“Build them here!” President Trump enjoined European car manufacturers in a June 22 tweet. This seems to be his real goal, assuming it is not confusedly autarky. In a July 1 Fox News interview, he repeated his hope that tariffs on European cars would bring European manufacturers to “build their cars in America.” This old mercantilist idea is intriguing.
Inspired by that, I tweeted:
Why should Americans work to produce stuff for foreigners instead of for Americans? If you can answer this question in a way that is not self-contradictory, you are on your way to understanding the economics of trade (or you already understand).
The first answer is that Americans produce stuff only for themselves, and use about 15% of it to import goods that are cheaper than the similar goods they can get in America. In return, they export what they can produce more efficiently than foreigners. From this exchange, everybody gains. This is the gist of the theory of comparative advantage.
Along these lines, James Mill wrote in his 1821 Elements of Political Economy (emphasis in original):
The benefit which is derived from exchanging one commodity for another, arises, in all cases, from the commodity received, not from the commodity given. When one country exchanges, in other words, when one country traffics with another, the whole of its advantage consists in the commodities imported. It benefits by importation, and by nothing else.
This seems to be so very nearly a self-evident proposition, as to be hardly capable of being rendered more clear by illustration; and yet it is so little in harmony with current and vulgar opinions, that it may not be easy, by any illustration, to gain it admission into certain minds.
In other words, we produce in order to consume, not the other way around.
The second answer is a qualification that emphasizes the individualist, as opposed to the collectivist, approach to trade and to the study of society in general. Each American produces stuff for himself (or his family or his chosen charity targets). The Americans who work for foreigners in return for the latter working for them are individuals, who are often grouped in private associations called firms, but act independently of all exporters or importers. It is not America that exports or imports, but individual Americans. At least, this is so in a country based on economic freedom and free enterprise.
READER COMMENTS
Evan Smiley
Jul 2 2018 at 3:14pm
This end would be much better achieved by further reducing regulations.
Warren Platts
Jul 2 2018 at 4:56pm
It could be that I am confused, but I thought the gains from trade are not really the reduced prices of imports, because the lower cost of import competing goods are largely counterbalanced by increased prices in export competing goods. For example, we get great deals on imported manufactured products, but we pay for those cheaper prices with higher food, home heating, and electricity costs. Thus, the gains from trade is not the consumer surplus generated by imports (or the producer surplus generated by exports), but rather by the efficiency gains enabled by trade (these are the obverse of the deadweight losses incurred when trade is stopped).
As for Trump’s tariffs encouraging foreigners to set up factories here, that does seem to work: China slaps 25% tariffs on US cars, so GM and Tesla set up shop there; the EU slaps 25% tariffs on motorcycles, so Harley-Davidson sets up shop over there; we slap 25% tariffs on washing machines, so LG and Samsung set up shop here. Thus, I guess, the question is whether the Americans employed in the new foreign factories could be employed in more productive endeavors if the tariff did not induce the foreign factory construction here.
And that question boils down to where the workers are coming from. If they are coming from export sectors where we have a natural comparative advantage, like mining and agriculture, then the case could be made that there will be efficiency losses. If the workers come from other factories, there will likely be marginal productivity gains as workers shift from less productive factories to the new foreign-constructed factories.
However, the tertiary service sector is by far the largest employer in the US. Thus, it is far more likely that the new employees will be former service workers. For good or ill, however, the service sector has notoriously low labor productivity: the average GDP output per service worker per year is roughly on the order of $50K/worker/year. As a result, their wages are low, and they are looking for better jobs. Meanwhile, workers hired at the newly constructed foreign factory could reasonably be expected to be putting out about $200K/worker/year of GDP, and could thus command relatively higher wages. Such a transformation would thus result in massive efficiency gains, and should be applauded imho.
Pierre Lemieux
Jul 2 2018 at 8:48pm
@Warren:
The deadweight losses are calculated in a partial-equilibrium setup (one market). They show only part of the gains from trade. To understand the law of comparative advantage, you have to consider a general-equilibrium model, where the world production possibility frontier (PPF) is pushed up by trade. International trade, like any trade, allows individuals to reach their contract curve (in the famous Edgeworth-Bowley box); add to this the higher PPF obtained through trade, and you get a better idea of the net gains from trade. In less technical terms, individuals benefit from trade both because they can trade whatever is produced and because more is produced . If one doesn’t realize that, one can indeed mistakenly conclude that lower (relative) prices of imports are compensated by higher (relative) prices of exports–and probably many other strange things.
