French economist Frédéric Bastiat, in his 1850 essay “The Balance of Trade” (#13 in “Selected Essays on Political Economy” attempts to debunk the mercantilist view of François Mauguin who prefers that their nation of France exports more than it imports. However, once we unpack the clever packaging of Bastiat’s narrative, we find that he gives support to the ideas he aimed to dismantle.
Bastiat recounts the tale of two business transactions: wine from Bordeaux to Liverpool, and coal from Liverpool to Bordeaux. Bastiat is pleased to make a profit of 40 francs (40F) on the two transactions, and thus decries Mauguin for mourning the excess of imports of exports.
But let us look a bit more closely at these deals. The following diagram records the four transactions mentioned in Bastiat’s tale.
| England (Liverpool) | Bastiat | France(Bordeaux) | ||
| 50F | ——-> | wine seller | ||
| wine | <—— | |||
| Wine buyer | <——– | wine | ||
| ——–> | 70F | |||
| Coal seller | ———> | coal | ||
| <——— | 70F | |||
| coal | ———> | coal buyer | ||
| 90F | <——— |
We can see that Bastiat starts with 50F and no commodities, and ends up with 90F and no commodities. He has clearly made a profit of 40F minus his transportation costs. Good for him! C’est bon!
Turning then, to consider the balance of trade for England, we find that the merchants of Liverpool valued the wine and coal equally. Both were considered to be worth 70F in Liverpool, so England traded some coal for some wine. England appears to have broken even on this deal. No gain. No loss.
Now let us consider the balance of trade for France, but excluding Bastiat himself. At Bordeaux, wine and coal are not valued equally: coal is more valued at 90F while wine is only valued at 50F. The traders of Bordeaux were presumably content to have traded at these prices, as reflecting their perceived valuation of the commodities.
But we know that both wine and coal can be had for 70F at Liverpool, and little prevents any Frenchman from replicating the trades made by Bastiat. So we might legitimately think the people of France are out of pocket to have paid 90F and only received 50F to swap wine for coal. France has indeed lost 40F across these trades, and the customhouse of Bordeaux has accurately recorded the loss.
Let’s see what happens when Bastiat is included as part of the accounting of France.
We can now ignore the trades between Bastiat and the Bordeaux traders, because these are all within the realm of France. At Liverpool, the realm of France has paid 70F and received 70F, and swapped wine for coal, where those commodities are the same price. So France including Bastiat has actually broken even. The profit of Bastiat has offset the loss of France.
What happens if Bastiat is instead reckoned as an Englishman? From the perspective of England (including Bastiat) the realm has paid out 40F and received 90F and swapped wine for coal (which are of equal value according to the prices in England at Liverpool. England plus Bastiat has now made a profit of 40F, the same amount that France lost, when France was reckoned without Bastiat.
There is no combination here where France makes a profit. The profit is either reckoned to England or to Bastiat himself, depending upon whether Bastiat is considered an Englishman or not.
Therefore it appears that Mauguin is correct to decry an excess of imports over exports, and Bastiat is wrong to defend it.
Note 1: Bastiat omits to figure in the cost of transportation between Liverpool and Bordeaux. Depending on whether the owners of the boat are French or English, some proportion of the 40F profit ends up with the boat owners and thus with their home nation. I think we can assume those transportation costs to be less than the 40F which Bastiat notes as his profit, otherwise why would he be making these trades at all? That his reported 40F profit is exactly the same as the price differences, suggests the transportation cost is close enough to zero to be negligible, perhaps just the cost of one crate on a large ship.
Note 2: But that then begs the question as to why the prices of wine and coal are so different between France and England. In a free market, other entrepreneurs should be chartering ships between Bordeaux and Liverpool, bidding up the price of wine in Bordeaux and undercutting the price of coal. The differential in prices ought to be eroded until it matches the cost of transportation.
Another explanation of the enduring price differentials between Bordeaux and Liverpool might be there is a risk of loss of the ship at sea, presumably causing loss of the goods.
RJ7: March 2021