Future enemies - protectionism

Reason, June, 1996 by Joel Mokyr

Protectionism kills new ideas, hurting future generations.

Protectionism is a bit like bloodletting. For centuries many intelligent and learned people passionately believed bloodletting was a panacea, and they fought for it on the political and intellectual battlefields. Yet they were hopelessly wrong. Unfortunately, whereas the practice of bloodletting has joined the flat earth, alchemy, and phlogiston physics in the dustbin of the history of science, protectionism somehow manages to raise its ugly head time and again in America. While the leaders of both major political parties have by and large embraced free trade, some fringe candidates have resurrected protectionism and are riding a wave of bigotry and parochialism, masquerading as "America First." Like taxes and death, we cannot shake it, and maybe we never will. But it is worth trying.

The intellectual case for protectionism is about as alive as a doornail. To be sure, a few clever economists have constructed some pathological scenarios in which a tariff could be beneficial. For the protectionists to take solace from this literature would be akin to flat earthers finding vindication in the fact that the Earth is slightly flattened at the poles or phlebotomists gloating about a few rare diseases in which removal of blood can be beneficial. But economics, unlike physics or medicine, cannot experiment and has no laboratories. The burden of proof is always heavier, and those who refuse to believe in the obvious can find a sympathetic audience, especially since protectionism has been able to draw support from the seemingly inexhaustible reservoirs of xenophobia and prejudice that bubble beneath the surface of American society. Moreover, there are always groups that stand to gain from protection. These groups naturally ignore the intellectual bankruptcy of protectionism and dig up various crackpot theories that seemingly show how tariffs can benefit a nation.

The most persuasive case against protectionism is not the standard one that undergraduate students are taught in their introductions to international economics, which goes like this: Tariffs distort the allocation of resources and impose a "dead-weight burden." The few gain at the expense of the many, but their gains are smaller than the losses. Society throws away valuable resources by artificially inducing its producers to supply goods that can more efficiently be imported.

The standard argument is certainly correct, but somehow it has failed to persuade many people since it was first enunciated by Adam Smith and David Ricardo. Presumably political speeches that urge people to "support your local efficient allocation of resources" are not exactly sound-bite material. Sometimes arguments are correct but do not work politically. In this regard, physicians have done a better job in persuading us that bloodletting is a useless medical practice than economists have in defending free trade. Part of the problem may be the rhetoric of economics. An equally important obstacle is the powerful interests who stand to gain from protectionism's distortions at everyone else's expense.

A more dynamic argument can be constructed. It, too, may be more of an intellectual exercise than a good campaign slogan, but because we can explain it without relying on "little triangles" in supply and demand diagrams, it may be more appealing. The argument is this: Protectionism and insularism impede innovation, depriving our children of the comfort and security that progress and economic growth bring. Free trade and international competition not only lead to a better allocation of resources; they ensure that countries do not lull themselves into the technological lethargy that is the archenemy of economic growth.

The omnipresent danger to continued technological advance is that innovation - not unlike free trade - has many enemies who would like nothing better than to impose legal and political restrictions on it, from licensing laws to featherbedding. Technological change is creative destruction. It almost always involves losers. These losers cannot be expected to stand idly by and watch others superannuate them.

Medieval guilds were by and large successful in codifying explicitly all stages of manufacturing, thus making new ideas almost impossible to introduce. Beginning in the 1920s, British labor unions tried the same thing. The technological status quo embodies huge investment in physical and human capital. It is hardly surprising that its owners promote slogans like, "If it ain't broke, don't fix it." Technological success breeds its own failure by using politics to protect itself from the next wave of innovation. For that reason technological success in any society is usually short-lived, a regularity that I have called "Cardwell's Law."

In an open economy, where producers constantly have to compete with foreigners working under different institutions, it is far more difficult to erect such barriers. An industry that cannot or refuses to innovate will be wiped out by imports. Since producers expect this, the incentives to stay near the cutting edge of technology are far stronger. Imports mean that consumers will still be able to get new products, unless the vested interests can persuade the government to surround the country with a wall of tariffs to protect an increasingly obsolete industry.