Remember Adam Smith on the fact that good wine can be produced in Scotland, or Taussig on good pineapples being produced in Maine, but at a much higher cost than them being “produced” through the following technique: producing other things and exchange them.
Warren Platts
Jul 3 2018 at 7:54am
@ Pierre
Good points about the world PPF. However, we need to make sure the USA itself is receiving net welfare gains under the current trade policy. If not, then the policy must be changed. (Saying this is not the same as advocating for autarky.)
As for growing pineapples in Maine, I must say that many of the fresh tomatoes and cucumbers I bought last winter were marked “Product of Canada,” so anything is possible!
Jon Murphy
Jul 3 2018 at 10:05am
From a practical and pragmatic viewpoint, such a thing is impossible to know. Welfare analysis is a theoretical tool, but it is, in a practical sense, impossible to import into the real world as it requires knowledge that simply doesn’t consciously exist.
There’s also the fact that speaking of “the USA” as something that can “receive net welfare” is incoherent. “The USA” has no agency. It cannot receive anything. The people of the USA can get benefits (which is one of the main arguments for free trade. Each person acting in his own best interest maximizes his net gains, and consequently, everyone’s net gains are maximized when they are all acting in this manner). But to speak of a nation or a country maximizing net gains makes no sense.
Note that it would not do to object to my previous argument by stating “externalities!” Externalities do not play in here for a number of reasons, but the big reason is to make policy off of the theoretical claim of externalities requires making a logical fallacy: begging the question. Of the 4 main cases where externalities can arise, only one of which suggests government intervention: the case where transaction costs are improperly estimated and bargaining does not occur and this incorrect estimation is either 1) known by a third party or 2) should have been known by the bargainers. #1 is where most policymakers go but it is a logical fallacy as it requires assuming the observer has the required knowledge and government is the solution; in other words, you assume your own conclusion. But, ex ante it is impossible to know if the transaction costs were improperly estimated (especially since costs are subjective). (As an aside, along these same lines I highly recommend Carl Dahlman’s 1979 JLE article The Problem of Externality)
But, leaving aside the theoretical issues of externalities and the knowledge problem, let’s assume that national welfare can be known and take a look at the supposed “terms-of-trade gain” from the optimal tariff. Adam Smith addressed this argument long ago in The Wealth of Nations. It is, in theory, possible to get better terms of trade for a specific group of people via tariffs if (and only if) such tariffs 1) get the trading partner to lower their barriers and 2) are immediately repealed. However, Smith dismissed such a possibility as improbable as national prejudices are likely to prevent such an action by the other guy; he is likely to jack up his tariffs too, resulting in a trade war and making everyone far worse off. As Smith discusses, even given the possibility of tariffs getting terms of trade gains, it is far more desirable to have unilateral free trade.
Even Paul Krugman discusses this in his discussion of the optimal tariff model. The optimal tariff model is only optimal if the other guy does nothing. If they retaliate, then any gains go away.
This is also ignoring the fact that the optimal tariff model is only optimal because you don’t account for its costs to foreign producers and citizens. While there may be political reasons to do so, there are no economic reasons; economists must account for all benefits and all costs. When the costs (ie the lost surplus) of foreign producers is counted, the “optimal tariff” becomes net welfare reducing.
“But wait! Jon, you sly and handsome devil,” a voice in the back chimes in. “Why should we care about the welfare of foreigners?”
The reason is simple: we live in a dynamic world. If foreigners are made worse off because of our trade practices, that necessarily means they’ll have fewer dollars to invest in the US or buy US products. That will, in turn, harm Americans. Nothing exists in a vacuum.
One final point on the practical impossibility and complete undesirableness of tariffs, even if they can theoretically improve terms of trade:
Transaction, transition, and enforcement costs are a real thing. TANSTAAFL. The “optimal tariff” model is a model without transaction costs. Once those are factored in, it is highly unlikely any kind of gains could be realized by tariffs. Those tariffs would need to be properly set, enforced, collected, overseen. Firms would spend resources adjusting to the tariffs, as would buyers. All these would eat away at any “terms of trade gain.” This gets further complicated by the fact that the optimal tariff is calculated off the (estimated) price elasticity. But elasticities are constantly changing due to market forces. Having to constantly calculate and recalculate tariffs (and the costs involved therein) would also reduce any net benefits. The more and more we look at costs, the more and more tariffs look like a bad idea from a practical and pragmatic POV.
And this isn’t even discussing lobbying or other public choice issues!
Pierre Lemieux
Jul 3 2018 at 7:47pm
@Jon Murphy: Good points, Jon!
