Waste your vote! Vote for Patrick Buchanan!
Protectionism and the Destruction of Prosperity
By Murray N. Rothbard
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 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 fewand 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 partiesin this case Japanese producers
and American consumersotherwise 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
arosefortunately not fulfilledto 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 tradesuch as protectionismcripple, 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, waterrivers and
oceanswas 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 pastmountain
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
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, 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.
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