Look at what they're doing. It cost them $60,000 to make this car.

542
00:59:41.460 --> 00:59:45.460
Now I'm assuming that this is correct. I don't know.

543
00:59:45.460 --> 00:59:49.460
But let's suppose it is. It cost them $60,000.

544
00:59:49.460 --> 00:59:53.460
I don't really believe it's true because it implies that the Japanese are idiots.

545
00:59:53.460 --> 00:59:55.460
But let's suppose it's true.

546
00:59:55.460 --> 01:00:08.460
The cost of $60,000 to make this Mercedes quality car, they're selling it to us for $48,000, so we're going in and sort of mindlessly buying these things.

547
01:00:08.460 --> 01:00:24.460
Well, that's sort of stupid. They lose $12,000 per shot. It only makes sense if what they're going to do after they drive us out of business is make it $100,000 for a $60,000 car.

548
01:00:24.460 --> 01:00:28.460
There are so many problems with this, one hardly knows where to begin.

549
01:00:28.460 --> 01:00:33.460
This is the predatory pricing model or the local price cutting model.

550
01:00:33.460 --> 01:00:37.460
You see, the Japanese are going to lose money hand over fist doing this.

551
01:00:37.460 --> 01:00:42.460
I mean, their whole fortune will be dissipated and all GM has to do is close down temporarily,

552
01:00:42.460 --> 01:00:45.460
leave those factories intact.

553
01:00:45.460 --> 01:00:49.460
Then as soon as the Japanese raise the price to $80,000 or $100,000,

554
01:00:49.460 --> 01:00:52.460
let's say the US can reduce it to $60,000,

555
01:00:52.460 --> 01:01:10.460
Well, then we go back into business. So for three years, the Japanese drive themselves crazy. They give us vast millions of dollars of treasure, and then they try to pull this fast one on us and we say, forget it, you yellow menace, we'll stop you, to be racist about it.

556
01:01:10.460 --> 01:01:14.460
I think that this is just imbecilic.

557
01:01:14.460 --> 01:01:17.460
Nobody makes money by...

558
01:01:17.460 --> 01:01:19.460
Yes, yes, there are lost leaders.

559
01:01:19.460 --> 01:01:26.460
You know, you go into their grocery store and they say they'll sell you a quart of milk for half price, but one to a customer.

560
01:01:26.460 --> 01:01:29.460
They figure once you're in the place, you'll buy some other things.

561
01:01:29.460 --> 01:01:31.460
That's okay.

562
01:01:31.460 --> 01:01:33.460
But you can't do it that way.

563
01:01:33.460 --> 01:01:39.460
I mean, you know, if they were really doing it, what they should do, if you wanted to make it sensible,

564
01:01:39.460 --> 01:01:42.500
They should make it like a lottery, instead of one to a customer.

565
01:01:42.500 --> 01:01:45.180
Well, everyone can afford one bottle of milk.

566
01:01:45.180 --> 01:01:48.380
You can't afford to give $12,000, one to a customer.

567
01:01:48.380 --> 01:01:51.100
No, you can't have a six-pack of lexuses.

568
01:01:51.100 --> 01:01:52.100
You can only have one.

569
01:01:52.100 --> 01:01:53.100
That wouldn't work.

570
01:01:54.420 --> 01:01:56.500
What they could do is have a lottery.

571
01:01:56.500 --> 01:02:01.300
They'll say, well, we'll sell one $60,000 car for $48,000,

572
01:02:01.300 --> 01:02:03.260
and the lucky winner will be,

573
01:02:03.260 --> 01:02:05.900
and that's a way of getting publicity.

574
01:02:05.900 --> 01:02:08.580
But what the contention is is very different.

575
01:02:08.580 --> 01:02:11.020
and I think the contention is completely fallacious.

576
01:02:16.020 --> 01:02:17.580
So we went on with dumping.

577
01:02:18.540 --> 01:02:20.680
Let me give you another cartoon now.

578
01:02:25.300 --> 01:02:27.780
You can see Uncle Sam with a top hat.

