Smashing Protectionist 'Theory' (Again)

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From
Making
Economic Sense
(1995)

Protectionism,
often refuted and seemingly abandoned, has returned, and with
a vengeance. The Japanese, who bounced back from grievous losses
in World War II to astound the world by producing innovative,
high-quality products at low prices, are serving as the convenient
butt of protectionist propaganda. Memories of wartime myths prove
a heady brew, as protectionists warn about this new "Japanese
imperialism," even "worse than Pearl Harbor."

This "imperialism"
turns out to consist of selling Americans wonderful TV sets, autos,
microchips, etc., at prices more than competitive with American
firms.

Is this "flood"
of Japanese products really a menace, to be combated by the US
government? Or is the new Japan a godsend to American consumers?

In taking
our stand on this issue, we should recognize that all government
action means coercion, so that calling upon the US government
to intervene means urging it to use force and violence to restrain
peaceful trade. One trusts that the protectionists are not willing
to pursue their logic of force to the ultimate in the form of
another Hiroshima and Nagasaki.

Keep Your
Eye on the Consumer

As we unravel
the tangled web of protectionist argument, we should keep our
eye on two essential points:

  1. protectionism
    means force in restraint of trade; and
  2. the key
    is what happens to the consumer.

Invariably,
we will find that the protectionists are out to cripple, exploit,
and impose severe losses not only on foreign consumers but especially
on Americans. And since each and every one of us is a consumer,
this means that protectionism is out to mulct all of us for the
benefit of a specially privileged, subsidized few – and an
inefficient few at that: people who cannot make it in a free and
unhampered market.

Take, for
example, the alleged Japanese menace. All trade is mutually beneficial
to both parties – in this case Japanese producers and American
consumers – otherwise they would not engage in the exchange.
In trying to stop this trade, protectionists are trying to stop
American consumers from enjoying high living standards by buying
cheap and high-quality Japanese products. Instead, we are to be
forced by government to return to the inefficient, higher-priced
products we have already rejected. In short, inefficient producers
are trying to deprive all of us of products we desire so that
we will have to turn to inefficient firms. American consumers
are to be plundered.

How to
Look at Tariffs and Quotas

The best
way to look at tariffs or import quotas or other protectionist
restraints is to forget about political boundaries. Political
boundaries of nations may be important for other reasons, but
they have no economic meaning whatever. Suppose, for example,
that each of the United States were a separate nation. Then we
would hear a lot of protectionist bellyaching that we are now
fortunately spared. Think of the howls by high-priced New York
or Rhode Island textile manufacturers who would then be complaining
about the "unfair," "cheap labor" competition
from various low-type "foreigners" from Tennessee or
North Carolina, or vice versa.

Fortunately,
the absurdity of worrying about the balance of payments is made
evident by focusing on interstate trade. For nobody worries about
the balance of payments between New York and New Jersey, or, for
that matter, between Manhattan and Brooklyn, because there are
no customs officials recording such trade and such balances.

If we think
about it, it is clear that a call by New York firms for a tariff
against North Carolina is a pure rip-off of New York (as well
as North Carolina) consumers, a naked grab for coerced special
privilege by less-efficient business firms. If the 50 states were
separate nations, the protectionists would then be able to use
the trappings of patriotism, and distrust of foreigners, to camouflage
and get away with their looting the consumers of their own region.

Fortunately,
interstate tariffs are unconstitutional. But even with this clear
barrier, and even without being able to wrap themselves in the
cloak of nationalism, protectionists have been able to impose
interstate tariffs in another guise. Part of the drive for continuing
increases in the federal minimum-wage law is to impose a protectionist
devise against lower-wage, lower-labor-cost competition from North
Carolina and other southern states against their New England and
New York competitors.

During the
1966 congressional battle over a higher federal minimum wage,
for example, the late Senator Jacob Javits (R-NY) freely admitted
that one of his main reasons for supporting the bill was to cripple
the southern competitors of New York textile firms. Since southern
wages are generally lower than in the north, the business firms
hardest hit by an increased minimum wage (and the workers struck
by unemployment) will be located in the south.