Mark Z
Jul 3 2018 at 9:24pm
Recent events have pretty well-demonstrated that unilateral protectionism isn’t really possible. Tariffs lead to trade wars, and we’re now engaged in trade wars with several of our biggest trading partners.
To repeat Jon above, “The optimal tariff model is only optimal if the other guy does nothing. If they retaliate, then any gains go away.”
Mercantilists often portray free trade as an ivory tower theory divorced from the practicality of ‘the real world.’ In point of fact, mercantilism is far more dependent on theoretical assumptions (in particular, non-retaliatory trading partners) that don’t pan out in real life.
Warren Platts
Jul 4 2018 at 11:53am
This is unacceptable. This is tantamount to saying that economics is not a science. Hypotheses that are not defeasible are not scientific.
As for your historical claim regarding Adam Smith and Robert Torrens’ terms-of-trade argument against unilateral free trade, you are badly mistaken. Smith did not discuss the terms-of-trade argument in his lifetime, mainly because it was never framed until multiple decades after Adam Smith died. Smith’s argument for unilateral free trade in WON Book 4, Chapter 2, is quite brief. Here it is in its entirety:
This is of course the familiar argument made by free trade apologists as to why we should never retaliate against our mercantilist trading partners/bullies: we cannot reform people who do not take advice from American economists; thus, while it may be the case that our exporters are getting screwed, that is no reason not to buy tariff-free, cheap, subsidized imports, or so the argument goes. However, Smith’s argument does not at all address the terms-of-trade issue: the fact that tariffs force exporters to lower their prices. For proof of this effect, one need look no further than the effect on US soybean prices caused by the threat of China’s (increased over what they already were) tariffs on soybeans.
When exporters are forced to reduce their profits in order to help pay for the cost of a tariff, a terms-of-trade gain is realized by the tariff-imposing country. The reverse of a terms-of-trade gain is a terms-of-trade loss. Terms-of-trade gains result in net welfare gains; terms-of-trade losses result in net welfare losses: the loser country is essentially paying tribute to the tariff-imposing country.
As for the true claim that terms-of-trade gains are eliminated by retaliation, that was exactly Robert Torrens’ argument against unilateral free trade. Given Adam Smith’s point that there is no hope of reforming trading “partners” who do not take their economic advice from American economists, the policy of unilateral free trade will result in terms-of-trade gains (and net welfare gains) for foreigners, and terms-of-trade losses (and thus net welfare losses) for the USA. It is a classic example of the Prisoner’s Dilemma. In a perfect world, we would all cooperate. But, given the reality that our trading partners are not interested in real free trade, we are chumps to not reciprocate their trading restrictions.
Jon Murphy
Jul 5 2018 at 12:26am
Well, no. 1) A science is a collected body of knowledge. Economics is a collected body of knowledge. 2) The hypothesis is testable. We test it all the time. The theory holds up. The problem, as I stated, is making policy off of it. Ex post we can see the results. Ex ante it is impossible to make policy. The knowledge necessary does not consciously exist, but it does exist. It is revealed in action. To wit: do you have an exact list of the total number of apples you’d buy at all possible price vectors? Of course not. But you still make choices of the number of apples to consume when you face a given price vector. To make policy based off of the theoretical analysis, you’d need to know each person’s complete demand schedule for all possible price vectors (among other things). That information simply does not consciously exist. But we act as though it does. We act based on the information we have at the time. To toss out the baby with the bathwater is to make a mistake.
Regarding Adam Smith: he did address the terms of trade argument. I’m not going to rehash this with you again. It is in the chapter you cited. The fact that Torrens did not frame it for years afterward is true but irrelevant: there is nothing new under the sun and the argument has existed for centuries (I think even Cicero addresses something similar in De Officiis, but I am not sure).
Well, that’s just completely incorrect. If you look at the model, there are net welfare gains. They are not maximized, sure, but no nation losses.
Warren Platts
Jul 5 2018 at 7:13am
1. If scientific knowledge does not “consciously” exist, it is not scientific knowledge. Science is not like riding a bike. If you cannot make predictions, you are not doing science. In particular, the theory in favor of unilateral free trade predicts higher rates of GDP growth. Has that happened?
2. You are absolutely wrong that Adam Smith “addressed” the terms-of-trade argument against unilateral free trade. It is not in the chapter I cited; it is not in any other chapter. At all. If it was, not only would you cite it because it would be trivially easy, you would draft a paper and get it published instantly because every historian of economics that has looked at this issue has concluded that the idea was original to Robert Torrens.
