Quotation of the Day…

by Don Boudreaux on May 22, 2015

in Crony Capitalism, Seen and Unseen, Work

… is from page 223 of the 5th edition (2015) of Thomas Sowell’s Basic Economics:

Just as businesses seek to have government impose tariffs on imported goods that compete with their own products, so labor unions use minimum wage laws as tariffs to force up the price of non-union labor that competes with their members for jobs.

Clever economists whose priors tell them that government generally intends (and largely, if imperfectly, actually manages) to promote the public interest by apolitically applying scientific economic theory can no doubt spin a logically coherent theory to explain that tariffs are really meant to correct for market imperfections.

Many real-world importers who buy goods from foreign sellers, after all, do not face perfectly elastic supply curves when purchasing from foreign sellers goods that are meant for resale in the home country.  These importers, therefore, are said by such economists to have monopsony power.  The result (as freshman econ students can easily explain with pen and paper) is that these importers pay prices that, when judged by the standards of a perfectly competitive market, are too low.

The same freshman econ students can also explain, using the same pen and paper, that a tariff can optimally raise the prices that importers pay for the goods they buy from foreign sellers over whom these importers exercise monopsony power.  Of course, in the case of a tariff the proceeds of the resulting higher prices go to the government and not to the foreign sellers who are victimized by the importers’ monopsony power.  But (explains the clever economist) that’s a mere distributional detail: “The fact is that because it is possible to explain tariffs as a social-engineering tool that is wielded by governments to raise the prices paid for imports up to their socially optimal levels – and, as a result, also to increase the quantities imported – we should conclude that this excellent purpose is the one that is actually served, or at least meant to be served, by real-world tariffs.”

The clever economist further explains:

This monopsony power is not the result of any phenomenon so obvious as a government-created exclusive privilege or of a market situation in which each importer happens to be literally the only buyer of the goods that he or she purchases.  Rather, the monopsony power is the result of ‘frictions’ that, sadly, are very common in the real world.  These frictions make it practically unlikely that any foreign seller who has had a commercial relationship with an importer will easily enough find other buyers for its wares if the importer refuses to pay prices for these wares that are as high as the importer should pay.  Such frictions – which free-market economists blindly ignore (these economists have a naive understanding of reality, thinking, as they do, that reality literally is explained completely by the first few chapters of an intro econ text!) – mean that, in the real world, importers will pay prices for foreign wares that are too low by the efficiency standards of sound economics.  Tariffs are simply meant to correct the ill-consequences of this monopsony power.  It is, therefore, wrong to allege that governments enact tariffs for any reasons so crass as to protect domestic producers from competition.


I wonder how many are the economists who believe that modern minimum-wage legislation is chiefly a justified and helpful response to real-world monopsony power also would entertain seriously the argument that tariffs are chiefly a justified and helpful response to real-world monopsony power.  I’ll bet not many (but I could lose this bet).


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