Another way
in which interstate trade restrictions have been imposed has been
in the fashionable name of "safety." Government-organized
state milk cartels in New York, for example, have prevented importation
of milk from nearby New Jersey under the patently spurious grounds
that the trip across the Hudson would render New Jersey milk "unsafe."

If tariffs
and restraints on trade are good for a country, then why not indeed
for a state or region? The principle is precisely the same. In
America’s first great depression, the Panic
of 1819
, Detroit was a tiny frontier town of only a few
hundred people. Yet protectionist cries arose – fortunately
not fulfilled – to prohibit all "imports" from
outside of Detroit, and citizens were exhorted to buy only Detroit.
If this nonsense had been put into effect, general starvation
and death would have ended all other economic problems for Detroiters.

So why not
restrict and even prohibit trade, i.e., "imports," into
a city, or a neighborhood, or even on a block, or, to boil it
down to its logical conclusion, to one family? Why shouldn’t the
Jones family issue a decree that from now on, no member of the
family can buy any goods or services produced outside the family
house? Starvation would quickly wipe out this ludicrous drive
for self-sufficiency.

And yet we
must realize that this absurdity is inherent in the logic of protectionism.
Standard protectionism is just as preposterous, but the rhetoric
of nationalism and national boundaries has been able to obscure
this vital fact.

The upshot
is that protectionism is not only nonsense, but dangerous nonsense,
destructive of all economic prosperity. We are not, if we were
ever, a world of self-sufficient farmers. The market economy is
one vast latticework throughout the world, in which each individual,
each region, each country, produces what he or it is best at,
most relatively efficient in, and exchanges that product for the
goods and services of others. Without the division of labor and
the trade based upon that division, the entire world would starve.
Coerced restraints on trade – such as protectionism –
cripple, hobble, and destroy trade, the source of life and prosperity.
Protectionism is simply a plea that consumers, as well as general
prosperity, be hurt so as to confer permanent special privilege
upon groups of less-efficient producers, at the expense of more
competent firms and of consumers. But it is a peculiarly destructive
kind of bailout, because it permanently shackles trade under the
cloak of patriotism.

The Negative
Railroad

Protectionism
is also peculiarly destructive because it acts as a coerced and
artificial increase in the cost of transportation between regions.
One of the great features of the Industrial Revolution, one of
the ways in which it brought prosperity to the starving masses,
was by reducing drastically the cost of transportation. The development
of railroads in the early 19th century, for example, meant that
for the first time in the history of the human race, goods could
be transported cheaply over land. Before that, water – rivers
and oceans – was the only economically viable means of transport.
By making land transport accessible and cheap, railroads allowed
interregional land transportation to break up expensive inefficient
local monopolies. The result was an enormous improvement in living
standards for all consumers. And what the protectionists want
to do is lay an axe to this wondrous principle of progress.

It is no
wonder that Frederic Bastiat, the great French laissez-faire economist
of the mid-19th century, called
a tariff a "negative railroad."
Protectionists are
just as economically destructive as if they were physically chopping
up railroads, or planes, or ships, and forcing us to revert to
the costly transport of the past – mountain trails, rafts,
or sailing ships.

"Fair"
Trade

Let us now
turn to some of the leading protectionist arguments. Take, for
example, the standard complaint that while the protectionist "welcomes
competition," this competition must be "fair."
Whenever someone starts talking about "fair competition"
or indeed, about "fairness" in general, it is time to
keep a sharp eye on your wallet, for it is about to be picked.
For the genuinely "fair" is simply the voluntary terms
of exchange, mutually agreed upon by buyer and seller. As most
of the medieval Scholastics were able to figure out, there is
no
"just" (or "fair") price
outside of the
market price.

