Can Protectionism/Scarcityism Encourage Industry?

Short answer: not likely

Long answer: Protectionists Scarcityists like to argue that protectionism is needed (or can otherwise) to encourage industry.  Foreign competitors use “unfair” practices to undermine the domestic industry and protectionism scarcityism is there to protect the industry from these shenanigans.  This, in turn, will foster more domestic investment and encourage industry.  But how likely is this to be?  Let’s take a look at the logic.

From a protected industry perspective, it is possible that scarcityist policies encourage some investment in that protected industry.  Domestic production increases (although this is merely a substitute for some of the imports and overall output decreases).  This increased production may encourage more investment, but it is hardly guaranteed to.  These protected industries are protected from competition, so there isn’t much incentive to invest and improve; they are output restrictors.

Enlarging our view to the economy as a whole, scarcityism is far more likely to reduce investment and industry.  As I pointed out above, scarcityism works because it reduces output, forcing prices to rise.  This necessarily means consumers have to spend more to achieve the same standard of living.  In turn, this means fewer savings and since savings are funds used for investment, this means less investment.*  Additionally, since imports are reduced, foreigners now have fewer dollars with which to buy exports or invest in the US economy.  Reduced savings, and thus reduced investment, comes from this area as well.

There are secondary effects of scarcityism as well.  Not only does it reduce overall output in an industry, it encourages the use of wasteful use of current resources.  The protected firms are using less efficient methods of production, which is eating up resources that could otherwise have been released for more valuable purposes.  This, in turn, means fewer resources for industry to use and grow.

In order for scarcityism to foster growth, it’d require an awful lot of luck and some highly specific conditions which are improbable in the real world.

*Note that this same logic holds even if consumers switch to a cheaper substitute for the now-more-expensive goods.

Today’s Quote of the Day…

…is from page 229 Karl Menger’s 1883 book Investigations into the Method of the Social Sciences, specifically Appendix VIII “The ‘Organic’ Origin of Law and the Exact Understanding Thereof” (original emphasis):

However, law can also come into being, and even under the most original conditions, in another way essentially different from the above: by authority. The man in power or intellectually superior can set certain limits to the discretion of the weak men subject to him or of those mentally inferior. The victor can set certain limits for the vanquished. He can impose on them certain rules for their action to which they have to submit, without considering their free conviction: from fear. These rules, however similar they appear on the surface to those of national law, are both by origin and by the guarantees of their realization essentially different from the law which grows out of the convictions of the population and the realization of which was also originally an affair of the nation. Indeed, they can be in direct contrast to national law; they are really statute, not law. But the strong man has an interest in calling them ”’law,” in cloaking them with the sanctity of law, in connecting them with religious  traditions, in elevating them so that they become the objects of religious and ethical education. This is the case until the habit of obedience and the sense of subjection developed by them recognize in them something analogous to law and until this habit and sense scarcely distinguish any longer those rules limiting the discretion of the individual which are produced by the convictions of the nation from those which power prescribes for the weak.

JMM: What Menger means here by “national law” is not some national convention or agreement (in fact, he explicitly rejects the “social contract origin” theory of law), but rather what is more akin to custom and tradition: something that evolved over time to serve a purpose (protect individual interests) and is widely accepted and respected by members of the society.

What Menger does in this paragraph is draw a distinction between “national law” (the subject of the essay thus far) with statutory law.  The primary difference is how these two are established: national law (which is properly called law) is established through human interaction.  Statutory law is established through authority (ie imposed).  The two have superficial similarities only.

This is not to say that statutory law is inherently less desirable that law.  What it is to say is that statutory law can become unhinged from morality, in which case we are faced with the Bastiat Dilemma: “When law and morality are in contradiction to each other, the citizen finds himself in the cruel alternative of either losing his moral sense, or of losing his respect for the law—two evils of equal magnitude, between which it would be difficult to choose.”  To treat statutory law as some “will of the people” or the object of some “divine intelligence” (to use Menger’s term elsewhere in the essay) is to fundamentally misunderstand law.

 

The Ad Hoc Nature of Protectionism

I want to clarify the purpose of my earlier post.  The questions are an attempt to get protectionists to formulate a theory of protectionism.  As it stands, protectionism is extremely ad hoc.  Justifications for various protectionist tariffs range all over the place and are often contradictory with one another.  This is true whether you read a free-market approach to questioning protectionism (eg Bastiat’s Economic Sophisms) or protectionist books themselves (eg James Steuart’s Principles of Political Oeconomy).  There’s no unified theory of protectionism, just ad hoc explanations given.

