Tuesday, February 03, 2009

Objectivism & Economics, Part 18

Limits of free-trade. Ayn Rand and her followers are well known advocates of free trade. In her Playboy interview, Rand explained:
The essence of capitalism’s foreign policy is free trade—i.e., the abolition of trade barriers, of protective tariffs, of special privileges—the opening of the world’s trade routes to free international exchange and competition among the private citizens of all countries dealing directly with one another..

Although Rand’s primarily rationalization of free trade rests on moral arguments, nonetheless, Objectivists also contend that free trade is, in terms of economic efficiency and productivity, superior to protectionism. Yet this view is not as irrefragable as laissez-faire and other free trade zealots tend to believe.

The Italian social thinker Vilfredo Pareto, who, early in his career, had been a fervent advocate of free trade, adopted a more impartial view later in life. Although Pareto continued to maintain that protectionism destroys wealth, he came to understand that it had other effects which, under special circumstances, might make up for the wealth lost through the imposition of trade barriers. As Pareto explains in his mammoth The Mind and Society:
We find that protectionism transfers a certain amount of wealth from a part, A, of the population to a part B, through the destruction of a certain amount of wealth, q, the amount representing the costs of the operation. If, as a result of this new distribution of wealth, the production of wealth does not increase by a quantity greater than q, the operation is economically detrimental to a population as a whole; if it increases by a quantity greater than q, the operation is economically beneficial. The latter case is not to be barred a priori; for the element A contains the indolent, the lazy, and people, in general, who make little use of economic combinations; whereas the element B comprises people who are economically wide-awake and are always ready for energetic enterprise—people who know how to make effective use of economic combinations. [§2208]

Pareto’s theory explains why protectionism helped, rather than hindered, wealth creation in 19th century America. American protectionism transferred wealth from agricultural interests to industrial interests—that is, from those who would’ve used the wealth primarily to buy consumer goods to capitalists who invested the money in industrial production. Hence the great success of American capitalism during the latter half of the nineteenth century despite the high tariffs. Entrepreneurial capitalism works best when capital is transferred into the hands of those best fitted to use it. When protectionism manages to accomplish this end, it can be economically beneficial. When protectionism achieves the opposite effect and transfers capital from those best fit to use it to those least fit to use it, the results are economically pernicious.

The typical Objectivist position is that protectionism always diminishes economic efficiency. As Objectivist write Dave Holcberg puts it: [Protectionism] destroys more jobs than it creates because the overall productivity of businesses is diminished by the higher costs imposed on them.” This view, however, flies in the face not merely of the experience of 19th century American capitalism, but of Pareto’s theory, which states that, under special circumstances, protectionism may create more wealth than it destroys.

5 comments:

Andrew said...

Short but excellent insight.

Quite interesting to consider the nuances of protectionism.

The moral argument for free trade strikes me as very mistaken, considering that would we not be, as a society, morally obliged to follow the direction of what works? If certain measures of protectionism strengthened society and increased affluence, that should be supported by societies morality and structures. In fact, our cultural evolution would likely move automatically in this direction.

Did utility and social progress come before morality and should we let it direct morality? Or should, as the Objectivists think, morality direct us towards our best utility? Which is probably impossible.

I read the article in question by Holcberg and this assertion seems counter-intuitive to me:

"As an example let's take the protection of the orange industry. The protectionist law imposes a tax of about 50% on Brazilian oranges, so that they will cost as much as Florida oranges do. In order to save a couple of thousand jobs in the American orange industry, all three hundred million people that live in the US plus tourists that come to America, have to pay an excess of 50c on the dollar when they drink a glass of orange juice. This extra 50c, if in the pockets of consumers, would go to buy other things such as milk, CD players, shoes, medicines, and thus create new jobs in all those sectors."

To offer up as fact that 50 cents more spent on a glass of orange juice is 50 cents less spent on electronics, shoes, medicine or other food items, seems absurd. If I have a glass of orange juice, it is most certainly NOT at the expense of my medicine or shoes. If I had an extra 50 cents because I had cheaper orange juice, would I buy MORE medicine and shoes? No, I dont think I would. I would buy what I need.

What kind of economic thought, or insight towards human behavior goes into this assertion of Holcbergs? I find it somewhat baffling.

Although maybe I am not budgeted down to my last 50 cents and cant appreciate these decisions?

Jay said...

Who decides what strengthens society and using what criteria?

Andrew said...

No one person or group would actually "decide" such a thing in a Capitalist economy. The aggregate level of knowledge required to run and advance society is not contained in one mind but many minds spread out over many structures, it would be impossible to consolidate in any way that would not resemble central planning.

I think this is good for a time period specific measure.

"Pareto’s theory explains why protectionism helped, rather than hindered, wealth creation in 19th century America. American protectionism transferred wealth from agricultural interests to industrial interests—that is, from those who would’ve used the wealth primarily to buy consumer goods to capitalists who invested the money in industrial production. Hence the great success of American capitalism during the latter half of the nineteenth century despite the high tariffs. Entrepreneurial capitalism works best when capital is transferred into the hands of those best fitted to use it. When protectionism manages to accomplish this end, it can be economically beneficial."

What strengthens society? Is what allow us to flourish, to expand our population and increase affluence. Cultural evolution of customs and traditions seem to be the driving force of this. As I am currently learning by reading Hayeks, "The Errors Of Socialism" Successful behaviors that strengthen society are imitated and become tradition, our morals and social structures then evolve to protect these functions.

Hayek:

"Learnt moral rules, customs, progressively displaced innate responses, not because men recognized by reason that they were better but because they made possible the growth of an extended order exceeding anyone's vision, in which more effective collaboration enabled its members, however blindly, to maintain more member and to displace other groups".

Later he goes on to discuss the spontaneous macro-order, briefly the laws position in the spontaneous order and how firms and administrative bodies are facilitated.

Hayek:

"The elements of the spontaneous macro-order are the several economic arrangements of individuals as well as those of deliberate organizations. Indeed, the evolution of individualist law consists in great measure in making possible the existence of voluntary associations without compulsory powers. But as the overall spontaneous order expands, so the sizes of the units of which it consists grow. Increasingly, its elements will not be economies of individuals, but of such organizations as firms and associations, as well as of administrative bodies. Among the rules of conduct that make it possible for an extensive spontaneous order to be formed, some will also facilitate deliberate organization suited to operate within the larger systems. However, many of these various types of more comprehensive deliberate organization actually have a place only within an even more comprehensive spontaneous order, and would be inappropriate within an overall order that was deliberately organized".

Its a great book packed with solid info. Have been learning a lot from it.

Millionaire Maker said...

No one would decide over this thing in a Capitalist economy.
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JayCross said...

That is the biggest scam ever.