So what could
be "unfair" about the free-market price? One common
protectionist charge is that it is "unfair" for an American
firm to compete with, say, a Taiwanese firm which needs to pay
only one-half the wages of the American competitor. The US government
is called upon to step in and "equalize" the wage rates
by imposing an equivalent tariff upon the Taiwanese. But does
this mean that consumers can never patronize low-cost firms because
it is "unfair" for them to have lower costs than inefficient
competitors? This is the same argument that would be used by a
New York firm trying to cripple its North Carolina competitor.

What the
protectionists don’t bother to explain is why US wage rates are
so much higher than Taiwan. They are not imposed by Providence.
Wage rates are high in the United States because American employers
have bid these rates up. Like all other prices on the market,
wage rates are determined by supply and demand, and the increased
demand by US employers has bid wages up. What determines this
demand? The "marginal productivity" of labor.

The demand
for any factor of production, including labor, is constituted
by the productivity of that factor, the amount of revenue that
the worker, or the pound of cement or acre of land, is expected
to bring to the brim. The more productive the factory, the greater
the demand by employers, and the higher its price or wage rate.
American labor is more costly than Taiwanese because it is far
more productive. What makes it productive? To some extent, the
comparative qualities of labor, skill, and education. But most
of the difference is not due to the personal qualities of the
laborers themselves, but to the fact that the American laborer,
on the whole, is equipped with more and better capital equipment
than his Taiwanese counterparts. The more and better the capital
investment per worker, the greater the worker’s productivity,
and therefore the higher the wage rate.

In short,
if the American wage rate is twice that of the Taiwanese, it is
because the American laborer is more heavily capitalized, is equipped
with more and better tools, and is therefore, on the average,
twice as productive. In a sense, I suppose, it is not "fair"
for the American worker to make more than the Taiwanese, not because
of his personal qualities, but because savers and investors have
supplied him with more tools. But a wage rate is determined not
just by personal quality but also by relative scarcity, and in
the United States the worker is far scarcer compared to capital
than he is in Taiwan.

Putting
it another way, the fact that American wage rates are on the average
twice that of the Taiwanese, does not make the cost of labor in
the United States twice that of Taiwan. Because US labor is twice
as productive, this means that the double wage rate in the United
States is offset by the double productivity, so that the cost
of labor per unit product in the United States and Taiwan tends,
on the average, to be the same. One of the major protectionist
fallacies is to confuse the price of labor (wage rates) with its
cost, which also depends on its relative productivity.

Thus, the
problem faced by American employers is not really with the "cheap
labor" in Taiwan, because "expensive labor" in
the United States is precisely the result of the bidding for scarce
labor by US employers. The problem faced by less efficient US
textile or auto firms is not so much cheap labor in Taiwan or
Japan but the fact that other US industries are efficient enough
to afford it, because they bid wages that high in the first place.

So, by imposing
protective tariffs and quotas to save, bail out, and keep in place
less efficient US textile or auto or microchip firms, the protectionists
are not only injuring the American consumer. They are also harming
efficient US firms and industries, which are prevented from employing
resources now locked into incompetent firms, and who could otherwise
be able to expand and sell their efficient products at home and
abroad.

"Dumping"

Another contradictory
line of protectionist assault on the free market asserts that
the problem is not so much the low costs enjoyed by foreign firms,
as the "unfairness" of selling their products "below
costs" to American consumers, and thereby engaging in the
pernicious and sinful practice of "dumping." By such
dumping they are able to exert unfair advantage over American
firms who presumably never engage in such practices and make sure
that their prices are always high enough to cover costs. But if
selling below costs is such a powerful weapon, why isn’t it ever
pursued by business firms within a country?

Our first
response to this charge is, once again, to keep our eye on consumers
in general and on American consumers in particular. Why should
it be a matter of complaint when consumers so clearly benefit?
Suppose, for example, that Sony is willing to injure American
competitors by selling TV sets to Americans for a penny apiece.
Shouldn’t we rejoice at such an absurd policy of suffering severe
losses by subsidizing us, the American consumers? And shouldn’t
our response be, "Come on, Sony, subsidize us some more!"
As far as consumers are concerned, the more "dumping"
that takes place, the better.

