Democracy tends towards protectionism when those harmed by free trade are numerous enough to count. But democracy also demands cheap goods. No one has yet squared that circle.
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Samizdata quote of the day – an unsquared circleSamizdata Illuminatus (Arkham, Massachusetts) · Economics, Business & Globalization · Slogans & Quotations April 23rd, 2025 |
 21 comments to Samizdata quote of the day – an unsquared circleLeave a Reply |
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The opposite explanation is often used to explain protection of the sugar industry in the US. The concentrated benefits to the industry make them more motivated than the vast majority that are harmed but only mildly by higher prices.
The issue one needs to square is the problem that Ricardo didn’t face – namely that in his day all exports were things. Now they aren’t, they can (and massively do) come in the form of services and IP. Ergo if Ricardian principles of trade are to work, they need to incorporate the idea that services are far more difficult to export (who wants to deal with a solicitor based in Mumbai who speaks your language terribly if at all, and is hardly going to suffer much consequence if he screws up your case) and also are far easier to block with non-tariff barriers (special qualifications, residency requirements, controls on financial transactions etc), and also the concept that IP can be stolen in a way physical goods can’t.
So if Western nations are supposed to outsource the production of cheap goods to countries that are better placed to produce them, and concentrate on the things they are good at (services and IP) then the world needs a trade system that means the West can gain full recompense for its output in the same way the non-West does for its physical output. This is not happening now when the non-West indulges in blatant and widescale theft of IP, and offers massive barriers to services as well.
What is happening now is the equivalent as if the West had full unfettered access to developing world markets for services and IP (all of which consumption had to be paid in full, no theft) and then stole a large proportion of the developing world’s goods. I don’t think anyone would regard that as ‘free trade’ so why is what we have now so considered?
That was quite an informative and balanced article.
When consumption goods are scarce, expensive relative to wages, consumers are more price sensitive. There has always been a quality-price relationship with higher quality, inconsistently defined by customers as they buy, being higher priced than lower quality. Buy American has long been a form of local made stuff has higher total social quality, thus a bit higher price.
As stuff gets cheaper, more & more folk are using local production as a justification for a bit higher price. Probably a 10% tariff, which results in a 0-8% price increase to the buyers, will hardly be noticed by most buyers of most products. Many retailers might eat the whole increase to keep the retail price the same, perhaps 9.99.
Over the past 4 years, I haven’t seen any significant complaints in foreign countries, like Canada, about high tariffs on US goods. In practice, anti-US protectionism has mostly squared that circle in the democracies with higher priced US goods.
As noted by the Cook, because concentrated benefits and spread out costs gives political power to the beneficiaries.
The best, or perhaps only way, to square the circle is to convince enough people that mercantilism, and the zero-sum fallacies it feeds on, is a loser for most people over time. It requires an ability to see beyond immediate self-interest, and to grasp what is unseen as well as immediately visible (as Frederic Bastiat would have called it). This is hard to do.
A related point is the benefit over time of more technology, automation and competition in general. There will always be those who are annoyed at losing their jobs from this, whereas the benefits to the wider population tend to be more diffused. There is an imbalance between the concentrated, visible rage of the losers, and the beneficiaries’ more long-term, less noisy, stance.
It is an age-old problem.
Jim thinks making US people pay $3000 for phone will show those damn slitty-eyes why they need to buy more fungible services from the USA :p
Leaving aside the modern situation, which I have discussed on other threads when posts like this are made (and they seem to be made endlessly around here), there is something to this idea – for example….t
Perhaps the greatest liberal (in the old sense of that word) in Colombian history was President Lopez in the mid 19th century – he ended slavery, ended the communal landownership of the tribal reservations (something the United States has still not done – in spite of the tragic failure of Pine Ridge and-so-on), stood for Freedom or Religion, Freedom of Speech……. yet President Lopez ended up helping to use violence (on a very large scale) to crush dissent, why so?
Because the common people wanted Protectionism and the Protectionism is against liberal principle (and I certainly agree that it is against liberal principle) – so the two sides fought it out in the “Artisan’s War” and the common people lost.
In southern Italy, in what had been the Kingdom of the Two Sicilies (the Kingdom of Naples) the common people also wanted Protectionism (certainly rather than than the high taxes that the new Kingdom of Italy imposed) – but they were crushed (shot as bandits and so on), hence the mass emigration from southern Italy in the late 19th century and early 1900s.
