On page 13 of their 2017 brief in support of “green industrial policy,” Tilman Altenburg and Dani Rodrik write:
However, it should be noted that consumers do not respond perfectly to price signals. Even when new products exist that are better in many ways and cheaper, many consumers stick to the bad old alternatives because they do not understand the situation well, because their neighbours have not changed or simply out of force of habit.
I know nothing of Mr. Altenburg, but I know much about Prof. Rodrik, who is among today’s most respected and prolific advocates of protective tariffs and other government interventions designed, in his view, to improve domestic economies.
So when I read the above-quoted passage, I wondered why Prof. Rodrik is so certain about his case for protective tariffs. After all, if it’s true that “many consumers stick to the bad old alternatives because they do not understand the situation well, because their neighbours have not changed or simply out of force of habit,” it’s unclear how much established domestic producers have to fear from new imports or from imports the prices of which have been cut. Stuck-in-their-ways consumers – whose numbers, according to Altenburg and Rodrik, are “many” – irrationally continue to purchase inferior goods even when better ones become available, and, rather than switch to lower-priced alternatives, continue indefinitely to pay higher prices for the goods these consumers are accustomed to buying.
While this alleged inertia on the part of many consumers isn’t sufficient to undermine the case for protectionism, it certainly makes that case less urgent and, depending on the strength of this inertia, might well make protectionism practically unnecessary (and it certainly is difficult to square with the so-called “China Shock”). The fact that, in other of his writings, Prof. Rodrik ardently endorses protectionism leads me to suppose that Prof. Rodrik regards consumers as being much more intelligent and rational than they are portrayed in the above-quoted passage.
