Mises Daily

Why Economic Dependence on Others Is a Good Thing

Daily article february 18 2015

In public policy discussions, the words independence and dependence make frequent appearances. Given that American political ideology has in many ways been defined by the Declaration of Independence, Americans naturally think of independence as good and dependence as bad. As a consequence, arguments to implement government policies to reduce our dependence on others — dependence on “foreign oil” being the most common current manifestation — often find a receptive audience.

Unfortunately, our understanding of dependence and independence in political and economic contexts is confused.

Economic Dependence Is Limited by the Availability of Other Choices

Economic dependence is not the same as political dependence. Say that you wanted to buy widgets and sell them in your store. Assume that the best offer you received to supply the widgets was $3, and the next best offer was $5. The freedom to choose the lower-cost option is economic independence. Which ever supplier you choose, you become economically dependent on that supplier, in this case, the lower-cost supplier. Let’s say the supplier of the $5 widget has a sterling reputation for delivering quality widgets, and on time. But you choose the supplier with the $3 widget, taking the risk that the supply of widgets won’t be interrupted, the cost won’t change, or he stops selling to you altogether. You become dependent on that seller’s choices (concerning his own business operations), and his continued willingness to sell to you at the original price. The potential harm or risk to you is the $2 difference between the best offer and the next best offer.

In other words, economic independence — the power to choose among offers — will typically coincide with you becoming dependent, to some degree, on the exchange partner you choose. In this case, you accept the risk that you could be harmed by changes to the original agreement (a willing offer).

It is important, however, to understand the limits on potential harm. When arrangements are voluntary, the availability of other willing offers places an upper limit on damages from dependence on a particular trading partner. In our example, if $3 widgets disappear, you can turn to the seller of $5 widgets. Thanks to economic independence, an alternative is available, and the harm has been limited to that $2 difference between the two types of widgets. To that extent, the potential “damage” is the extent to which the current gains you are getting from a partnership — relative to your alternatives — may be reduced or eliminated in the future. If one remains free to choose among competitors, however, the availability of voluntary arrangements with others (i.e., competitors) guarantees that there will be no “harm” beyond that.

Political Dependence Is Not About Choice, But Coercion

Dependence on government stands in sharp contrast to economic dependence. Since governments have the power to coerce you, they can take away options that others would willingly offer you. And not only can they take away the best options you have, they can also take away the alternatives that would protect you from harm in voluntary arrangements. That is, they can take away everything. As Barry Goldwater memorably put it, “A government big enough to give you everything you want is big enough to take everything you have.”

Dependence Is Fine, If Voluntary

So given that economic independence is perfectly consistent with voluntary dependence on trading partners who benefit us the most, the important choice is not between independence and dependence. The real choice we face is between the dependence that results from voluntary arrangement and the dependence that results from government control.

“Oil Independence” and Other Fallacies

It is also important to note that dependence arguments, such as “reducing our dependence on foreign oil,” are generally misleading excuses for imposing political restrictions that harm citizens. For example, protectionism that is sold as a choice between “good” American producers and “evil” foreigners ignores the fact that we deal with those foreigners because they make us better off than our domestic alternatives. And taking those superior options away can seriously harm Americans. A better way to view the results of this argument is as a conspiracy between American producers and the American government to harm American consumers and the foreign suppliers that most benefit them.

Finally, we must question the way dependence arguments are usually framed — as if it is never a problem to depend on other Americans, but always at least a potential problem to depend on foreigners. Do we really trust other Americans that much? If so, why do we have so many laws and prisons to deter our neighbors from harming us? The fact is, the best thing we can do to facilitate trust in our domestic neighbors is denying them the ability to coerce us. But that same defense of our self-ownership would equally allow us to trust non-American trading partners, as well. In contrast, the damaging power of government coercion that is repeatedly employed in the service of some, while necessarily harming others, puts us almost totally at our rulers’ mercy, while giving us very little reason to trust them.

Image source: iStockphoto.
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