579
01:02:30.180 --> 01:02:33.100
And the Canadian representative has got

580
01:02:33.100 --> 01:02:35.740
reindeer antlers on his head.

581
01:02:35.740 --> 01:02:41.740
Anything to make Canadians look ridiculous in dealing with the U.S. Colossus.

582
01:02:41.740 --> 01:02:45.740
It's funny, like here in the U.S. we feel hard done by by the Japanese.

583
01:02:45.740 --> 01:02:50.740
We're a country of what, 270 million? They've only got 90 million?

584
01:02:50.740 --> 01:02:54.740
It's much more reasonable in Canada that they feel hard done by by the U.S.

585
01:02:54.740 --> 01:03:01.740
You know, that the expression is, the U.S. sneezes and Canada catches cold.

586
01:03:01.740 --> 01:03:18.740
Another one is this joke where there's this elephant and a mouse, and the mouse is sitting on the elephant's back and they walk over the bridge, and the bridge sways, and then the mouse says to the elephant, boy, we made that bridge sway, didn't we? Mainly the elephant.

587
01:03:18.740 --> 01:03:28.740
So it says here, agreed, Canada will corner the market in hand-carved high-deck chess pieces and boards while the U.S. controls oil.

588
01:03:28.740 --> 01:03:32.740
Oil is better than chess pieces.

589
01:03:32.740 --> 01:03:35.740
Okay, another objection that was voiced...

590
01:03:35.740 --> 01:03:40.740
Well, I guess, I don't know, some jokes are funny, some aren't.

591
01:03:40.740 --> 01:03:47.740
I think I'm the world's worst joke teller, but it's probably good that I try.

592
01:03:47.740 --> 01:03:53.740
If you hate it, you know, if you sign a petition, no more jokes and I'll try not to.

593
01:03:53.740 --> 01:04:03.740
Political integration. Another fear of Canadians is that they'll be gobbled up, not only economically speaking, but politically speaking.

594
01:04:03.740 --> 01:04:09.740
Now remember, I don't think it's possible to be gobbled up, economically speaking, because trade is mutually beneficial.

595
01:04:09.740 --> 01:04:14.740
It's not a rape, it's not a murder, it's not a theft, it's mutuality.

596
01:04:14.740 --> 01:04:30.740
But the idea here was that if Canada engaged in a free trade agreement with the U.S., then eventually Canada would become part of the U.S., you know, maybe three states. Canada would come in as three U.S. states.

597
01:04:30.740 --> 01:04:40.740
My answer to that is that anytime the US wants to take Canada over in naked states, it can do it militarily.

598
01:04:40.740 --> 01:04:47.740
They don't need to engage in integration of economics. I mean, the US is stronger than Canada.

599
01:04:47.740 --> 01:04:51.740
If they wanted to conquer Canada, Canadians couldn't stop.

600
01:04:51.740 --> 01:04:58.740
Canada really doesn't have much of an army or an air force or a navy. I think they've got a few row boats and that's about it.

601
01:04:58.740 --> 01:05:28.740
So, you know, all they have is police, you know, the Vancouver police, the Toronto police, but they have no army worth, I mean, even the mother of all battles, Saddam Hussein probably could have conquered, well, maybe not, because we've got the technology, but certainly the US could take over politically, so there's no reason to take over economically, even if taking over economically was a coherent phrase, which is not, but then there are other examples that show the,

602
01:05:28.740 --> 01:05:58.740
The case where you have economic integration without any political integration, for example, the EEC, the European Economic Community, you've had lots of big countries, you see the fear is that the US is very big and Canada is very small, but Great Britain, France and West Germany were gigantic compared to Liechtenstein, Portugal and Belgium, Netherlands and Luxembourg, and yet there's no political integration, there's just economic integration so far.

603
01:05:58.740 --> 01:06:06.740
is the, what are those countries of North Sweden, what are they called? Scandinavian countries.

604
01:06:06.740 --> 01:06:14.740
I don't know why I keep losing words, I guess it's brain dead or something.