But what
of the poor American TV firms, whose sales will suffer so long
as Sony is willing to virtually give their sets away? Well, surely,
the sensible policy for RCA, Zenith, etc. would be to hold back
production and sales until Sony drives itself into bankruptcy.
But suppose that the worst happens, and RCA, Zenith, etc. are
themselves driven into bankruptcy by the Sony price war? Well,
in that case, we the consumers will still be better off, since
the plants of the bankrupt firms, which would still be in existence,
would be picked up for a song at auction, and the American buyers
at auction would be able to enter the TV business and outcompete
Sony because they now enjoy far lower capital costs.

For decades,
indeed, opponents of the free market have claimed that many businesses
gained their powerful status on the market by what is called "predatory
price cutting," that is, by driving their smaller competitors
into bankruptcy by selling their goods below cost, and then reaping
the reward of their unfair methods by raising their prices and
thereby charging "monopoly prices" to the consumers.
The claim is that while consumers may gain in the short run by
price wars, "dumping," and selling below costs, they
lose in the long run from the alleged monopoly. But, as we have
seen, economic theory shows that this would be a mug’s game, losing
money for the "dumping" firms, and never really achieving
a monopoly price. And sure enough, historical investigation has
not turned up a single case where predatory pricing, when tried,
was successful, and there are actually very few cases where it
has even been tried.

Another charge
claims that Japanese or other foreign firms can afford to engage
in dumping because their governments are willing to subsidize
their losses. But again, we should still welcome such an absurd
policy. If the Japanese government is really willing to waste
scarce resources subsidizing American purchases of Sonys, so much
the better! Their policy would be just as self-defeating as if
the losses were private.

There is
yet another problem with the charge of "dumping," even
when it is made by economists or other alleged "experts"
sitting on impartial tariff commissions and government bureaus.
There is no way whatever that outside observers, be they economists,
businessmen, or other experts, can decide what some other firm’s
"costs" may be. "Costs" are not objective
entities that can be gauged or measured. Costs are subjective
to the businessman himself, and they vary continually, depending
on the businessman’s time horizon or the stage of production or
selling process he happens to be dealing with at any given time.

Suppose,
for example, a fruit dealer has purchased a case of pears for
$20, amounting to $1 a pound. He hopes and expects to sell those
pears for $1.50 a pound. But something has happened to the pear
market, and he finds it impossible to sell most of the pears at
anything near that price. In fact, he finds that he must sell
the pears at whatever price he can get before they become overripe.
Suppose he finds that he can only sell his stock of pears at 70
cents a pound. The outside observer might say that the fruit dealer
has, perhaps "unfairly," sold his pears "below
costs," figuring that the dealer’s costs were $1 a pound.

"Infant"
Industries

Another protectionist
fallacy held that the government should provide a temporary protective
tariff to aid, or to bring into being, an "infant industry."
Then, when the industry was well-established, the government would
and should remove the tariff and toss the now "mature"
industry into the competitive swim.

The theory
is fallacious, and the policy has proved disastrous in practice.
For there is no more need for government to protect a new, young,
industry from foreign competition than there is to protect it
from domestic competition.

In the last
few decades, the "infant" plastics, television, and
computer industries made out very well without such protection.
Any government subsidizing of a new industry will funnel too many
resources into that industry as compared to older firms, and will
also inaugurate distortions that may persist and render the firm
or industry permanently inefficient and vulnerable to competition.
As a result, "infant-industry" tariffs have tended to
become permanent, regardless of the "maturity" of the
industry. The proponents were carried away by a misleading biological
analogy to "infants" who need adult care. But a business
firm is not a person, young or old.