Even in Britain John Bright (perhaps the leading advocate of Free Trade) was horrified when tariffs were replaced by an income tax – which he understood had far more dire implications for Civil Liberties.
So the matter is not simple – it is complicated.
“Jim thinks making US people pay $3000 for phone will show those damn slitty-eyes why they need to buy more fungible services from the USA :p”
No, I’m saying that all the free traders going on about comparative advantage are talking b*ll*cks, because there is no free trade when one side steals the other’s output. How does Ricardo suggest dealing with that little problem?
I think this is a bit misleading. I mean it is a small sliver of a bigger problem with democracy. In democracy we give power to the masses who can then use it to extract tribute from the less numerous. It is what leads to ideas like soak the rich, and socialized medicine and government run retirement schemes. It is why democracy is such a flawed system. What you are describing is just one symptom of that broader disease. And as has always been the case in democracy reality means you have to find a mid point between what is best in a theoretical sense and what is practical enough to prevent the folks from rising up with pitchforks and torches.
It is like that saying in IT support — the computer systems would run perfectly if it weren’t for all those damned users.
FWIW, I have often thought that, for this reason, corruption is a necessary feature of democracy. Those at the bottom of the pyramid will always seek to pull down and take the wealth of those at the top. Doing so is utterly destructive but it is the tendency of democracy. And so you need a countervailing force, since those at the top are badly outnumbered but cannot be outspent. And in western societies that countervailing force is largely corruption — the buying off of politicians.
It would be nice if the countervailing force was the good character of politicians doing what is right even at their own political peril. And it would also be nice if money grew on trees and blowjobs tasted like chocolate.
Jim:
The issue one needs to square is the problem that Ricardo didn’t face – namely that in his day all exports were things. Now they aren’t, they can (and massively do) come in the form of services and IP.
Comparative advantage does not just relate to physical differences, but things such as skills and aptitudes that have taken years, decades even, to accumulate and develop, and which can endure for a long time. A culture can be a comparative advantage in a way, so a country that is good at producing lots of skilled musicians or doctors is not one that can be easily replicated, at least not for many years. As for IP, certain business processes can be covered by patents, and then there are trademarks that apply to certain services, as is also the case with copyright on things such as films, books, various other productions.
It is true that in a world where labour and capital and mobile, services can also be more mobile and those who practice them find it easier to move than, say, car factory owners, although this is relative.
Ergo if Ricardian principles of trade are to work, they need to incorporate the idea that services are far more difficult to export (who wants to deal with a solicitor based in Mumbai who speaks your language terribly if at all, and is hardly going to suffer much consequence if he screws up your case) and also are far easier to block with non-tariff barriers (special qualifications, residency requirements, controls on financial transactions etc), and also the concept that IP can be stolen in a way physical goods can’t.
If services are “far more difficult to export”, how come the US has such a large surplus in services?
In fact, one of the killer qualities that the US/Anglosphere has had around services is the English language. Take one topic: education. Millions of aspiring parents send their children to English language schools, and hundreds of thousands of youngsters attend universities and other such places in the West. Private schools now franchise their “brands”, and it is a big earner for places such as the UK (although the existing UK Labour government, in its typically egalitarian zealot way, is doing its best to blunt this). The renowned universities of Harvard in the US or Cambridge in the UK are part of the service economy, to that extent.
Fraser: I think this is a bit misleading. I mean it is a small sliver of a bigger problem with democracy. In democracy we give power to the masses who can then use it to extract tribute from the less numerous. It is what leads to ideas like soak the rich, and socialized medicine and government run retirement schemes. It is why democracy is such a flawed system. What you are describing is just one symptom of that broader disease. And as has always been the case in democracy reality means you have to find a mid point between what is best in a theoretical sense and what is practical enough to prevent the folks from rising up with pitchforks and torches.
Which is also why I say that the key point about the West is not that it is full of democratic nations, but, rather, constitutional countries (monarchies/republics) that accept that there must be side-constraints (to use a Robert Nozick term) on the use of power, and an acceptance that the ends (prosperity, safety, whatever) don’t justify the means. (Donald Trump, please note.)
The greatness of the US, for example, is that it is a constitutional republic, created to protect individual rights that are inalieble, not that it is a democracy.
