The Lincoln Fallacy

THE LINCOLN FALLACY

For centuries, professors and politicians have debated the wisdom of allowing foreign producers to sell their goods on equal footing with domestic producers. To free trade advocates, limiting consumer choice to domestically produced goods is a violation of free market principles and the spirit of competition. But many other groups see free trade as the selling-out of our fellow citizens. Buying foreign goods, they say, sends our jobs and hard-earned money to foreign nations, building their economies by tearing down ours. This timeless argument seems to surface with each new political cycle and is as appealing today as it was when Abraham Lincoln endorsed it in his characteristically direct fashion: "I know this much. When we buy manufactured goods abroad, we get the goods and the foreigner gets the money. When we buy the manufactured goods at home, we get both the goods and the money." To the trained eye, Lincoln's argument is conspicuously and dangerously flawed. But how many college graduates, or Congresspersons for that matter, would disagree with Lincoln's logic and understand why they should?

Like most misleading arguments, Lincoln's case against free trade is true in and of itself, but it is also incomplete. It's true that buying domestic goods keeps our money in the country whereas buying foreign goods sends our money abroad. But this is only part of the story. The key to the fallacy involves something Lincoln overlooked: the resources used to produce the goods. When we buy goods produced domestically, some local resources must be used: the labor, the materials, and a physical location. But, when we buy goods from abroad, foreign resources are used, leaving the domestic resources that would have been used in production at home free to be used to make something else. In other words, buying from abroad frees up resources that can be used in a more productive manner, leading to greater wealth for our country.

Adding this part of the story to Lincoln's argument renders a more complete comparison between buying domestic goods and buying foreign goods. The complete comparison could be phrased like this: "When we buy manufactured goods abroad we get the goods and we get to keep the resources that would have been used to make them and the foreigner gets the money. When we buy goods made at home, we get the goods and the money, but have to use up resources that could have been used to make other goods." And, if those freed resources are used in more productive industries, we'll have more goods to consume when we're open to international trade than we would if we were not. The same logic holds for our foreign trade partners, and so this argument implies that free trade makes all countries better off.

Essentially, the idea that free trade is better for everyone boils down to an argument for