Older
Industries

Indeed, in
recent years, older industries that are notoriously inefficient
have been using what might be called a "senile-industry"
argument for protectionism. Steel, auto, and other outcompeted
industries have been complaining that they "need a breathing
space" to retool and become competitive with foreign rivals,
and that this breather could be provided by several years of tariffs
or import quotas. This argument is just as full of holes as the
hoary infant-industry approach, except that it will be even more
difficult to figure out when the "senile" industry will
have become magically rejuvenated. In fact, the steel industry
has been inefficient ever since its inception, and its chronological
age seems to make no difference. The first protectionist movement
in the United States was launched in 1820, headed by the Pennsylvania
iron (later iron-and-steel) industry, artificially force-fed by
the War of 1812 and already in grave danger from far more efficient
foreign competitors.

The Nonproblem
of the Balance of Payments

A final set
of arguments, or rather alarms, center on the mysteries of the
balance of payments. Protectionists focus on the horrors of imports
being greater than exports, implying that if market forces continued
unchecked, Americans might wind up buying everything from abroad,
while selling foreigners nothing, so that American consumers will
have engorged themselves to the permanent ruin of American business
firms. But if the exports really fell to somewhere near zero,
where in the world would Americans still find the money to purchase
foreign products? The balance of payments, as we said earlier,
is a pseudoproblem created by the existence of customs statistics.

During the
day of the gold standard, a deficit in the national balance of
payments was a problem, but only because of the nature of the
fractional-reserve banking system. If US banks, spurred on by
the Fed or previous forms of central banks, inflated money and
credit, the American inflation would lead to higher prices in
the United States, and this would discourage exports and encourage
imports. The resulting deficit had to be paid for in some way,
and during the gold-standard era this meant being paid for in
gold, the international money. So as bank credit expanded, gold
began to flow out of the country, which put the fractional-reserve
banks in even shakier shape. To meet the threat to their solvency
posed by the gold outflow, the banks eventually were forced to
contract credit, precipitating a recession and reversing the balance-of-payment
deficits, thus bringing gold back into the country.

But now,
in the fiat-money era, balance-of-payments deficits are truly
meaningless. For gold is no longer a "balancing item."
In effect, there is no deficit in the balance of payments. It
is true that in the last few years, imports have been greater
than exports by $150 billion or so per year. But no gold flowed
out of the country. Neither did dollars "leak" out.
The alleged "deficit" was paid for by foreigners investing
the equivalent amount of money in American dollars: in real estate,
capital goods, US securities, and bank accounts.

In effect,
in the last couple of years, foreigners have been investing enough
of their own funds in dollars to keep the dollar high, enabling
us to purchase cheap imports. Instead of worrying and complaining
about this development, we should rejoice that foreign investors
are willing to finance our cheap imports. The only problem is
that this bonanza is already coming to an end, with the dollar
becoming cheaper and exports more expensive.

We conclude
that the sheaf of protectionist arguments, many plausible at first
glance, are really a tissue of egregious fallacies. They betray
a complete ignorance of the most basic economic analysis. Indeed,
some of the arguments are almost embarrassing replicas of the
most ridiculous claims of 17th-century mercantilism: for example,
that it is somehow a calamitous problem that the United States
has a balance-of-trade deficit, not overall, but merely with one
specific country, e.g., Japan.

Must we even
relearn the rebuttals of the more sophisticated mercantilists
of the 18th century – namely, that balances with individual
countries will cancel each other out, and therefore that we should
only concern ourselves with the overall balance? (Let alone realize
that the overall balance is no problem either.) But we need not
reread the economic literature to realize that the impetus for
protectionism comes not from preposterous theories, but from the
quest for coerced special privilege and restraint of trade at
the expense of efficient competitors and consumers.

In the host
of special interests using the political process to repress and
loot the rest of us, the protectionists are among the most venerable.
It is high time that we get them, once and for all, off our backs,
and treat them with the righteous indignation they so richly deserve.

Reprinted
from Mises.org.

Murray
N. Rothbard
(1926–1995) was dean of the Austrian School,
founder of modern libertarianism, and chief academic officer of
the Mises Institute. He was
also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his literary
executor. See
his books.

The
Best of Murray Rothbard

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