David Ricardo may have been good on trade – but, overall, his influence on economics was very bad – he pushed the Labour Theory of Value (which seems to have originated in some confused thinking, in old age, by Adam Smith himself – the so called “paradox of value” is not a paradox a all, as we do not (for example) value all water against all diamonds – we value a particular amount of water against a particular amount of diamonds in the circumstances of time and place (to a person dying of thirst water is likely to be more valuable than diamonds – unless they wish to die, which some people do).
Nor can trade be considered on its own.
For example, the liberal celebration of the “unification” of Italy ignored the robbing of the banks of Naples (“gold is not important Paul” – if it is not important why did the regime steal it?), the imposition of higher taxes, the language persecution (use the “correct” form of Italian – or else), conscription being imposed in Sicily – and on and on. The ruination of Southern Italy, which led to mass emigration, was all fine – because it was, supposedly, about “free trade”.
As for why 19th century liberals supported the “unification” of Germany – i.e. the conquest of relatively low tax places such as Hanover by higher taxes places such as Prussia (just as Piedmont was a relatively high tax place conquering relatively lower taxed places) – well the support for such “unifications” is baffling.
Democracy leads to…..
In reality none of the Welfare State schemes in the United Kingdom, the United States and so on – were demands from “below” (from the people), they were all ideas imposed from “above” – by an “educated” (and often very wealthy) elite.
So “democracy leads to….” is not true – as the growth of the state has nothing to do with democracy.
Lord Stanley (later he Earl of Derby) imposing a state school system on Ireland and, later with Lord Russell, imposing Poor Law taxation – is about as far from democracy as it possible to be.
Even in the 1930s and 1960s the New Dealers and the Great Society intellectuals did not give a toss what policies ordinary Americans wanted – they (the intellectuals) decided policy.
It is Rousseau and the “Lawgiver” – deciding what the “General Will” is, and disregarding the opinions of ordinary people as the despised “will of all”.
Places that actually have democracy (over centuries) such as Appenzell Innerrhoden – are not left wing, quite the contrary.
Perhaps the worst original contribution that David Ricardo made to economics was his theory on LAND – which led to some people thinking that rent was somehow wrong, and that a land tax was less harmful than other forms of taxation (whether it be the insane Poor Law tax in Ireland in the late 1840s – or the later theories of Henry George) – even today some supposedly free market bodies (such as the Tax Foundation) defend property taxes as somehow better than other forms of taxation.
Taxes on property, on land, are not better than other forms of taxation. Indeed the entire David Ricardo theory of land is nonsense (just as his Labour Theory of Value is nonsense) – but although it was refuted by Frank Fetter more than a century ago, the Ricardo theory on land continues to do harm.
“Which is also why I say that the key point about the West is not that it is full of democratic nations, but, rather, constitutional countries (monarchies/republics) that accept that there must be side-constraints (to use a Robert Nozick term) on the use of power,”
Not many constraints on the use of power in the West if you’re a Leftist, then you can do what you like. Use the police like your own private security force. Some one says something you don’t like, get the police around to arrest them. Human rights legislation only applies to criminals, not the law abiding. Do I have any right not to have all my income and wealth taxed away by the State, or have my property expropriated by the State without proper compensation? No I don’t. But if I’m a violent criminal immigrant human rights law will protect me a from being sent back where I came from, and grant me access to all manner of welfare benefits, paid for by people like me, naturally.
You’re under the quaint notion that ‘its a free country’. It hasn’t been for years, and it rapidly getting worse.
“If services are “far more difficult to export”, how come the US has such a large surplus in services?”
Because the other countries don’t provide such services, so there’s hardly anything going the other way, so of course the US (and the UK) run service surpluses. But those service surpluses should be massively greater, if the non-West didn’t steal most of the West’s IP, and put up massive internal barriers to service competition. A fact I notice you completely ignore, the blatant rip off of Western IP throughout the non-Western world.
Paul Marks:
David Ricardo may have been good on trade – but, overall, his influence on economics was very bad – he pushed the Labour Theory of Value (which seems to have originated in some confused thinking, in old age, by Adam Smith himself – the so called “paradox of value” is not a paradox a all, as we do not (for example) value all water against all diamonds – we value a particular amount of water against a particular amount of diamonds in the circumstances of time and place (to a person dying of thirst water is likely to be more valuable than diamonds – unless they wish to die, which some people do).
