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Siberian Grapes and Adam Smith: Why Tariffs Are Bad
Adam Smith, Wikimedia Commons
Tariffs might be OK as a source of revenue, and it would be hard for them to suck as bad as the current American income tax system. They might be OK as a means to the end of achieving a foreign policy goal. So I’m not talking about Trump’s tariff policies as such.
I’m just talking about tariffs as such. As such–in and of themselves, not considering all possible uses and consequences–they’re bad. They’re inherently detrimental to economic productivity. And did you know that that was exactly the point Adam Smith aimed at when he talked about the Invisible Hand?
Now the same insight applies generally to more or less all government meddling in the economy. But when he talked about the Invisible Hand, he was specifically talking about what’s wrong with “Restraints upon Importation from Foreign Countries of Such Goods as Can Be Produced at Home.” Here’s The Wealth of Nations–do a Ctr-F for yourself.
Here’s a version of his argument:
1. Everyone who makes economic decisions freely is someone who uses his economic resources in support of local industry.
2. Everyone who uses his economic resources in support of local industry is someone who is working so as to make the local economy as productive as possible.
3. So everyone who makes economic decisions freely is someone who is working so as to make the local economy as productive as possible.
Thus the famous line about how my economic self-interest is good for other people too:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
All this is much clearer with his superb illustration:
By means of glasses, hot-beds, and hot-walls, very good grapes can be raised in Scotland, and very good wine, too, can be made of them, at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and Burgundy in Scotland?
I like to make it clearer still: Suppose an ambitious Russian businessman wants to grow grapes to make wine in Siberia. And suppose a well-meaning Russian government decides to pass some laws to support the new wine industry by imposing massive tariffs on imports of wine into Siberia.
The result: Inefficiency. Wasted resources. Maybe a successful wine industry, sure. But at a cost. A cost we can’t always see but know is there: some real bad caused and some real good prevented because customers couldn’t buy wine without paying an unnecessarily high cost for it. That wasted money means less food, less savings, less investment, a car going too long without maintenance, medical bills paid off more slowly, or something else that’s bad.
What makes an example like this easy to understand is just how bad a policy like this is. But what makes it bad is something that involves any tariff: When people can’t make free economic decisions, their decisions are less efficient; when their decisions are less efficient, they’re worse for a growing local economy.
Published in Religion and Philosophy
They can still make efficient decisions; it may not be the most efficient that could be, but it can be the most efficient among the choices available.
Not wrong.
When people can’t make free economic decisions, they can’t make as efficient ones.
So far, every item that I have looked into that is tariffed by the United States, costs more to make and buy here than in most of the rest of the world. If somebody could find an example where our tariffed item is actually cheaper, I would be much obliged.
I suggest a broader view. Like anything else, Smith’s reasoning is true and moral within a definable set of conditions – in this case, that all the players interact according to common rules, customs, traditions, and institutions. Let’s give a name to such a set, including its projection over the population and its economic activity. I suggest we call it a smith.
Obviously, each smith should adopt Adam’s reasoning for itself. Those, we have found, are the principles that will maximize their happiness and hopefully the great work. But what happens when smiths meet and trade? Even if they all do respect Adam, they will evolve differently. And we know they don’t, so the mismatch will be even worse. Totalitarian smiths can bring all the power of the state to bear on every transaction, but the trader from a free
statesmith is on his own.Tariffs and other controls on trade the only way for smiths to trade and cooperate fairly.
P.S. Oh, man, I need to fix this. It’s not a smith, it’s a smithy. Can’t believe I missed that.
Tariffs are probably not as inefficient as some non-tariff trade barriers, like import quotas. Tariffs can raise money to pay for public goods, which can improve efficiency. It would be inefficient for me to build a lighthouse, if you can free ride on the benefits.
Smith assumes property rights are distributed efficiently and are enforceable.
On a little reflection and another glass, I think I’ll challenge your conclusion about efficiency, or rather inefficiency. I say that controls on inter-smithy trade are actually required, if one’s goal is to maximize efficiency. Are you applying gas law thinking to a network problem?
Does he assume it? It’s a big book. I wouldn’t be surprised if he argues at length for his views on what these things should be, assuming little about what they are.
I ain’t read the whole book myself. (I’m a loser.)
Not sure I’m following. Perhaps an illustration would help.
All disparate systems require some sort of interface. Engines can’t be tied directly to the wheels. Electrical circuits need impedence matching. All such things take energy out of the system – they’re a cost. It’s no good comparing the joint system to what it would have been, were the two sides perfectly matched already.
Your example is a very specific type of tariff called “protectionist”. A country has an industry they’re not very good at, and they apply tariffs on imports to protect the local companies. That is inefficient, certainly, but it’s a special case.
But inefficiency is not an especially compelling argument because:
The abstract economic argument against tariffs is that free trade is good, each party gains because they wouldn’t partake in the transaction if they didn’t, and the more trade the more good, and anything standing in the way of free trade is a negative.
Which is fine.
But when you take any economic model into international territory, things get weird.