3. If you look at the model–I assume you are referring to the so-called large country tariff model–there are indeed net welfare losses to the exporting country because of a tariff. Think about it this way: tariffs result in global net welfare losses. Right? Therefore, if the importing country is getting net welfare gains, the exporting country is getting net welfare losses. The exporting country’s economy may be growing for other reasons, but the foreign tariff will cause a headwind to GDP growth.
Jon Murphy
Jul 5 2018 at 8:07am
Warren-
That knowledge is dispersed and time/place specific does not mean it does not exist. I’m not sure why acknowledging the fact that people act differently in ways even they may not be able to initially comprehend when faced with different incentives and knowledge is “unacceptable” to you. Again: you have a detailed plan for every possible combination of events that can happen in your life?
2. Book IV, Chapter II, paragraphs 38-39 (Liberty Fund Edition). The exact same area you quoted. You just ellipsis-ed out all the parts where he discusses the terms of trade argument and used brackets to incorrectly insert things that change the argument.
3. “there are indeed net welfare losses to the exporting country because of a tariff.” Yes. Yes there are. That is why we oppose tariffs. They harm the net welfare. The point we objected to was your claim that with unilateral free trade there are net losses. There are not. As you state here the losses come with the tariffs, not with the free trade. It is the tariffs, not the trade, that causes net losses.
Warren Platts
Jul 5 2018 at 1:44pm
Your assertion that Adam Smith “addressed” Torrens’ terms-of-trade argument against unilateral free trade is utterly false. As is your defamatory claim that I intentionally distorted Smith’s argument for unilateral free trade. Here is the relevant section in its entirety.
This is simply the standard explanation given by free traders to promote unilateral free trade: given the fact foreign trading partners refuse to lower their trade barriers, there is no point in punishing home consumers. Which makes sense as far as it goes, but as is typical for such explanations, there is absolutely no discussion of, let alone a refutation of, Robert Torrens’ terms of trade argument. The latter points out that because of a the foreign tariff, our exporters must lower their prices. The result is that we must sell more exports in order to obtain the same amount of imports–assuming the foreign demand is there; if the foreign demand is not there, a big trade deficit will develop. Consequently, if the foreign country refuses to lower its tariffs, we will be better off imposing reciprocal tariffs. Nowhere in Wealth of Nations does Adam Smith discuss this objection to unilateral free trade.
Sorry, but there is a reason that every historian of economics who has studied the terms of trade argument for tariffs has concluded that it was first constructed by Robert Torrens in the 1820’s at the earliest–and not Adam Smith. Like I said, if you could in fact prove that Adam Smith formulated–and refuted–the terms of trade argument, that would be an important and significant finding. But you will need a better argument than “there is nothing new under the sun.”
As for your point that, given recalcitrant trading partners, there are always net gains under unilateral free trade, the real question is: Compared to what? It is not enough to show that unilateral free trade is better than autarky. It must also be shown that net welfare under unilateral free trade is higher than under retaliation. And to do that, you would have to make the case that world supply curves are perfectly elastic, and that monopolists never have an incentive to lower their prices when facing tariff–or at least concoct a GTAP model that says as much.
Jon Murphy
Jul 5 2018 at 5:13pm
Mr Platts:
That is not the quote in its entirety. Indeed, you’ll note I cite two paragraphs and you only quote one. The one immediately prior is important as well, which is why I cited it.
I am not going to get into an argument with you over this Smith passage. It’s in black and white. What you do (or don’t do) with it is up to you. Also, I did not “defame” you. I did not accuse you of deliberately hiding anything. I said your interpretation was incorrect and incomplete; you removed important sections of the quote.
It is. When you claim that free trade is a “net welfare loss,” that is explicitly what that means. To show that under free trade welfare is not maximized compared to some theoretical, but impractical, optimal is not the same as saying it is a net loss. To say my car is going 60 mph when it could be going 80 mph is not the same as saying it is going in reverse.
Incorrect. The elasticity of supply curves is necessary, but as my comments, Pierre’s comments, Krugman’s comments, the models, Mark Z’s comments, Adam Smith’s comments, etc all show, it is hardly sufficient.
