A Question for Protectionists

by Don Boudreaux on January 12, 2019

in Question for Protectionists, Trade


Given that you are so thoroughly convinced of the (utterly bizarre) proposition that greater abundance that comes into the home country from different political jurisdictions presents such a threat to the living standards of people in the home country that the state must have a policy of reducing this abundance, are you also thoroughly convinced that the state must have a policy of reducing the greater abundance that comes from –

– discoveries in the home country of new deposits of “natural” resources such as petroleum, iron ore, and magnesium?

– improved skills – such as those acquired through worker training and through better schooling – of workers in the home country?

– improved health of workers in the home country?

– a deepening of the division of labor in the home country that allows any given number of workers to produce more output?

– the increased productivity of home-country workers caused by increases in the amount of capital they work with?

– any declines in the amount of destruction that natural disasters inflict on the home country?

– improvements in the home-country’s infrastructure?

– improvements in financial markets that enable a larger number of home-country entrepreneurs to get the funds they need to launch or to expand businesses that increase the amounts of goods and services available for sale to home-country buyers?

– improvements in organizational and managerial practices that enable home-country firms to produce from any given amount of resources greater amounts of outputs for sale to home-country buyers?

– better packaging, faster and more reliable trucks and other transportation vehicles, and other innovations that reduce the amount destruction and damage done to goods being transported to market?

I assume that your belief in the dangers posed to home-country citizens by a greater abundance of goods and services leads you also to endorse, in addition to an active state policy to restrict imports, also an active state policy of tamping down all of these, and any other, sources of a greater abundance of goods and services. And so I ask explicitly: Do you believe that the state should punitively tax, for example, workers’ access to on-the-job training? If not, why not?

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… is from page 19 of Virgil Storr’s, Stefanie Haeffele’s, and Laura Grube’s 2015 book, Community Revival in the Wake of Disaster (citation and footnote omitted; link added):

[Young-back] Choi argues that [Joseph] Schumpeter and [Israel] Kirzner agree on three points, “(1) that there exist in the economy unexploited opportunities, (2) that the role of the entrepreneur consists of exploiting them, and (3) that traditional economic theory is flawed in leaving out the existence of unexploited opportunities and thereby overlooking the very force that moves the economy….

While Kirzner characterizes this as discovery and Schumpeter describes this as creative destruction, both view the entrepreneur as seeing some possibility (e.g., to profitably combine factors in a particular way) that no one else has identified or attempted to pursue. Both Schumpeter and Kirzner conceive of the entrepreneur as someone who must be willing to be a believer in a world of skeptics.

DBx: Anytime there exists an opportunity for genuine economic profit there exists a market failure – that is, a market failing to improve human well-being by as much as is possible (given the existing scarcity of resources and the array of human preferences). Anytime an entrepreneur earns genuine economic profit, he or she has corrected a market failure – that is, has caused the market to work better than it worked previously. The competitive market process is an incessant series of incidences in which entrepreneurs identify and correct market failures.

Unlike in modern mainstream economics in which the default market standard is a market working perfectly and peopled by rather dull individuals who can only respond to “given” market prices, wages, and interest rates – both currently existing and ‘rationally’ expected – in Austrian economics the default standard is quite different. The default standard for Austrians is a market currently filled with all manner of errors, both of commission and omission, but populated by creative individuals who, although each has knowledge and information only very limited and local, identify opportunities to profit by arranging for markets to work better if never “perfectly.”

The entrepreneur who reduces costs by vertically integrating with a supplier – the entrepreneur who reduces costs by vertically disintegrating with part of her company’s supply chain – the entrepreneur who senses that the supply of wheat tomorrow will be less than is predicted by today’s price of wheat – the entrepreneur who comes up with a new contractual term that better protects his interests as well as those of his counterparties – the entrepreneur who devises a new manner of pricing his outputs in ways that attract more sales – the entrepreneur who innovates in ways that make feasible the production and sale of a better mousetrap – the entrepreneur who…. I could extend this list from now until my dying day.

The entrepreneur – this kind of entrepreneur – is all but absent in mainstream economics. And so when the typical economist identifies (whether correctly or incorrectly) something that he interprets as a market failure – that is, as an opportunity for someone to earn genuine economic profit – this economist’s model contains no one who can correct this market failure. The typical economist then typically makes the mysterious leap to the conclusion that the state (an almost-godlike force in this economist’s worldview), and only the state, must, can, and will – if not obstructed by rubes or ideologues – “solve” the problem.

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Here’s a letter to Kerry Traeger, a new visitor to Cafe Hayek:

Mr. Traeger:

Thanks for your e-mail.

