Tuesday, January 24, 2017

Protectionism and the Destruction of Prosperity

By Murray N. Rothbard

The below monograph was first published by the Mises Institute, 1986

Potectionism, 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 U.S. 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 U.S. 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 inter-state 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 ripoff 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, inter-state 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 inter-state 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 U.S. 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 U.S. wage rates are so much higher than
Taiwan. They are not imposed by Providence.

Wage rates are high in the U.S. 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 U.S. 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
U.S. twice that of Taiwan. Since U.S. labor is twice
as productive, this means that the double wage
rate in the U.S. is offset by the double productivity,
so that the cost of labor per unit product in the
U.S. 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 U.S. is precisely
the result of the bidding for scarce labor by U.S.
employers. The problem faced by less efficient
U.S. textile or auto firms is not so much cheap
labor in Taiwan or Japan, but the fact that other
U.S. 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
U.S. textile or auto or microchip firms, the protectionists
are not only injuring the American consumer.

They are also harming efficient U.S. 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 Sony s, 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 U.S. 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 Non-Problem 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 pseudo-problem
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 U.S. 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 U.S., 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 fractionalreserve
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, U.S. 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 U.S. 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