Warren Platts
Jul 6 2018 at 2:51pm
As for the economy going 60 mph when it could be going 80 mph, that is my point exactly. It is not enough to say, “Look, the economy is going 60 mph under unilateral free trade. See, it is moving forward.” We need to understand whether unilateral free trade is preventing the economy from going 80 mph. Samuelson provided good theoretical reasons to believe that unilateral free trade with the likes of China would in fact result in a headwind to GDP growth rates, and the actual growth rates are in fact down. Therefore, it certainly looks like the policy of unilateral free trade has slowed down the economy. Consequently, you free trade apologists need to clearly explain exactly what caused the GDP growth rate to slow down, if it was not due to unilateral free trade. Handwaving “muh regulations” is not going to cut it.
Jon Murphy
Jul 6 2018 at 10:48pm
@Warren Platts
Fine, but that’s not what “net welfare loss” means. It does not mean “going slower than it should.” It means going backward. Please be precise and accurate with your terminology. It makes discussing things difficult when you are imprecise.
Why? You’re making the claim here. Provide some evidence. Merely showing that GDP has slowed and merely asserting it is (confusingly) due to “unilateral free trade” is no evidence. You’re the one claiming the emperical facts aren’t real. Make the case.
Warren Platts
Jul 7 2018 at 5:54am
No. It is you are misusing language. Net welfare loss is always measured against a benchmark. It is a measure economic loss, not accounting loss.
As for unilateral free trade slowing down US economic GDP growth, the channels are obvious: 65,000 factories have been shuttered; 8,000,000 more manufacturing workers should be working that are not; manufacturing workers put out about $200K/worker/year compared to the $50K/worker/year that service workers put out; therefore, free trade causes a $1.2 trillion annual net economic loss.
Warren Platts
Jul 6 2018 at 2:38pm
Well, here is the previous paragraph in Smith that supposedly discusses Torrens’ terms of trade argument–except that it doesn’t:
At first Smith says that retaliatory tariffs are mainly motivated by the natural human desire for revenge. And then in the next paragraph, he goes on to explain retaliatory tariffs can be helpful, if they can persuade the foreign country to open its markets: the long run gain from free trade will outweigh the short term pain caused by the trade war. He then continues with the section previously quoted where he argues that there is no hope of getting the foreign country to open its markets, then retaliation will do no practical good, and only punish home consumers. There is no discussion of how unilateral free trade causes the free trader to have to export more in order to get the same amount of imports.
EB
Jul 2 2018 at 5:23pm
Yes, each of us produces in order to consume, and the more each one wants to consume, the more he will have to produce. Although some people are lucky and don’t have to produce anything to consume because others are willing to support them, we know how exceptional this is.
That is only a starting point to understand the world we live in. Since many others will try to benefit from our work and production by resorting to violence and fraud, the second point should be what we are willing to sacrifice to protect ourselves from bandits. As long as this second point is ignored, the analysis is irrelevant.
Warren Platts
Jul 2 2018 at 7:24pm
We produce in order to consume
It is no doubt true that production is a means to the end of consumption. However, as the American pragmatic philosopher John Dewey would say, it does not follow that production is a mere means to the end of consumption. If we measure importance in terms of the energy, care, and attention that must be paid, then to be quite honest, we would have to say that the means of production are more important than the end of consumption. I believe this truth is what archmercantilist Friedrich List was getting at when he said that the fruit tree is worth more than the fruit. An orchard owner that basks in the fruits of his labor to the point that he neglects the proper care and attention to his fruit trees will probably not be in business very long. The same principle holds at the national level of political economy: an economy maximally structured to facilitate consumption to the point that the means of production are considered to be of no account will soon run into headwinds in terms of economic growth.
IMHO YMMV
Jon Murphy
Jul 3 2018 at 9:37am
Warren-
Don’t forget scarcity is a thing. The massive problem with List, and mercantilism is general, is that it forgets scarcity. When resources are diverted into inefficient means, they inherently weaken the productive capabilities.
To bring the fruit tree analogy to its proper conclusion: if the tree is more important than the fruit it produces, then logically one should never destroy a tree so long as it bears fruit. But what if that fruit is undesirable (say, crabapples)? Then that tree is taking up resources (land, labor, capital) that could go toward producing something else, something more valuable. The fruit tree is only valuable insofar as it produces something of value. If it does not, it must be replaced. That is the point List forgets.
The simple fact is mercantilism, protectionism, etc cannot, almost by definition, improve productive capabilities of a nation for the simple reason that they waste resources.
EB
Jul 3 2018 at 9:53am
Yes, we spend a lot of time in production and we want to enjoy as much as possible the time spent on it. We applaud those that enjoy too much the time spent in production and call them celebrities. It doesn’t change anything about the purpose of producing to consume (directly or indirectly via trade).
