Here’s a letter to National Review.
Editor:
Michael Brendan Dougherty claims to find support for tariffs in F.A. Hayek’s article “Competition as a Discovery Procedure” (“Defending Dynamic Markets,” October 16). This move is as bizarre as claiming to find support for creationism in Darwin’s On the Origin of Species.
Mr. Dougherty’s argument is this: Because tariffs protect domestic producers from foreign competition, these producers will gain access to larger markets. These larger markets will then enable these producers to take advantage of economies of scale denied to them when having to share their markets with foreign rivals. As these firms produce at larger scales, their per-unit costs of production will fall and, voilà, prices will fall – thus justifying the tariffs!
Facepalm.
First, domestic firms that scale up to produce more output draw resources away from other domestic producers, thus causing these other producers to scale down. The prices of the outputs of these other producers rise.
Second, because U.S. tariffs reduce the number of dollars earned by foreigners, foreigners purchase fewer U.S. exports. (Mr. Dougherty should consult another famous economic paper, one written by a student of Hayek: Abba Lerner’s 1936 article “The Symmetry Between Import and Export Taxes.”) The markets served by American firms that export will shrink, causing many of these firms to scale down, thereby raising their per-unit costs of production and, in turn, raising the prices of their outputs.
Third, if (as is likely) a fall in U.S. imports doesn’t cause a dollar-for-dollar fall in U.S. exports, the fall in U.S. imports will also reduce foreign investment in the U.S. – thus denying to some American firms the capital they would otherwise have used to modernize or expand.
Fourth, Hayek’s point in the article cited by Mr. Dougherty is that markets should be left as free as possible in order to discover the best outputs to produce and the best means of producing these outputs. This on-going discovery procedure takes account of as many relevant realities as possible, including the policies of foreign governments. Yet by imposing tariffs – even stable ones – the home government short-circuits the market’s ability to discover and implement these ‘best’ economic plans and procedures. Protection not only prevents buyers from spending their money in ways that most accurately signal to producers just which products buyers want most urgently, it incites protected firms to expand production, not because they’ve discovered better ways to compete for customers but, instead, because government shields them from having to discover better ways to compete for customers.
Mr. Dougherty wants us to swallow the puzzling proposition that protecting firms from competition makes firms more “dynamic” and, hence, improves their economic performance. (If I were to protect my students from being assigned poor grades, would I incent them to study more and, hence, improve their learning?) It’s true that markets deal with, and find ways to reduce, the damage done by protectionism. But this fact is no more an argument for protectionism than is the fact that individuals deal with, and find ways to reduce, the damage done to their homes by hurricanes an argument for hurricanes.
Hayek would be appalled to encounter an attempt to use any of his work to justify protectionism.
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