605
01:06:14.740 --> 01:06:21.740
Sweden is much bigger than Norway and Finland and Norway and Finland are way bigger than Iceland

606
01:06:21.740 --> 01:06:26.740
and yet the Scandinavian free trade zone has been in operation for decades

607
01:06:26.740 --> 01:06:30.020
and there's been no movement toward political integration.

608
01:06:30.020 --> 01:06:32.900
It's Alzheimer's disease, that's what I'm getting.

609
01:06:32.900 --> 01:06:35.020
Look, you laugh now, but, you know,

610
01:06:35.020 --> 01:06:37.300
they're like, oh, it's time, you know.

611
01:06:37.300 --> 01:06:40.700
Not only does the physical body deteriorate,

612
01:06:40.700 --> 01:06:42.140
but everything else does too.

613
01:06:43.820 --> 01:06:45.780
I would go so far as to say that there's no case

614
01:06:45.780 --> 01:06:48.340
in the history of the world where economic integration

615
01:06:48.340 --> 01:06:50.220
led to political integration.

616
01:06:50.220 --> 01:06:52.820
The usual way of political integration is conquest,

617
01:06:52.820 --> 01:06:56.380
or voting, but economic integration has got to do it.

618
01:06:56.740 --> 01:07:11.740
Another one is that tariff protection can be justified on monopoly grounds. A large country can act like a monopolist or a monophsonist. A monophsonist is a single buyer, a monopolist is a single seller.

619
01:07:11.740 --> 01:07:28.740
This is technically correct, that there could be a case, there's a specialized literature in economics that shows that on certain conditions, if the big government or big country acts monopolistically,

620
01:07:28.740 --> 01:07:34.740
and whether we're going to the small country or countries, it can reap certain monopolistic privileges.

621
01:07:34.740 --> 01:07:47.740
Well, I have two objections to this. One, I don't go for the argument at all. But to go into that, I have to give you a whole hour's lecture on why I think that the monopoly arguments or the arguments for antitrust are wrong.

622
01:07:47.740 --> 01:07:59.740
I won't do that. I'll assume just for the moment that it's right, that under certain technical conditions, the country could act like a monopolist. But still, there are problems with this.

623
01:07:59.740 --> 01:08:11.740
First of all, it's incompatible with our only antitrust law. We have an antitrust law in the United States that prohibits companies from doing this.

624
01:08:11.740 --> 01:08:21.740
So the argument in favor of tariffs would make the government get into the monopoly business, which is certainly morally questionable.

625
01:08:21.740 --> 01:08:27.300
Secondly, it assumes that government can plan its way out of paperback, that government

626
01:08:27.300 --> 01:08:33.100
intervention is economically viable. Yet if we learn anything from the debacle of the

627
01:08:33.100 --> 01:08:42.100
Soviet society, we learn that government can't really plan. It might conceivably work under

628
01:08:42.100 --> 01:08:46.900
the best conditions, but the reality is that there'll be log rolling and special interests,

629
01:08:46.900 --> 01:08:53.900
and that's the way the antitrust will work, not in the hands of these technically correct economic arguments.

630
01:08:53.900 --> 01:09:02.900
Now I want to give you a good cartoon. This doesn't come from the book, but it's a great cartoon.

631
01:09:02.900 --> 01:09:11.900
The depiction here is that this is Mr. and Mrs. Average Canadian. They watch Bill Cosby on Sony TV.

632
01:09:11.900 --> 01:09:17.980
TV. Now remember, Bill Cosby is bad because he's a nerd. We're in Canada now. And Sony

633
01:09:17.980 --> 01:09:24.300
is bad because it's Japanese. He eats Big Macs, Kentucky Fried Chicken and Chinese takeout.

634
01:09:24.300 --> 01:09:30.100
He wears Levi's and Calvin Klein's, which is the US. He walks in English Wallabies with

635
01:09:30.100 --> 01:09:35.500
his Siberian Husky, again from another country than Canada. He drives a Honda. He sits on

636
01:09:35.500 --> 01:09:41.580
Scandinavian furniture. He drinks Bud Coke or Pepsi, which is from the US. And he thinks

637
01:09:41.580 --> 01:09:52.580
Why is it that free trade will destroy the unique Canadian identity?