In addition, we know how hard we have to work for producing anything and therefore we take care of anything that facilitates our efforts. Yes, some people may not care for their means of production because they don’t own them, but owners know that it is a question of giving them proper incentives.
The big difference with respect to that the idea that we produce in order to consume that I pointed out in my comment was that to produce and consume we demand protection. If we are going to discuss government seriously we have to start with by analyzing the benefits and costs of relying on government for protection. There is no free trade without protection.
Mark Z
Jul 3 2018 at 9:36pm
First of all, “An orchard owner that basks in the fruits of his labor to the point that he neglects the proper care and attention to his fruit trees” is not committing the error you attribute to him (that of neglecting the value of the tree aside from the fruit). He is making the error of undervaluing the tree’s future fruit. Even if the tree is only valued for its fruit, the owner has every incentive to maintain his trees well so that they produce fruit well into the future; it is not in one’s economic self-interest to kill the golden goose, even if one only values it for its eggs.
Secondly, inasmuch as people work for reasons other than consumption – such as for personal fulfillment – there’s no reason to expect that restricting international trade will enhance such fulfillment. Indeed, if, without punitive tariffs, people choose to sell their goods to higher paying foreigners, it suggests either 1) that they do really only care about consumption, or 2) they get no more ‘fulfillment’ out of selling to other Americans than selling to foreigners. The ‘fulfillment premium’ is already factored into wages and prices.
If you want to coerce people into working on farms by taxing non-farm businesses and subsidizing farms because you think working on a farm is so much more meaningful and fulfilling that non-agricultural work, you should be asking yourself why, if farm work really does have such a ‘fulfillment premium’, aren’t people already willing to work on farms for lower wages without penalties and subsidies?
Warren Platts
Jul 5 2018 at 2:24pm
You guys are missing List’s point, I think. You are conflating value–something measured in dollars and cents–with what I want to call importance which is measured in care and attention paid. Neither List nor I claim that the fruit tree is worth more in dollars than the subsequent consumption enjoyed by the orchard owner. Yet the fact remains that the means are more important than the end.
In the same passage, List poses a question: If England offered to supply Germany with all of its needs for manufactured goods–for free–for a number of years, should Germany accept the offer. Now, any free trade economist would answer YES! Why? Because the fruit is more important than the tree, thus if we can get the fruit without the tree, then why not?
List’s answer was of course the opposite: Germany should emphatically reject England’s offer. Indeed, he likened the offer to a Trojan Horse. The English offer would atrophy Germany’s manufacturing power.
Basically, List’s argument is the same as that offered by many Libertarians against welfare payments and universal basic income. When people don’t have to work for a living, they tend to cease to work. Their productive capacity atrophies. The simple ability to show up on time goes away. The same effect can happen to entire nations.
Jon Murphy
Jul 5 2018 at 5:02pm
No he’s not. He’s explicitly making the argument that includes importance.
Jon Murphy
Jul 5 2018 at 6:04pm
I realized I was insufficiently precise in my response to Warren above:
Mark Z’s comment does take into “importance” and all other factors. He’s making an economic profit argument as opposed to an accounting profit argument.
Craig W
Jul 3 2018 at 6:21pm
“Why should Americans work to produce stuff for foreigners instead of for Americans?”
Instead of? More like ‘in addition’ — the items I manufactured are limited editions. Limited that is to the number I can sell.
Also if a choice were presented I produce stuff for foreigners when they pay more for it than Americans.
EB
Jul 4 2018 at 5:56am
Pierre, I agree with you about Warren Platts’ arguments against free trade are wrong. But you say nothing about protecting producers and consumers and therefore traders from bandits. To draw the Edgeworth Box you need to assume perfect enforcement of well-defined alienable property rights and you know that there is not such a thing. Tell me how you deal with bandits and more important how people have been dealing with bandits for the past thousands of years. Please don’t assume bandits away. Tell me what you assume about law and its enforcement, about government as a provider of protection, about a world divided in hundreds of political jurisdictions. Tell me why humanity has been spending a lot on protection and why so many people around the world still feel they don’t have good protection against bandits.
Jon Murphy
Jul 4 2018 at 8:50am
EB-
I don’t quite get where you’re going with all this. Yes, protection is necessary. The cost of that protection, whether provided by the government or by the traders themselves, is reflected in the price (if traders had to protect themselves, marginal cost would rise and subsequently marginal revenue would need to rise as well, leading to a new market price). Nothing about the Edgeworth box assumes away bandits at all; bandits are implicitly incorporated in there. Absent government protection, you’d likely have less trade on the margins, but it wouldn’t disappear.