What if the nation we’re trading with:
And what if a certain amount of self-reliance is deemed to be really, really important to a nation?
These are all important concerns.
That’s a good moral argument, but only comes up in a couple of specific countries, China being one of them.
Another good argument, not sure how to handle that situation.
Now on this one I never understood the fear. Why is it so bad for one country to spend its tax dollars to guarantee that Americans get great deals on appliances? I’m all for this situation. Let the stupid bastards waste their industry and money to benefit us.
This is a big one. It is stealing. That’s why for the life of me I don’t understand why Trump has never suggested taking away Most Favored Nation Trade Status from China. It seems like a no-brainer.
That shouldn’t be much of a concern to the United States because we are the most self-reliant country in the world.
And this should be done by force?
I’m trying to think of why it need not be done by force, and the best I can come up with “Hey, where are those libertarians on Ricochet who would explain this better than I could?”
I’m also trying to think of why it might be good if it were done by force sometimes, and I can’t quite think of a good example. Perhaps governmentally specified measurements for exactly how long is one inch make it a lot easier for different industries in different places to work together.
(I’m also trying to think about other things because I’m very busy and tired.)
Indeed. One reason I’m not at all unfriendly to the idea of tariffs as an alternative to income tax.
Indeed. My opening disclaimer was not thorough.
Consider that our country has been burdening our own manufacturing businesses for decades with all sorts of regulatory abuse, Environmental Protection Agency (EPA) abuse, Americans with Disability Act (ADA) abuses, OSHA abuses, DEI requirements, having to pay for health cares, lawyer abuse, abusive unions, and so forth.
One could argue that tariffs can compensate for that. And they can. But the better approach is to make it easier to operate a manufacturing business in the US.
A separate issue is whether tariffs should be considered as a national revenue source, possibly replacing income taxes. That’s a very intriguing concept. Taxes are bad for the same reasons tariffs are bad, right?
And then the next question is what is the optimum mix of federal revenue from tariffs and income taxes. I have no idea, but it’s worth exploring.
I expect so.
Agreed on other points too.
Adam Smith also said:
“It has been the policy of Europe, particularly of England, to give extraordinary encouragement to the industry of the country, by imposing high duties or absolute prohibitions upon the importation of such goods as could be produced at home. The effect of such regulations upon the balance of trade has been much disputed. If any particular manufacture was necessary, indeed, for the defence of the society, it might not always be prudent to depend upon our neighbours for the supply; and if such manufacture could not otherwise be supported at home, it might not be unreasonable that all the other branches of industry should be taxed in order to support it. The bounties upon the exportation of British-made sail-cloth, and British-made gunpowder, or the duties upon the importation of foreign sail-cloth and foreign gunpowder, may perhaps be considered as coming under this description; as may also the act of parliament which prohibits the exportation of the materials of which our shipping is built, and which gives a monopoly of the home market to the produce of our own oak forests.”
Switch to deflation.
Public goods only.
You don’t need the government producing inflation or non-public goods. Education is a non-public good. Look at it. They lie about inflation. It only helps the top 10% and people in the government while we choke ourselves on government debt.
The government should just produce public goods. When they talk about lowering taxes, that’s all swell, but I don’t really see how you can get anything really effectively done if you think non-public goods are good.
The most basic answer to this might be “okay, let’s outsource YOUR job, and see what you think of it then. And if you get a different job, we’ll outsource THAT. And keep it up as long as it takes.”
Let’s have a giant duel. Consumers vs job-holders, flintlock pistols at 40 paces.
You think consumers aren’t job-holders?
Except for the ones not actually working.
Far more people buy under the right policies, than lose their jobs.
Do you really want to force the economy around to keep employment up?
They can shoot themselves then. Should be easy targets.
Again, it’s not just NUMBERS. There’s SELF-WORTH, and a lot more.
Some people are doing jobs that foreigners are not capable of doing. Others are doing jobs that could either be done better by foreigners or done less expensively by foreigners.
Let the purchasers of the goods and services decide which jobs will stay in America and which will be outsourced.
Uber has eliminated many Taxi Cab Driver jobs. The automobile eliminated the jobs of many blacksmiths. The government should not interfere with creative destruction.
Moderator Note:
Please make your arguments without personally insulting other Ricochet members.lol
Self-worth through Federal government central planning. [redacted.]
Deflation is everybody’s friend except the top 10% and the government.
That is what’s known as advancing technologically as a country. Half of all Americans used to work in agriculture and farming. Are you suggesting that we go back to those days?
Uber employs drivers too – at least for now (I’ve long thought Uber really wanted to wait until they could have driverless cars, and having to have actual drivers is just a stopgap for them) – and those drivers and the people who used to be blacksmiths were Americans who could get other jobs in America, such as taxi drivers becoming Uber drivers and blacksmiths becoming auto workers… In America. That’s not the same as exporting those JOBS to other countries.
You still don’t get it. But there are a lot of people who can’t simply go get a better job. Your approach sounds a lot like “let them eat cake.”