638
01:09:52.580 --> 01:09:57.580
The next one is the Infant Industries Argument.

639
01:09:57.580 --> 01:10:04.580
The Infant Industries Argument was promulgated by, oh, what's his name, a bad guy in American history.

640
01:10:04.580 --> 01:10:06.580
I should have this in my notes.

641
01:10:06.580 --> 01:10:16.580
That's it. You have to poo and hiss whenever you hear the name Alexander Hamilton. He's just the evil incarnate.

642
01:10:16.580 --> 01:10:25.580
He was the one that was in favor of the first tariff policy in the U.S. back in 1790 or 1805 or something.

643
01:10:25.580 --> 01:10:32.580
A little week on history. His idea was, yes, yes, the British, they were the bad guys in those days.

644
01:10:32.580 --> 01:10:57.580
We Americans can't compete, but what we'll do, for 20 years or so, is we'll have protective tariffs, that is, not protecting the consumer in America, but rather the producer in America, and we'll let them hide behind tariff walls until they grow up out of their infancy and then they'll be able to take on the big bad brits.

645
01:10:57.580 --> 01:11:04.580
Well, these infants have a way of lasting for hundreds of years in their infancy.

646
01:11:04.580 --> 01:11:07.580
You know, if you let infants crawl around, they never grow up.

647
01:11:07.580 --> 01:11:09.580
You have to eventually tell them to shape up.

648
01:11:09.580 --> 01:11:11.580
So that's one problem.

649
01:11:11.580 --> 01:11:17.580
You get textiles, you get shoes, which have been infants for hundreds of years.

650
01:11:17.580 --> 01:11:19.580
Now, when does this infancy end?

651
01:11:19.580 --> 01:11:25.580
But on a more radical level, you can object to the infant industry argument on the grounds

652
01:11:25.580 --> 01:11:36.580
And it turns out that in the initial period, the consumers lose and the manufacturers gain vast profits.

653
01:11:36.580 --> 01:11:46.580
Eventually, assuming that this is correct, that the infant will grow up, then he'll make profits because he's now a grown-up manufacturer.

654
01:11:46.580 --> 01:11:49.580
In other words, let's assume that the infant industry argument was correct.

655
01:11:49.580 --> 01:11:53.580
I try to say that it's not, that the infants last 100 years, but suppose it were.

656
01:11:53.580 --> 01:11:58.580
Suppose Alexander Hamilton just did it for 20 years and then he let them cut them a draft.

657
01:11:58.580 --> 01:12:05.580
But every industry, every firm, when it starts up, is an infant, that is, it loses money.

658
01:12:05.580 --> 01:12:13.580
You open an ice cream store or a hot dog stand and before you've opened up on day one, you've already lost money.

659
01:12:13.580 --> 01:12:17.580
And you know what that's called? It's called investment.

660
01:12:17.580 --> 01:12:23.580
And the presumption is that in the initial period you invest, you lose, and then later on you gain.

661
01:12:23.580 --> 01:12:26.580
Well, look at what the infant industry argument does.

662
01:12:26.580 --> 01:12:33.580
It says initially, instead of you investing Mr. Manufacturer or Mrs. Manufacturer, we'll do the investing for you.

663
01:12:33.580 --> 01:12:36.580
And then when it succeeds, you keep the money.

664
01:12:36.580 --> 01:12:39.580
What kind of nonsense is that? That's not the free market system.

665
01:12:39.580 --> 01:12:45.580
The free market system is that he or she who wants to open an enterprise, they pay the investment.

666
01:12:45.580 --> 01:12:50.580
Alexander Hamilton is going to pay it for him with taxpayer money.

667
01:12:50.580 --> 01:13:02.580
So even if the infinite industry argument were correct, which it's not, it still doesn't apply.

668
01:13:02.580 --> 01:13:10.580
I have a few other things that are mainly Canadian, but I've only got a few minutes.

669
01:13:10.580 --> 01:13:20.580
So I want to summarize. Oh yes, the Canadian culture. I've got to tell you about Canadian culture.

670
01:13:20.580 --> 01:13:29.580
See, the argument there is that if we allow free trade, then all the indigenous Canadian culture will be swamped by U.S. culture.

