Perhaps the single most consequential, widespread misunderstanding about economic reality is that this reality is relatively simple – simple enough, at least, to be grasped, and hence mastered, by the human mind. But in fact this reality is unfathomably complex. (If you can think of a stronger word than “unfathomably,” please insert that word here in place of “unfathomably.” The result will still be an understatement.) The human mind cannot begin to hope to get its mind around the complexity of modern market processes.
This unfathomable complexity is the subject of my latest column for AIER. A slice:
In contrast, the human eye cannot see the full extent of the productive processes that make this cornucopia a reality. Indeed, this massive, ‘below-the-surface’ market activity is easy to deny or to trivialize. And it’s therefore tempting for those who are unhappy with what they see on the surface to demand that the surface phenomena be rearranged to be more pleasing to the unhappy complainers’ eyes.
But these unhappy complainers don’t realize that to knowingly meddle with that which is on the surface is to unknowingly meddle with far more; it’s to unknowingly yank on an uncountably large number of cords by which the surface phenomena are connected to the Everest of market processes beneath the surface.
Meddling with the surface phenomena causes these unseen cords to pull, twist, and rearrange in unpredictable ways many beneath-the-surface economic arrangements and processes. Among the simplest examples of such unseen pulling, twisting, and rearranging involves raising tariffs on imported steel in order to protect the jobs of today’s steelworkers or to better ensure supplies of a critical military input. Seems simple; and, indeed, it’s likely that such tariffs work – at least for a time – to ensure that more steel is produced domestically and, hence, to protect some steelworker jobs that would otherwise be made redundant by imports.
But peer beneath the surface. The higher tariffs on steel artificially raise the costs to other domestic producers of supplying the likes of precision tools, automobiles, home appliances, and office buildings. These producers of goods made with metal react with some combination of reduced outputs, lowered quality, and greater use of aluminum and other substitutes for steel. Buyers pay higher prices for these goods, thus generally leaving them less to spend to buy other goods and services – such as health care, restaurant meals, nights out at movie theaters, and vacations to Disney World. Employment in these other industries falls, thus offsetting any tariff-engendered gains in the employment of steelworkers.
The unseen consequences continue. As more aluminum is used domestically to produce (say) home appliances, the price of aluminum rises. The cost of supplying some military hardware thus also rises, both because of the higher prices of steel and because of the higher prices of aluminum. The defense budget grows, causing either taxes to rise today or – through debt issuance today – taxes to rise tomorrow. The need to pay these higher taxes reduces consumer spending and business investment in ways unforeseeable, thus causing contractions in the size of some industries. As these industries contract, they employ fewer workers and buy fewer inputs from suppliers.
Yet because the consequences of tariffs play out over large numbers of economic relationships in space and time, no one can trace out their details. We know – chiefly through economic theory – that these consequences are real and generally worse than what would prevail absent any tariffs. But out of sight, out of mind. If the surface economic phenomena can be manhandled in ways that give it a better appearance to those who mistake the surface for the entire economy, then that’s that. The manhandling of the surface phenomena is mistakenly thought to work.
“See! Steel tariffs ensure that we produce more steel!” boasts the protectionist. The economist is left to verbally insist – quite correctly – that this visible ‘success’ comes at too hefty a price paid in the form of invisible distortions now infecting the vast subsurface web of market processes.