Indeed, we often see protectionism presented as an exception rather than a rule.  “Oh sure, free trade is great and all,” the protectionist will often say, “but when someone is unfair then protectionism is needed.”  Or some justification is given for protecting infant industries (which, by the way, is contradictory to the unfair argument).  Or some exception is given for national defense (which is contradictory to the unfair and infant industry argument).  The list goes on.  The protectionists set up protectionism as a series of exceptions rather than rules.  It is insufficiently general to be called a theory in any sense.

The few attempts to generalize protectionism revolves around a tragedy of the commons style argument.  My earlier questions are designed to address that assumption.  To argue that protectionism is sufficiently general as to be the rule, and free trade the exception, to US policy, protectionists need to justify their generalizations.  The first step is through answering the questions I posed.  I’ve not seen any satisfying attempts to answer those questions.

Some Questions for Protectionists

Protectionism is, by definition, state-action.  The argumentation is that trade with foreign nations make us worse off (with few exceptions) and we need to protect our industries in order to grow.  Protecting our industries, from unfair competition, from competition in general, whatever the reason, will make people better off than in free trade.  This claim, however, leads us to some questions:

1. Why is foreign trade a collective-action problem?  In other words, if people were actually made better off via protectionism, what is preventing them from acting in a manner to better themselves naturally?  Why is government needed?
   1. If there is a Prisoner’s Dilemma type situation or some other coordination problem, that doesn’t necessarily prevent a non-government solution from arising.  As Elinor Ostrom discusses in “Governing the Commons,” the Prisoner’s Dilemma is not an inescapable trap.  People can get out of it through various interactions with each other.  To justify government action, there’d need to be some barrier preventing people from getting to the socially optimal outcome point.  What are the barriers that prevent this from occurring?
2. Why is there a coordination issue at the international trade level but not the intranational trade level?  Protectionists never demand restrictions on intranational trade, preferring to let people act.  What is unique about intranational trade that allows for coordination that international trade does not?  In other words, why are people’s actions at the intranational level sufficient to generate overall prosperity but those exact same actions are insufficient, indeed detrimental, to overall prosperity at the international level?

A Difference Between Enforcement and Creation

At Cafe Hayek, Don Boudreaux links to his Freeman article from December 2003 on the source of rights.  Don’s article is excellent, but there is a subtlety that I think needs to be highlighted and discussed to prevent misunderstanding.

There is a difference between the enforcement of rights and the creation of rights.  Those who enforce are not necessarily the same as those who create.  For example, let’s say I create a business: I design the product, I market it, I sell it, etc.  However, to protect my business, I hire someone to patrol the grounds when I am not around.  While I created the business, she enforces my claim to the business.  It’d be incorrect to conclude that, because she enforces the claim, she thereby created the claim.  She was just chosen as the method of the enforcement; the claim (in this case, the business) preceded her.  Indeed, it had to.

The same is true of rights.  A government may be desirable to enforce and protect rights (like the nightwatchman in my example above), but those rights need to precede the enforcement.  So, the fact that an agency enforces something does not mean that it also creates.  Pointing to the government as an enforcer does nothing to show that it is the originator.

What’s the End-Goal?

Commenting on this blog post at Cafe Hayek, Donald Jansen writes:

Yes, yes, protectionism is evil. Still. The government needs revenue. Why are tariffs inferior to other taxation schemes? During the many decades of US history in which the tariff was the primary means of financing the US government, the federal government’s share of GDP consistently averaged 3%. Who would not gladly prefer those circumstances over what we have today?

Below is an extended response to him I left:

To the extent a government is desirable, it will need to be financed. To that end, you want a tax, whatever it be, that’ll maximize revenue while minimizing costs. In other words, you’d want the lowest tax rate possible to finance the government.

But note that an optimal tax is a fundamentally different beast than the tariff discussed here. Don is discussing protectionist tariffs, tariffs not meant to fund government but meant to control behavior. The “butwhatabouts” want tariffs to “protect” industry, not to finance government. They want it to achieve some goal different from finance. To that end, the tariff is more likely to be harmful than helpful (barring an extreme set of assumptions).

Understanding the end-goal of an action is important when it comes to discussing the action.  If the goal of a tariff is to fund government, then it will be radically different than a tariff meant to discourage imports.  The former will try to keep imports as high as possible.  The latter wants to keep them as low as possible.  While both beasts have similar names, they have quite disparate goals.  it makes no sense to object to the argument against a protective tariff by pointing out the theoretical benefits of an optimal tariff; it’s comparing apples and oranges.