You offer two reasons for your support of Trump’s punitive tariffs on Americans who buy goods imported from China. The first reason is China’s alleged theft of Americans’ intellectual property. The second reason is Beijing’s “subsidies which let Chinese firms dump [goods] on us at prices which are unjustified, artificially and unfairly low.”

Your argument – which isn’t uncommon – is very curious. Your hostility to subsidies doled out by Beijing to Chinese exporters reveals your belief that we Americans are harmed if Chinese firms are able to sell to us at prices that are artificially low – that is, if Chinese firms don’t have to pay market prices for all of the inputs that they use to bring their goods to the American market.

But if you’re correct that we Americans are harmed by being able to buy Chinese-made goods at prices insufficient to cover the true, full costs of making these goods available to us, then aren’t the Chinese harmed by being able to buy Chinese-made goods at prices insufficient to cover the full costs of making those goods available to them? To the extent that the Chinese do steal our IP, we Americans effectively, if involuntarily, subsidize Chinese production, the great bulk of which is purchased by buyers in China.

If – as you imply by your fear of Beijing’s subsidization of Chinese exports – the American people are impoverished by the availability of goods sold here at prices made artificially low by property being forcibly transferred from its rightful owners (that is, from Chinese taxpayers) to favored Chinese producers, it must also be true that the Chinese people are impoverished by the availability of goods sold there at prices made artificially low by property being forcibly transferred from its rightful owners (that is, from American IP owners) to favored Chinese producers.

Asked differently, if we Americans are impoverished by being able to partially free-ride on property confiscated from its rightful Chinese owners, aren’t the Chinese impoverished by being able to partially free-ride on property confiscated from its rightful American owners?

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

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Bonus Quotation of the Day…

by Don Boudreaux on January 11, 2019

in Myths and Fallacies, Trade

… is from pages 43-44 of the 2002 first edition of Geoffrey E. Wood’s Fifty Economic Fallacies Exposed:

Trade between countries is not a competition in which there are winners and losers. It is a mutually beneficial activity, from which both sides gain….

So, then, the notion that countries ‘compete’ with one another in international trade is totally misconceived. And not only misconceived. It can cause harm, if it leads to policies which impede international trade. If, for example, we start protecting firms by tariffs or subsidies to produce ‘national champions’ then we are wasting resources.

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Colin Grabow on the Jones Act

by Don Boudreaux on January 11, 2019

in Trade

After reading my and Alice Calder’s recent op-ed on the Jones Act, Colin Grabow of the Cato Institute sent to me the following e-mail, which I share (in italics) with his kind permission:

Hi Don,

I was very pleased to see you highlight the odious Jones Act in a column earlier this week. There are, however, a few points I wanted to bring to your attention:

    • “Not surprisingly, the cost of operating an American flagged and crewed vessel is double that of foreign ones.” I think this actually understates matters, with a 2011 MarAd report finding average U.S. vessel operating costs to be roughly *2.7 times* higher than their foreign-flag counterparts. Furthermore, an August 2018 GAO report says that “According to MARAD officials, the relative cost of operating a U.S.-flag vessel compared to a foreign-flag vessel has increased in recent years, making it increasingly challenging for vessel operators to remain economically viable under the U.S. flag.” This makes me think the cost difference is probably at least 3x at this point.
    • “A 1999 report by the U.S. International Trade Commission finds that this welfare gain would be $1.32 billion, which is $2.0 billion in today’s dollars.” I just want to note that the most recent assessment put out by the USITC that examined the cost of the Jones Act is actually from its 2002 report which came up with a figure of $656 million. For the record, I think this grossly understates the cost, but I wanted to alert you to the fact that more recent data than the 1999 report exists.
    • “This tragedy likely occurred because of the Jones Act.” I’d advise being careful here, with the both the NTSB and Coast Guard largely laying blame on the ship’s captain for bad decision-making and the ship’s owner, TOTE Maritime, for items such as having older lifeboats that are not fully enclosed. The age of the ship certainly didn’t help, and I think that overall the Jones Act certainly does serve to degrade maritime safety, but my understanding is that it’s not clear a newer ship would have survived. As much as I’d like to make this argument about the El Faro being sunk by the Jones Act, I’m still reluctant to do so.

In any case, again, great to see you taking on the Jones Act and helping to raise awareness, which is certainly needed. I only pass all of this along as FYI, and hope to see further pieces by you devoted to this shipwreck of a law.

Best regards,

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In November of 2017 at Hillsdale College I debated Ian Fletcher on trade. My – as well as Ian’s – opening remarks from that debate have just been published in Hillsdale’s annual Champions of Freedom series. Below the fold is the version that I presented at Hillsdale (which is close to, but not identical, to the version that now appears in print in the Hillsdale publication):

Read the full post →

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Here’s a letter to a young woman, Ms. Emily Shin, from California who is a senior in high school and who tells me that she’d like to study economics at George Mason!

