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Economic Ignorance on Steroids

Here’s a letter to the Daily Reckoning:

Editor:

If James Rickards’s aim in writing “Tariffs: As American As Apple Pie” (May 15) was to set a record for the greatest number of fallacies crammed into a single op-ed, he’s earned a gold medal.

Without the space of a full op-ed, I here mention only two of Rickards’s howlers.

First, Rickards reveals his complete misunderstanding of the principle of comparative advantage when he asserts that this principle is proven to be incorrect by the fact that the Japanese export goods such as automobiles and steel rather than tuna fish. Contrary to Rickards’s cartoonish portrayal, a producer’s comparative advantage is never determined exclusively – and in many cases not chiefly or even at all – by the natural resources that happen to be abundant in the producer’s vicinity.

Second, Rickards mistakes correlation with causation. It’s true that the American economy grew spectacularly during the 19thcentury. It’s true also that Uncle Sam back then often imposed crushing punitive taxes on Americans who bought imports. But it’s untrue that the latter caused the former.

During this time, immigration was largely open and American governments’ overall involvement in the economy was much less than it is today. Because economic theory is clear that growth is much more likely to be fueled by an increasing abundance of the ultimate resource – human minds and effort operating in markets mostly free and only lightly taxed – than by tariffs and other policies that artificially increase scarcity, we can be confident that the features of 19th-century America that promoted economic growth were not tariffs but, instead, open immigration, limited government, and a widespread acceptance of the creative destruction unleashed by entrepreneurship.

Readers who want further evidence against Rickards’s claim can consult Dartmouth economist Doug Irwin’s findings that (quoting Irwin): “(i) late nineteenth century growth hinged more on population expansion and capital accumulation than on productivity growth; (ii) tariffs may have discouraged capital accumulation by raising the price of imported capital goods; (iii) productivity growth was most rapid in non-traded sectors (such as utilities and services) whose performance was not directly related to the tariff.”

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

(I thank Roger Meiners for alerting me to Rickards’s essay.)

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