Protectionism

Some debates keep going on forever. Does the minimum wage hurt, or help, poorly skilled workers? Do gun control laws reduce “gun violence,” or do permissive carry laws reduce violent crime? Is free trade a good or an evil?

Surprisingly, there is a lot of empirical evidence to help us evaluate these claims. As Thomas Sowell keeps pointing out, before minimum wage laws unemployment among black youth was lower than unemployment among white youth. After minimum wage laws, the opposite was true: black youth unemployment is higher than white youth unemployment. States that changed to a shall issue gun control scheme often had a reduction in violent crime.

A huge experiment in protectionism versus free trade has already taken place.

Many of the United States States have economies the size of European nation states. The US Constitution through the Commerce Clause gives exclusive jurisdiction over interstate commerce to our Federal Government. The Federal Government has never permitted States to impose tariffs against the goods of other States, but it could. Consider it a huge experiment in free trade.

At one time the US economy probably had half the World GDP, and there was a huge free trade zone comprising all of it.

What do the advocates of trade restrictions claim as benefits? They say well paying US manufacturing jobs are “exported” to low paying Mexico or China or Vietnam. Isn’t the same true of Michigan and South Carolina?

Just think, if New York put up a $ 100,000 tariff on cars imported from any other State, the automobile industry in New York would flourish. The Corzone-Trablant factory would have many high paying jobs. Only New York residents could not buy a Telsa, or a Porsche, or a BMW, or a Ford Focus.

Of course other States might, or would, impose a tariff on New York jewelry and paintings.

Could you imagine having to buy everything you buy from producers in your home State? Why limit your choice to products from producers in your home country?

The United States free trade zone has sometimes hurt individual States when they had to complete with more productive higher capital people from other States, but, all in all, it has been a blessing in capitalistic competition and productivity. Allowing the citizens of each state to produce and specialize in what they excel at has made all of us richer.

The largest experiment in free trade of all time has proved itself. No politician even advocates intrastate domestic trade barriers. Yet every claimed benefit of international trade protectionism is available on the State level. All the unheralded detriments are there also.

Why do Politicians Promise Affordable Health Care

Often we have no choice but to buy health care services.  No one likes to pay money for a purchase forced upon them.  The need for health care may strike arbitrarily due to no fault of the sufferer.  Health care can be ruinously expensive. It all makes it seem unjust and painful to devote lots of money to it.

So should the price be reduced by all the means available to the modern state?  The state could put a lot of pressure on health care providers to force a lower price.. There could be tax incentives for insurance plans that keep price increases lower than a goal.  There could be ceilings on annual price increases, limits on the number or MRI’s, government panels to approve treatments and drugs, mandated end of life counseling, penalties for hospitals that have higher than average readmission rates, cash payments to doctors whose patients use fewer services, etc.

What purpose does the price of something have in a capitalistic system, besides extracting your hard earned money?

Price allocates the current supply to those who value it most.

The money you spend on something can be viewed as a willingness to give up all the other things that the money could buy for you. So more accurately price allocates the current supply to the people who relatively value it more among their options.   No one can make it possible for you when making purchase decisions to have the options of Donald Trump, but you can make it possible to allocate the resources that you do have among your competing wants, thereby valuing some things more and some things less.  Donald Trump probably does not move the demand curve for any medical care, because people like him are very rare. I could charge $100 for an aspirin and would sell very few aspirin. If I were sitting next to Trump in the jury room and he had a headache and wanted an aspirin I might make a $100 sale.  The entire supply is what determines the price, and that has to take into consideration people who are more reluctant than Trump to part with $100.

Price also communicates information to the entire economy.

Price signals to suppliers, producers and sellers, how valuable their “things” are. A high price signals a willingness to buy it in preference to lower priced things. A high price also invites more supply. In NYC twenty five years ago you could get a cup of coffee on nearly every block. It was served in a paper cup from a large urn, not good. Enter Starbucks, introducing west coast coffee to NYC.  Not only did Starbucks open a store seemingly every block but also thousands of independent coffee shops sprung up, eating places started sprouting European espresso machines, and even McDonalds entered high end coffee.  Why did that happen? For decades New Yorkers were offered the same coffee urn product (except at high end restaurants). Suddenly, millions of dollars were voluntary invested by private citizens to supply great coffee. How did they get the idea that escaped them for decades? Did New York citizens not appreciate good coffee while the West Coast did? Later developments showed the demand for good coffee in NYC was as great as in Europe or Berkeley, but the darn suppliers did not know it. Starbucks charging five times the price of a cup of swill, and selling like hotcakes, convinced them, drew capital and effort, and increased the supply of great coffee overnight.

So price under capitalism has an important function of transmitting information. If you suppress the price you short circuit the information.

Why would politicians and bureaucrats think that they can make health care more affordable to people who can order their allocation of money as they see fit without causing over consumption and underproduction  of health care?

 

Trade or Comparative Advantage (cont.)

Last post I claimed that trade could improve the lot of all participants, be they more productive or less productive, higher cost producers or lower cost producers, advanced or backwards.

I even claimed that if you are better then me at every productive activity, I can benefit from trade with you. This is the opposite of the wisdom that capitalism and voluntary exchange allows the “stronger” to take more from the “weaker”.