Ms. Shin:

Thanks for your e-mail. I’m honored that you read Café Hayek, and I’d very much love to have you one day as a student in my classes!

Your question is excellent: “What is the one deepest mistake made by persons who fight against free trade?”

Ethically, it is to suppose that some people – specifically, government officials or those who are in today’s political majority – have a right to interfere with the peaceful commercial choices of other people. I believe that such interference is predatory despite it being cloaked in officialdom’s costume.

Economically, the single deepest mistake committed by opponents of free trade is difficult to identify because they commit so very many mistakes. But obliged to choose just one, I offer this mistake: protectionists see only the specific jobs and businesses that international trade ‘destroys.’ Protectionists are blind to the specific jobs and businesses that international trade creates.

As a result of their blindness, protectionists tell literally only half of the story. If protectionists were to recite, say, the story in Dickens’s A Christmas Carol in the same way that they recite the story of trade, their audiences would be left with the impression that Ebenezer Scrooge remained a scrooge forever and that young Tiny Tim died an excruciatingly horrible death – obviously, an impression completely the opposite of reality.

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

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Some Links

by Don Boudreaux on January 11, 2019

in Budget Issues, Immigration, Philosophy of Freedom, Regulation

My intrepid Mercatus Center colleague Veronique de Rugy opposes Trump administration efforts to obstruct individuals’ freedom to gamble across state lines. A slice:

There are a lot of bad arguments used to prevent the spread of legal online gambling, which mostly consists of poker. The biggest of these is the moral argument, which is basically that gambling is bad and, therefore, nobody should be allowed to do it. But in a free society, the real moral outrage is those who would prevent individuals from freely engaging in activity that does not violate the rights of anyone else.

My support for liberalizing immigration into the United States for all immigrants, regardless of their skills levels, does not prevent me from endorsing – as I do here with GMU Econ student Jeffrey Mason – a specific plan to liberalize immigration into the United States of high-skilled immigrants and their families.

Pres. Trump’s hostility, unquestionably inexcusable, at least is not hidden. This hostility, therefore, is well-known. The same cannot be said about Pres. Obama’s inexcusable hostility to immigrants.

Here’s more perspective from Steve Landsburg – perspective on Trump’s border wall, the National Endowment for the Arts, government overreach, and Congressional fiscal recklessness and hypocrisy.

George Will writes about Germany’s young but growing populist party, the AfD.

T. Norman Van Cott recalls his stints working for the U.S. government.

Bruce Yandle looks ahead to 2019. A slice:

A second foundational problem relates to White House leadership efforts to control major elements of economic activity through unilateral executive branch action. This includes not just tariff and trade policy but also undue and uneven influence on private-sector decisions to expand, contract, or relocate investments.

Jonah Goldberg takes accurate aim at the surging hostility to free markets by right-wing populists such as Tucker Carlson. (HT Ross Kaminsky) A slice:

But it seems to me the new rightwing anti-market populists are going to need to do a lot more thinking about what they are actually advocating here. The left has used economic regulation as a façade for cultural regulation for a century — and it wants to do a lot more of it. And people like my friend Tucker Carlson have gotten famous and wealthy denouncing elites for their nanny-statism. If I’m going to take the idea that the free market is solely a tool seriously, I’m going to need to hear a hell of a lot more about why rightwing nanny-statism is philosophically distinguishable from the leftwing variety. I haven’t heard anything like that from him or his fellow-travelers, at least not yet.

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Quotation of the Day…

by Don Boudreaux on January 11, 2019

in Immigration

… is from David Simon’s March 21, 2017, essay about his late father, “Julian Simon Would Tell Us: America Needs More Immigrants“:

What kinds of immigrants does the U.S. need? All kinds, Simon would tell us. We need the innovators, inventors, and entrepreneurs who will create the next Google, Comcast and Tesla (all founded or co-founded by immigrants). And we need the immigrants who pick fruit and do other back-breaking work that almost no other Americans will do.

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Bonus Quotation of the Day…

by Don Boudreaux on January 10, 2019

in Trade, War

… is from page 687 of the 2007 Liberty Fund edition (Bettina Bien Greaves, ed.) of Ludwig von Mises’s 1949 treatise, Human Action:

The philosophy of protectionism is a philosophy of war.

DBx: Indeed so – and a double one at that. Protectionism is a philosophy that endorses both the war of citizen against fellow citizen, and the war of politically dominant domestic groups against foreign producers.

Protectionism is a base, cruel, destructive, antediluvian, and idiotic superstition masquerading as serious “public policy.” It is a primitive fury even worse and stupider than the one that propels the Hatfields and the McCoys each to escalate the violence that each inflicts on the other, for protectionism propels each nation to escalate the violence that it inflicts on itself.

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