Indeed. It is odd that economists who have a mix of good and bad ideas are remembered for the bad ones more than the good ones, in some cases anyway. A case in point is Henry George, who was most famous for his socialistic ideas about land values, on which he was mistaken, and not much known as a champion of free trade, where he was (obviously!) correct.
George Reisman has this excellent debunking of the “exploitation” theory that Marx constructed on the shaky foundations of the labour theory of value.
Heeeeeere’s Jim!
Not many constraints on the use of power in the West if you’re a Leftist, then you can do what you like.
A better term is “collectivist”; there are forms of Right wing collectivism (might is right) and Left wing forms (whatever the “working class”, or the “oppressed”) demand. Both are driven from mostly incorrect forms of grievance, a hatred of supposed oppressors (foreigners, “cheap” labourers, speculators, landlords, owners of land, Jews, Asians, insert as appropriate). As such, both sides are impatient with constraints, such as due process of law, and in the Maga case, look at the abuses of due process, or the complete ignoring of it, around some cases that have come up around illegal immigration or even those with papers and so on. https://www.cato.org/multimedia/media-highlights-radio/ilya-somin-discusses-scope-president-trumps-deportation-power
Your response to my point about services from the US is so lame, it is hardly worth responding to, but I have this desire to educate you, Jim:
Because the other countries don’t provide such services, so there’s hardly anything going the other way, so of course the US (and the UK) run service surpluses. But those service surpluses should be massively greater, if the non-West didn’t steal most of the West’s IP, and put up massive internal barriers to service competition.
Well, if there is “hardly anything going the other way”, then ask yourself why not? The reasons why not is because these countries, for various reasons, are not very mature, economically. But that will hopefully change as they get richer (assuming the idiots who favour vast tariffs don’t succeed in beggaring us all). Countries such as S. Korea, to take just one example, now produce tons of TV dramas and films and I watch a few of them; there will be schools in Asia – possibly offering far higher standards of schooling than in the West – that might attract Westerners in time. And so on. Your problem, Jim, is that you cannot imagine this sort of thing, so you dismiss it.
I am not ignoring the rip-off of IP – that is an issue, particularly with China. The issue is that Western firms, in conducting joint ventures in China, traded the presumed advantages of getting into a large and growing market against the risks of losing IP.
Needless to say, if IP theft is a legitimate cause for complaint, but the damage caused by tariffs would seem to outweigh it considerably. I also note that hardly any efforts that I can see have been made by this or previous US administrations to use the procedures of the World Trade Organisation to go after China on this; there are also pricing changes on royalties charged for patents that could reduce incentives by China to steal IP.
If China were to refuse to abide by WTO arbitration on IP theft, and continue to routinely steal Western IP, this could be grounds for removing China from the WTO, and for countries to engage in bilateral agreements with China, or not.
There are already large internal barriers to services competition around the world, including in the US. But even so, the service earnings the US makes are large, and significant.
If a UK barrister/attorney wants to practice law in New York, for example, he cannot do so without getting registered by a local bar, and the same goes for France, for example. But manufacturing is seldom much better. It is also an issue with agriculture, such as disputes over the right to sell certain drugs or foodstuffs, such as GM crops.
What is clear is that the claim that service exports are far less robust than goods when it comes to barriers is not really based on fact. As I type these words, I read that major retailers in the US such as Walmart fear their shelves will be empty soon because of the tariffs on foreign imports. Seems a fairly cut-and-dried case of how restrictions on physical goods can be enforced pretty fast, and to bad effect.
And meanwhile, Trump’s approval ratings keep sliding.
“Well, if there is “hardly anything going the other way”, then ask yourself why not? The reasons why not is because these countries, for various reasons, are not very mature, economically. But that will hopefully change as they get richer ”
China has got a LOT richer over the last 30 years, has its surplus declined as it starts to consume more imports? You mention S Korea exporting services, thats even more exports to add to all the goods it exports. What about imported services? Is there a single bit of evidence it has increased its consumption of imported services as its got wealthier?
Can you name one single exporter country that has got wealthy and started running a trade deficit because it sucked in lots of imported services? Indeed has any country ever run a trade surplus based entirely on services? Ie has managed to offset a massive deficit in goods with an even larger surplus in services? I doubt this has ever happened, because by and large people will buy imported goods, but they’ll buy services from domestic suppliers. So however good you are at selling services abroad, the revenue raised will always be less than the cost of the imported goods consumed by your own population. As is shown by pretty much every Western nation, they consume far more imported goods than they can ever offset with exports of services and IP.