671
01:13:29.580 --> 01:13:36.580
And what they have there is special laws, Canadian content laws on TV. Canadian TV is very boring.

672
01:13:36.580 --> 01:13:42.580
You've either got US good shows or you've got the most boring crap imaginable that nobody wants to watch.

673
01:13:42.580 --> 01:13:45.580
That's the Canadian content laws.

674
01:13:45.580 --> 01:13:51.580
I mean, look, Canada isn't really much bigger population-wise than Ohio and Indiana.

675
01:13:51.580 --> 01:13:56.580
You know, it's got about 20 million people, no, maybe 26 million people.

676
01:13:56.580 --> 01:14:03.580
To expect Canada to be a world's leading expert in everything is akin to expecting Ohio and Indiana

677
01:14:03.580 --> 01:14:07.580
and Pennsylvania State to be a world leader in everything.

678
01:14:07.580 --> 01:14:17.580
Canada has some good actors and movie stars and musical artists and artists,

679
01:14:17.580 --> 01:14:23.580
but not as many as would keep all Canadian customers satisfied.

680
01:14:23.580 --> 01:14:30.580
Canadians want to watch Elvis Presley and Archie Bunker and the dynasty and all those TV shows.

681
01:14:30.580 --> 01:14:59.580
Another problem with this cultural protectionism is that Mozart and Bach were not Canadians, they weren't even Americans, they were bloody Europeans, so if we're going to really have a cultural imperialistic policy of not allowing any culture to affect the pure Canadian version, we've got to get rid of Mozart and Bach, who I happen to like, and I'm sort of against it on that ground.

682
01:14:59.580 --> 01:15:08.580
Another problem is that there's no demonstration that there's any indigenous Canadian culture, because all of it is subsidized by the government.

683
01:15:08.580 --> 01:15:15.580
The only culture, as far as I'm concerned, that makes any sense, is culture that people are willing to put cash down on the barrel head for.

684
01:15:15.580 --> 01:15:25.580
In Canada, very little of that is done. Most of it is just welfare recipients who draw pictures that nobody wants to watch.

685
01:15:25.580 --> 01:15:35.580
Well, we're lucky we don't have it in this country, so you can sort of laugh at it, but we have equivalents, you know.

686
01:15:35.580 --> 01:15:41.580
See, we have a, what do they call it, corporate welfare bonds.

687
01:15:41.580 --> 01:15:49.580
We have companies that go down to Washington or go to Boston and get thousands or millions of dollars to do stuff that nobody wants to pay them for.

688
01:15:49.580 --> 01:15:57.580
In conclusion, the alternative is before us with the free trade, with this election, a small step toward free trade,

689
01:15:57.580 --> 01:16:02.580
where we stick our head in the sand like an ostrich and we let the world go by.

690
01:16:02.580 --> 01:16:08.580
I think that it's a mistake to open up stores that say that they're Canadian, that they're U.S. stores.

691
01:16:08.580 --> 01:16:11.580
It's a mistake for companies not to buy from Japan.

692
01:16:11.580 --> 01:16:17.580
It's a mistake for companies to give bonuses to people that buy American cars.

693
01:16:17.580 --> 01:16:24.580
It's a mistake for gasoline filling stations to make cheaper gas if you have a U.S. car.

694
01:16:24.580 --> 01:16:27.580
It's very hard to tell what a U.S. car is nowadays anyway.

695
01:16:27.580 --> 01:16:29.580
Half the parts are made elsewhere.

696
01:16:29.580 --> 01:16:32.580
And then the Hondas and Toyotas are made in this country.

697
01:16:32.580 --> 01:16:35.580
So it's just silly and imbecilic.

698
01:16:35.580 --> 01:16:39.580
And that's an all-free trade.

699
01:16:39.580 --> 01:16:41.580
So read the Hazlip.

700
01:16:41.580 --> 01:16:43.580
Brian?

701
01:16:43.580 --> 01:16:45.580
We're out of time.

702
01:16:45.580 --> 01:16:47.580
I'll see you there.