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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
Davis is arguing for complete stagnation in industry. He posted a video in another couple of threads that was arguing for innovation in manufacturing, like employing robots and machines to do the work that people used to do. I don’t think he is even aware that he is arguing both sides of this issue at the same time.
True. This is why we need deflation.
Inflation is evil, but 99% of the people will look at you like you are nuts.
Splendid. National security defense of tariffs from Smith himself. Thanks.
No, I wasn’t arguing in favor of robots, nor particularly against really. The idea there – and in the video – was that by separating the “idea” people from the “production” people, both actually suffer. One example given was Apple “designing” products in California but producing everything in China, etc.
Don’t you just love it when people quote only part of something? Such as “A little knowledge is a dangerous thing.” Or “There are fine people on both sides.”
This is progress and deflation. It is good. If you want to slow it down and not have bad things happen switch to deflation.
Only if the pistols, powder, and shot are manufactured here. And we have to get PDTv2 to bust the Ticketmaster monopoly so I can sell tickets.
Surprisingly little about property rights, overtly. It’s been a while since I read Wealth of Nations and had to go back and look. For Smith, institutions arise to determine rights to property. I believe Smith’s starting point is John Locke and natural law for the right of every person to his own labor, and if this is respected, and people are free to pursue their own self-interest, they frequently promote the interests of all of society, and they do it more effectively than when they really intend to promote it. I don’t see much discussion on how institutions arise that protect property rights, much of the book is explaining how Government institutions and policy harm the factors that lead to greater wealth.
Why not let each individual decide whether he wants to purchase Canadian oil or Brazilian bananas or a Japanese automobile, rather than have the federal government impose high taxes on Americans who want to buy these things?
What you seem to be advocating is for a Bernie Sanders-Richard Gephardt tariff regime.
If Apple were to produce its products in the US instead of China, those products would be so expensive, they wouldn’t be able to sell very many.
The result of the policy you seem to be advocating would mean fewer sales of Apple products and fewer Americans being able to afford Apple products.
In other words, we would all be poorer under protectionism than under freer trade.
Imagine someone decides that he doesn’t want to be dependent on others for his well-being.
So, he decides that, instead of buying ketchup, he will make his own ketchup. But ketchup requires tomatoes. He decides not to purchase tomatoes from others and decides to grow his own tomatoes instead.
Instead of buying toothpaste, he decides to make his own toothpaste. Instead of buying water from the local water provider, he decides to use his own rainwater.
Instead of buying gas and electricity from the utility, he decides to find his own gas and electricity.
This guy eventually starves to death or freezes to death, all because he wanted to be self-sufficient.
This is why a small country like Singapore has a mostly free trade policy. It’s a small country that can not produce everything it needs within its small geographical boundaries. So, it buys things from countries around the world. The result is that instead of Singapore being dirt poor, Singapore is quite wealthy.
The Trump policy is to make the US poor. We ought to resist it.
It seems like Trump, by imposing a 10% tariff on Australian imports, has violated the 2005 Australia-US Free Trade Agreement.
The US Senate passed the Australia-US Free Trade Agreement by a vote of 80 to 16 and the US House of Representatives passed it by a vote of 314 to 109.
It was signed into law by President George W. Bush on August 3, 2004 and began on January 1, 2005.
Seems like a US businessman that imports products from Australia to help run his business has standing to file a lawsuit against the 10% tariff on Australian imports.
The menace is running with inflation instead of deflation. Plus, they lie about how much inflation there is. Switch to deflation and let anybody buy anything. Instead, we get all of these social problems.
You could get by with inflation for a long time, but we are running out of runway on that.
I mean the whole financial system and the one percent got completely bailed out in 2008. We had the NASDAQ bubble before that when everybody was all happy about Bill Clinton getting rid of the 30 year treasury bond and having a balanced budget. It was actually just stock sales receipt receipts. Then they ran out of stock sales receipts.
For everybody that’s whining about populism, socialism, and central planning, there it is.
I was thinking of posting a comment very like this. Thanks, Frank.
I would be poorer under Davis’s wishes because I use an Apple computer.
Stated beautifully!
A lot of what ends up really happening, isn’t obvious. You may get what appears to be a bargain on the Canadian oil, but then you pay unemployment for the US oil workers through your taxes, and it very easily ends up costing you more in total; you just don’t see it on the oil receipt. And overall the economy would be doing better if the oil people were working too, rather than you just getting your bargain for one thing.
Apple products were made in the US in the past. And the actual cost of components for an iPhone is low. Since the cost of labor in China is also very low, what you’re doing is making huge profits for Apple and the CCP.
Some estimates I’ve read say that producing iPhones in the US would double the price. But that probably assumes keeping profit levels the same, which is certainly not some universal requirement, and from what I see most people don’t just buy their iPhone anyway. It’s a deal through their service provider.
Also, see my previous comment. Having more people working in the US, assembling iPhones, would improve the US economy.
You know what people did before there was ketchup in stores? Mostly they didn’t use ketchup.
Also, wanting to have ketchup doesn’t mean the ketchup has to be made in China, because it’s cheaper. Although, to add to that, the idea that it’s cheaper to make ketchup in China and then bring it over here, to sell for LESS than domestic ketchup, indicates serious other problems.
People bought Apple computers in the past when they cost $10,000 and life still continued.
https://en.wikipedia.org/wiki/Macintosh_IIfx
That’s over $24,000 in today’s money, and I knew people who had them. They were doing fine too.
Just how awful do you think the early 1990s were, anyway? I’ve seen people right on this site seeming to wish those times were back.
This is a terrible example. The price is set on the global market.
It would be mostly excluding US production, if US production is “too expensive.”
And I didn’t mention Canadian oil; Frank did.
Based on what I heard you are saving $400 to $500 per phone for millions of purchasers. That money goes elsewhere into the economy.
They pay for it with interest, even if that isn’t spelled out in the contract. They don’t save any money doing that.
Everybody’s money goes further if you build it in a [REDACTED] country. Labor and costs are lower. Millions of people have extra money this way.
The reason everything is unaffordable is because the Fed is creating inflation and we don’t have a libertarian economy.
You make it sound like this is a good thing. It’s not.
Trading with the Chinese mafia is stupid.
The serious other problem is the inflation that the Fed lies about. Otherwise, what are you talking about?
You keep ignoring that U.S. unemployment is at record low levels and has been for eight years, combined with the largest number of available jobs. Are you disputing that? You have not once responded to this fact through your thousands of comments.
How would this happen?
So minimum wage assembly jobs is our answer?
Frank’s point wasn’t that we need to have the Chinese make our ketchup. It is that trying to do everything yourself for the sake of self-sufficiency leads to impoverishment.
By the way, Heinz is the most popular brand of ketchup in the U.S. It’s sold around the world, and is manufactured in a variety of countries, but all of the Heinz Ketchup sold in the USA is made in Fremont, Ohio and Muscatine, Iowa.
Great response! Now our solution is to give-up everyday products that people use.
No, it indicates the benefits of trade!