Warren Platts
Jul 4 2018 at 2:23pm
The original name for the Iraqi intervention was “Operation Iraqi Liberation.” However, when people realized the acronym was a little too to the point, it was changed to “Operation Iraqi Freedom.” When Somali piracy became a problem, it was the U.S. Navy that fixed it. Now that China is saying that no ships may pass within 12 nautical miles of its fake islands in the South China Sea, it is only the U.S. Navy that is maintaining freedom of navigation. Who is really paying for this? A: U.S. producers. Thus, your point that the costs of such “protection” should be priced into the price of products is a good one. But whose prices is the cost of the U.S. worldwide protection baked into? A: U.S. domestic production. Therefore, U.S. exports cost more than they otherwise would because of the U.S. defense budget. Meanwhile, foreign exporters and U.S. consumers-who-do-not-produce are free riding on the backs of our military. The cost of the U.S. Navy alone is about 20% of the value of all imports. Therefore, a 20% national defense tariff could be justified on that ground alone.
Pierre Lemieux
Jul 4 2018 at 7:42pm
@Warren Platts: This is not correct. To influence a price, something has to increase marginal cost (or demand). Go back to Econ 101. Do public expenditures on sexual education influence the price of exported widgets. Of course not. Do lower income taxes in the US than in Europe subsidize American exports? Of course not.
Jon Murphy
Jul 5 2018 at 12:17am
That is only correct if we assume the US is the only exporter in the world.
EB
Jul 4 2018 at 4:39pm
Jon, what are the choices that each party has in the E-Box? By assuming perfect enforcement of well-defined, alienable property rights you take away the possibility that the other party is a bandit.
Jon Murphy
Jul 5 2018 at 12:16am
Well, no. That possibility is taken away when we assume a voluntary transaction. It has nothing to do with property rights.
EB
Jul 5 2018 at 6:17am
No. As a party to any interaction with you to get what you have, I’m free to choose between reaching an agreement or coercing you. I’m free to rely on coercion to get what I want, and if I don’t do it most likely is because the expected cost is high enough to deter me to use it. Go back to Edgeworth (but I suggest you read some of the papers written by Stergios Skaperdas, for example, Insecure Property and the Efficiency of Exchange, EJ, 2002)
Jon Murphy
Jul 5 2018 at 7:52am
EB- true but trivial. Again, I’m not sure where you’re going with this. I don’t understand your point here.
EB
Jul 5 2018 at 10:37am
Jon, to develop a theory no assumption is trivial. In the neoclassical theory of exchange, once our predecessors were able to determine a set of assumptions under which exchange will take place because it benefits both parties, successive generations of economists have been working on the consequences of changing the initial set of assumptions. The extraordinary expansion of neoclassical theory in the past 60 years is largely due to that work as well as to the work of many other economists that have been applying the theory to a great variety of social interactions.
EB
Jul 5 2018 at 10:54am
My point is that we should never ignore government because its justification is and will always be as protector of our liberty, and more important at best it’s a good protector relative to the alternatives. Given the deficiencies of all governments as protectors of our liberty, competition among governments is essential to our liberty (as discussed by research on this competition and the world’s political order).
Jon Murphy
Jul 5 2018 at 12:05pm
Ok. But it’s not ignored in neoclassical theory. Just the opposite, in fact. There are two major areas of research focused on government: Public Choice and Law & Economics. Both of those feature prominently in Pierre’s post as well as my comments above.
Lots of ink has been spilled discussing government’s role. See: Limits of Liberty (James Buchanan), Calculus of Consent (Buchanan & Tullock), Dark Side of the Force (Jack Hirshleifer), Economics of Discrimination (Gary Becker), The Law (Frederic Bastiat), Wealth of Nations (Adam Smith), Lectures on Jurisprudence (Adam Smith), The Firm, The Market, and the Law (Ronald Coase), just to name a few. Many Econ intro textbooks feature prominently discussions on property rights and the role of government in economics: The Economic Way of Thinking (Heyne, Boettke, Prychitko), Principles of Economics (Cowen and Tabarrok), University Economics and Exchange and Production (Alchian and Allen)(I should mention this last one is being re-released by the Liberty Fund soon under the title “Universal Economics”).
The role of government, the discussion of the definition and enforcement of property rights, is not assumed away in neoclassical economics. It features prominently.
