In Defense Of Economic Freedom
I have recently been engaging the people around me in political and economic discussion. I’m discovering that many people with regards to economics are not only mis-informed, but, additionally, resistant to having their logic questioned. It is in this context that I will attempt to clarify an apparently murky issue.
While on the job site today, a co-worker remarked about how a material used was stamped with “Made in the USA” saying, “At least something still is”. I replied to him that I didn’t see a reason to specifically buy American made products over ones made anywhere else, which prompted a lengthy discussion where he (effectively) explained to me why 17th century mercantilism is an ideal economic model. He actually went as far as to say that, “[…] Everyone would be better off if we could go back to an agrarian economy”.
My co-worker seemed to miss two important economic ideas:
- Trade is mutually beneficial
- Division of labor increases efficiency in management of scarce resources
Why do we engage in trade? It may seem silly to even ask the question, but it’s important to start at the beginning. We engage in trade because we don’t have something we want and/or need. Why does the other person involved engage in trade with us? For precisely the same reason! What this tells us is that each person subjectively values what someone else has over what we have. As a means of exchange, we happen to use money to expedite the process and give us a numerical reference, but the idea is the same for any trade. Money, it is important to remember, is simply a common denominator for determining how many resources are used, (provided, of course, the the pricing mechanism hasn’t been tampered with). So, strictly speaking, you don’t work simply for money: Money is the representation of your labor, and your agreed upon wage is a representation of how many resources you demand in exchange for your labor.
This idea is important, because it implies that trade is not exploitive as some would assume. That doesn’t, of course, imply that every trade is fair. Trade entered into under false pretense is fraud, and should be treated as such. However, trade entered into under voluntary agreement should not be seen as exploitive.
My co-worker also didn’t seem to grasp the division of labor, by telling me that, “By keeping everything in a closed loop, it cycles around”. He related it to the “Buy Local” movement. In the past, he has supported the idea of tariffs on China.
The problem with this view (and consequently, 17th century mercantilism [which Adam Smith bravely battled in, The Wealth of Nations]), is that it doesn’t allow for the most efficient producer to freely engage in trade. Remember how price is a determinate of resources used? This is where that comes into play. If a producer in China (or Japan, or Canada, or Brazil, or…) is capable of producing a product for less than a producer in the USA, then that producer is using less scarce resources and the winner ends up being the consumer who is able to get the product they want for less, which frees up some of their limited resources to be able to engage in further trade, which if you’ll remember, is mutually beneficial. This is how wealth is created.
By attempting to keep everything in a closed loop, you are necessarily cutting yourself off from the majority of the world’s trading partners and harming yourself AND those potential trading partners by refusing to engage in a mutually beneficial exchange.
Tariffs only exacerbate this problem, for what is a tariff but a tax on imports? While undoubtedly domestic producers love tariffs, and surely profit from them, the consumer is the one who has to bear the brunt of it in the form of higher priced goods. Let’s use an example (hat tip to Henry Hazlitt):
A domestic producer makes sweaters, and can produce them for $20 a piece. Along comes a producer from Taiwan who can produce sweaters for $10, so the domestic producer lobbies for a tariff to “protect jobs” (and the politicians listen), and a tariff of $10 per sweater is imposed. Who is really benefitted here? To be sure, the domestic producer of sweaters is benefitted, and the workers maintain their jobs; that much is seen. What typically isn’t seen is the $10 per sweater tax that is now being paid by consumers! Consumers are now unnecessarily poorer by $10 when they buy a sweater. Because their economic freedom has been restricted, their means has been restricted as well in the form of reduced purchasing power due to government favor towards the domestic producer.
Furthermore, what if the roles were reversed, and the domestic producer were the more efficient one? Wouldn’t they desire to be able to sell more sweaters to the world at large? If Taiwan were to impose a tariff on the USA to “protect” Taiwanese jobs, the USA would be harmed because of reduced demand for their products. Everyone suffers.
Henry Hazlitt said it well in Economics in One Lesson:
For the erection of tariff walls has the same effect as the erection of real walls. It is significant that the protectionists habitually use the language of warfare. They talk of “repelling an invasion” of foreign products. And the means they suggest in the fiscal field are like those of the battlefield. The tariff barriers that are put up to repel this invasion are like the tank traps, trenches and barbed-wire entanglements created to repel or slow down attempted invasion by a foreign army.
These ideas are elementary in understanding economics. Frankly, I’m amazed that nearly 250 years after The Wealth Of Nations was published, mercantilism is still rearing it’s ugly head.