Here’s a letter to a new correspondent:
Insisting that Vernon Smith is “wrong that the optimal tariff is zero ,” you write that “theory is clear that the optimal tariff can often be a positive rate and if it is true that government practically can’t determine it [this optimal rate] that doesn’t mean that it is zero in theory.” You conclude by expressing disappointment that both Vernon and I “confuse theory with practice.”
I disagree. Precisely because tariffs are imposed by government officials – and because government officials are inescapably human, in both theory and practice – no sound theory of so-called “optimal tariffs” is possible if it ignores the limited knowledge and political incentives confronted by government officials. When these ever-present features of reality are taken into account, the optimal tariff is indeed, as Vernon insists, zero.
If your argument were correct, then, say, the optimal amount of property that I should steal from you is greater than zero. After all, it’s quite easy for some second-year PhD student with a bit of time on her hands to describe theoretical conditions under which my theft of some positive amount of property from you yields net social-welfare gains. Yet surely you would not dispute Vernon Smith (or anyone else) nevertheless saying that the optimal amount of my theft of your property is zero.
All human action is carried out in practice, never merely in theory. And in theory and practice this action is done, not by god-like creatures, but by human beings. To ignore this reality when the human beings in question possess political power is insupportable, in both theory and practice.
Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030