 

A Politcal Survey (Guest Post)

What follows is a guest post by Brandon Marshall, a grad student at Stoney Brook:

My name is Brandon Marshall, and I’m a graduate student from Stony Brook University. I research political parties and partisan attitudes. I’ve recently begun a project on how people react to messages from political parties and other organizations, and as part of that project I’m gathering survey data from people who read and comment on political blogs. More information about the survey is on the consent form, but briefly it should take about 15-20 minutes and covers a variety of political attitudes. For anyone who is concerned, the information is anonymous and will be presented in aggregated form.

Click the link below to begin the survey:

https://stonybrookuniversity.co1.qualtrics.com/jfe/form/SV_bDvaFRlp0rmqYBf

Note: This study has been approved by Stony Brook University’s Institutional Review Board protecting research involving human subjects.

JMM: Please do take a few minutes to help a fellow grad student out.

A Tariff is a Tax on Domestic Manufacturers

At Cafe Hayek, Don Boudreaux makes an important point: if the comparative advantage of one industry is protected by tariffs, that necessarily means another industry’s comparative advantage is reduced.  While this makes logical and mathematical sense from the point of view of the theory, is it reflective of reality?  Yes:

Virtually all steel used in U.S. tire manufacturing must be imported, as domestic steel suppliers cannot meet volume and quality needs for this critical tire safety component. Thus any trade constraint could potentially have a cascading, negative impact on U.S. commerce nationwide, as the transportation industry depends on a reliable supply of tires to ship goods. Additionally, the U.S. military depends on the tire manufacturing industry to supply tires used to protect our national security.

The US tire manufacturing industry, as quoted above, as a consumer of steel would see their comparative advantage reduced, and thus their competitiveness reduced, due to import tariffs on steel.  Their costs rise, their competitiveness is thusly reduced.  All so US steel manufacturers can have potentially higher profits.

I think it’s worth noting that the tire industry is also an industry that feels threatened by imports and demanded tariffs, too.  So the steel industry tariffs would make this supposedly threatened industry even more threatened.

In short, you cannot Make America Great Again by taxing it into oblivion.

Today’s Quote of the Day…

…is from Armen Alchian’s 1950 address to the Pacific Coast Economic Association, as reprinted on page 635 of the Liberty Fund’s 2006 volume of Alchian’s work: Choice and Cost Under Uncertainty (emphasis added):

The real issue [of the debate about economic methodology and mathematical models] relates to the economic substance – the applicability to real economic problems, or what I call here economic validity – of the mathematical models.  And with regard to this, it is submitted here that the mathematical analysis reveals very clearly the true scope and structure of the analysis, thereby facilitating an evaluation of its economic validity.  One may well argue that the empirical invalidity, or unrealism, of so many mathematically expressed theories and hypotheses is simply a result of their clarity, which reveals quickly the applicability of the system, whereas in literary theorists it is difficult to make such an appraisal so readily.  In any event, the mathematical approach must not be treated as the new delivery truck was treated by the delivery man who became so absorbed in the operating characteristics of the truck that he neglected to deliver the goods.

JMM:  As is characteristic of Alchian, he delivers a lot of economic insight into a small area.  Mathematical models have an important role to serve in economics: they can sharpen our thinking by pointing out logical flaws in the reasoning.  They can help solidify the pattern predictions we make by testing them against real data.  But, as Alchian warns, we should not become so obsessed with the working of our models that we economists forget that our primary duty is to provide insight into economic matters.  If our models do not do that, then they are failing in their job, as are we.

Toward a New Classical Economics

Writing over at Hackernoon, Arnold Kling writes about a need to “overthrow neoclassical economics.”

Kling’s article rings of truth.  A lot of neoclassical economics, as it is taught and practiced, does tend to simply treat “labor” and “capital” as blobs and ignores the individual believes and attitudes of individuals.  People are reduced to “representative agents” or mere resource-allocators in the standard neoclassical framework.  Firms are treated as mere input-output machines that run by blobs of homogenous things known as “capital” and “labor.”

Kling proposes to insert the ideas of cultural evolution into economics, a proposal I am sympathetic to.  And, at one time, economists took this factor into account.  Adam Smith, David Ricardo, Frederic Bastiat, and many other of the classical economists knew you had to take into account people’s attitudes, desires, sympathies, etc and they acted on these.  Adam Smith’s Theory of Moral Sentiments is a proto-economic book and he discusses at length how our sympathies and morals, shaped and shaping those around us, affect our behavior.  Frederic Bastiat, in The Law and That Which is Seen and That Which is Unseen discuss the role of institutions and how people react to those institutional frameworks if they deviate from their moral foundations.

In a sense, Kling is correct.  We need to overthrow neoclassical economics.  I’d like to see it return, at least insofar as the assumptions concerning homo economicus goes, to its classical roots.