EB
Jul 5 2018 at 6:41pm
Jon, I’m 77 years old and I have spent the past 60 years studying and working in Law, Econ, and Politics. I know each of the references you mention and personally some of the authors you mention (in particular, I was close to Buchanan and Tullock in the late 1970s and early 1980s). In the past 12 years, after I retired from formal work as consultant and professor, I have been reviewing Econ Theory to integrate recent ideas in Law, Econ, and Politics that my mentors and others have worked so hard to develop. Like or not, Public Choice and Law&Econ have failed to be integrated into Econ Theory. We may argue why most economists (at least 80 percent of Econ professors?) ignore Public Choice and Law&Econ but it’s a fact. I suggest you talk to “old” Richard Wagner at GMU about this failure.
Jon Murphy
Jul 5 2018 at 11:36pm
Whether or not they have been fully integrated into neoclassical economics is wholly irrelevant. The claim was that we ignore the protection aspect of property rights. That is incorrect.
EB
Jul 6 2018 at 1:36pm
Jon, as I said at the very beginning, the neoclassical theory assumes perfect enforcement of well-defined, alienable property rights. This assumption is as bad as the assumption of perfect information that had been fundamental to the theory in the 40s and 50s. Akerlof, Spence, and Stiglitz won the Nobel Prize for their contributions to expand the neoclassical theory to take account of imperfect information and today none ignores them. Buchanan, Coase, North, Elinor Ostrom and O. Williamson won the Prize for contributions that were extensions of the neoclassical theory but they have not been integrated into the theory.
Please talk to Richard Wagner.
Jon Murphy
Jul 6 2018 at 10:42pm
@EB-
I have talked with Wagner. Just today actually. He thinks you’re grossly overstating.
I also find your statement “Buchanan, Coase, North, Elinor Ostrom and O. Williamson won the Prize for contributions that were extensions of the neoclassical theory but they have not been integrated into the theory,” to be strange, especially since Coase is the highest cited paper in economic history and there are major journals dedicated to their work (JLE, Public Choice, etc). I agree with Wagner: I think you are grossly overstating the case here.
EB
Jul 7 2018 at 6:32pm
Jon, I’m glad that you talked to Richard (I don’t know him personally because he was not in Blacksburg when I spent 1979-80 there). I understand that he may think I overstated grossly my position on the failure of Public Choice and Law&Econ to be integrated into the neoclassical theory. His most recent work (say the past 10 years) reflects the long evolution of his ideas whereas I rely only on his most recent work to understand that failure (as well as on other sources). In addition, Richard does not deal directly with Law&Econ (he does it indirectly via his main concern on Public Choice). I hope you read at least his most recent work. In the meantime, and to support my position, read the abstracts of Richard’s two recent papers:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2956441
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2968652
Finally, I suggest you read the syllabus of Richard’s two courses in https://mason.gmu.edu/~rwagner/
EB
Jul 7 2018 at 8:15pm
And regarding Ronald Coase, just read this short piece he wrote after 80 years of academic work
https://hbr.org/2012/12/saving-economics-from-the-economists
Pierre Lemieux
Jul 4 2018 at 7:49pm
@EB: Isn’t there a confusion there–or I don’t understand what you mean? “Protection” in the sense of enforcement of liberty (including economic freedom) against bandits must not be confused with “protection” in the sense of forbidding a national to import what he wants when he finds the terms advantageous. Indeed, the two “protections” are contradictory.
EB
Jul 4 2018 at 10:12pm
Pierre, yes I refer to protection as enforcement of liberty. That’s is why you have to question the many ways in which this protection has been provided and can be provided. We have to pay a price to enjoy liberty, and unfortunately, sometimes the price is too high.
Hilary Barnes
Jul 4 2018 at 3:27pm
“A tariff only works if others do not retaliate:”. Is this correct? The tariff will permit the domestic price of the product protected to rise. If the country has no exports of the product this might not matter, but if it does export the product, its exports become less competitive. Tariffs are a tax on exports. The same process takes place in retaliating countries: the domestic price of the product protected goes up, exports are less competitive. So what is the point of the EU putting tariffs on EU products to retaliate against the Trump tariffs? It means the EU consumers will have to pay more for these goods. There is no reason to suppose they will give thanks to Trump. There is, of course, an eye for an eye, a tooth for a tooth justification for retaliation, a temptation which humans always find difficult to resist. Personally, I would rather keep both eyes and all my teeth.
Pierre Lemieux
Jul 4 2018 at 7:35pm
@Hilary Barnes: You are speaking of intermediate products, and you are right. The same conclusion applies to a consumer good. In one case as in the other, what the consumer ends up paying is what is most important.
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