To simplify everything I imagined a shipwrecked pair, Mr. A and Mr. B on an island. Their little economy was focused on survival and the main element of GDP was fishing and gathering fruit. Reality compels them each to somehow obtain four fish per day and four small fruit to thrive.  I claimed that if Mr. A was better at fishing and Mr. B was better at gathering, if they traded the products of their effort they could get the same output for less work because they could specialize at that which they were best.

As a baseline we could imagine each of Mr. A and Mr. B had to work four hours each day at fishing and four hours at gathering to get their requirements. Now suppose Mr. A has some sort of absolute advantage over Mr. B.  Mr. A. can not only catch his four fish in three hours but is a killer at gathering, getting four fruit in two hours effort.

Of course, Mr. A could work five hours per day getting everything he needs (3 hrs for 4 fish, 2 hrs for 4 fruit). He could with satisfaction watch poor Mr. B work eight hours a day for the same. Or he could be smart and realize that if he traded with Mr. B, he could spend all his time on his most productive activity – gathering fruit. He could gather enough fruit for all their needs in four hours instead of personally meeting his fish and fruit needs in five, but he could only do it if Mr. B joined in an agreement with him. Mr. B had to give him some of his fish for Mr. A to specialize in fruit. Even though Mr. A is better at fishing then Mr. B, he is even more better at gathering fruit. Obviously they would come to some agreement that splits the gain for Mr. A (five hours work reduced to four hours work) with Mr. B in exchange for Mr. B allowing him to specialize in his best field.

Mr. B stops gathering fruit and spends all his time fishing. Even though he is no more productive fishing than gathering fruit, his specialization enables Mr. A to produce more at less effort. His reward for enabling Mr. A is some of Mr. A’s higher productivity.

That is why the lawn care guy benefits from the brain surgeon. When I was a kid in a working class neighborhood nobody paid to have their lawn mowed.  Well maybe a few people did as favors to enterprising kids or when facing declining health.  Where I live now, people make lots of money when they are working. In fact most would trade money for a little free time for themselves and their family. Their high productivity makes it possible for very low productivity people (perhaps someone who can not read or write or speak English) to get a little of the higher productivity person’s production.

Far from the strong taking advantage of the weak, capitalism and voluntary exchange spreads the wealth. If Mr. A with his higher productivity did not exist, poor Mr. B would be stuck working eight hours a day to live. When higher productivity Mr. A arrives, there is surplus available for them to split. If Mr. A tries to claim all the new surplus for himself, Mr. B can simply decline to trade with him being no worse off then before.

Trade or Comparative Advantage

Trade, voluntary exchange, is now controversial, particularly international trade. Are we being taken advantage of by the Peoples Republic of China?  After all they have lower labor costs and fewer expensive pollution controls. Or, as in most areas of life, is it a trade off between benefits and detriments? Free trade with the PRC gets American consumers cheaper Iphones but causes other Americans to experience a loss of high paying manufacturing jobs.

I contend that trade creates a free benefit for all parties involved, be they more or less productive, higher or lower cost producers, developed or underdeveloped economies. Interestingly when trade occurs, the stronger benefits the weaker, as well as itself.

Imagine two castaways on an island.  In abstract, an economy

I will postulate some reality constraints on them.  Each has to eat to survive.  There are two categories of food available to them: fish and fruit.  If one ate only fish he would die of scurvy, if one ate only fruit he would lack protein and starve,

Our castaways, Mr A and Mr B, each need 4 small fish per day and 4 fine fruit to meet their caloric requirements. Mr A and Mr B can meet their requirements by each fishing 4 hours per day and each gathering fruit 4 hours per day. Under these conditions there would be no trade between them.

In the real world, some people are better than others at tasks.  Anyone who ever played a pick up game of sports knows some people are better than others at any given task. Suppose Mr A is a better fisherman and can catch his 4 small fish in three hours.  Suppose Mr B is a better gatherer and can gather his 4 fruit in three hours.

Without trade

Mr A      3 hours fishing (4 fish)      4 hours gathering (4 fruit)     7 hours work to survive

Mr B      4 hours fishing (4 fish)       3 hours gathering (4 fruit)      7 hours work to survive

Now suppose it occurs to Mr A and Mr B to make a trade.  Mr A could trade 4 fish to Mr B for 4 fruit.  Now the situation is:

Mr A     6 hours fishing (8 fish)   0 hours gathering fruit  (no fruit)      6 hours to survive

Mr B     0 hours fishing (no fish)   6 hours gathering fruit (8 fruit)     6 hours to survive

Our little economy just achieved the same output with two fewer hours of work per day, for free.

Next entry: what if Mr A is better at both fishing and fruit gathering than Mr B?

Profits Are Good

When I got to college I was surprised at how much disdain capitalism and the bourgeoisie were held in.  I was a small town unsophisticated kid.  To me, a law abiding person who served the wants of fellow people and supported a family seemed good. The way life was ordered, with shopkeepers, tradesmen, doctors, clerks, was not only familiar but correct.

Professors didn’t agree with me. In fact, it was implied that my thinking was shallow. The bourgeoisie were exploitative, secretly dishonest, depraved, and above all boring.  The artist, the academic and the world historical individual were the ones who deserved respect. Don’t think too much about the trail of blood left by the world historical individual.

Anyway it is a story for another time how I came to decide that capitalism is good. I have decided to start a blog defending capitalism. To defend capitalism one has to defend profits.  For under capitalism no business exists and grows unless it is profitable.

Continue reading