“If China were to refuse to abide by WTO arbitration on IP theft, and continue to routinely steal Western IP, this could be grounds for removing China from the WTO, and for countries to engage in bilateral agreements with China, or not.”
If you think the WTO is going to chuck China out I’ve got a bridge you might like to buy.
I aren’t a particular fan of democracy but the idea that democracy is used to soak the rich seems fanciful. Past experience over the last several decades suggest that unless enough elements of the elite are onboard with something, it doesn’t matter what the masses think or voted for.
Consult the UK elections in 2010, 2015, 2017, and 2019. In each case, the voters voted for lower immigration. In each case the subsequent government went on to increase immigration further. What the voters wanted didn’t mean anything. Enough of the elite for various reasons are addicted to mass immigration, so that’s what we got.
Jim, China has got richer: but bring a dictatorship and run by the CCP it has also seen massive misallocation of capital (“ghost cities”), and a repressive system that’s unfavourable to a vigorous services sector, at least not yet.
At some point, the population will want to ode what that country is earning: there’s no real welfare system or equivalent to the West’s pensions system. But a change has to come or the country will fall apart.
Other Asian nations aren’t as stupid.
The People’s Republic of China Communist Party Dictatorship has twice the industrial power of the United States – and eventually (eventually) industrial power becomes military power.
This is an unprecedented situation – Nazi Germany and Soviet were midgets compared to the industrial power of the United States, the People’s Republic of China has twice the industrial power of the Unites States – that means that the present military advantage of the United States will-not-last, not unless this relative industrial decline is reversed.
As for “GDP” and “services” – this is just spending (GDP is spending) and Credit Bubble antics (the absurd games of “Wall Street” or “The City”) – it is not part of a serious discussion.
As Adam Smith correctly pointed out – “defense is more important than opulence” so the industrial power of the United States must be restored – by any means necessary. And the “opulence” of Wall Street or “the City” of London is not going to last anyway (regardless of what policy is followed) – indeed it is already coming to an end.
As for pensions – I will not get one, as I did not go to “sign on” when I was not in work, this ritual struck me as pointless – but it is a legal requirement for getting a pension.
So when I can not find work I will have to self terminate – I suspect I will not be alone, and that many of the people who did “sign on” will also, eventually, be in similar position – as there will no funds to pay the pensions and other benefits in a few years.
BTW, when people – with some justice – raise IP theft as a reason for imposing tariffs on China, a few thoughts from Don Boudreaux at his Cafe Hayek blog make a lot of sense. He has this letter that he sent to the Wall Street Journal. I quote it in full:
With respect, I disagree. I do so mainly because to “hit the Chinese hard, fast, and where it hurts” is to also hit Americans hard, fast, and where it hurts. Each dollar of Chinese imports into America is a benefit to Americans. Further, the dollars earned by Chinese exporters are spent and invested in the global economy. These dollars make their way – some directly, others indirectly – back to the U.S. as either demand for American exports or as investments in the American economy, also creating benefits for Americans.
I disagree with you also because intellectual property is private property – by which I here mean that intellectual property is not “ours” just because it’s owned by some fellow citizens. For example, Apple’s proprietary software belongs to Apple Inc. and not to me or my siblings. At best it’s unclear why American owners of intellectual property who choose to do business in China should not themselves shoulder the chief responsibility for protecting their IP.
Three reasons combine to counsel caution before using allegations of IP theft to justify trade restrictions. First, private owners of IP can themselves take measures – including refusals to do business in China – to protect their property from Chinese theft. Second, to the extent that our government is involved, it should first attempt to resolve IP issues by using the WTO’s dispute-resolution provision under its TRIPS (“Trade-Related Aspects of Intellectual Property Rights”) agreement. (See this 2019 Mercatus Center paper by Dan Griswold and me.) Third and most importantly, trade restrictions unavoidably inflict damage not only on those Chinese officials and pirates who are guilty of IP theft, but also, and substantially so, on Americans (and on Chinese citizens) who are guilty of nothing more than being caught in the crosshairs of governments waging trade wars as each pursues an idiotic mercantilist agenda.
At the very least, snagging government-granted protection from foreign competition shouldn’t be as easy as screaming “IP theft!”