Caricature of the anti-free-trade position

Aretae seems to be willfully missing the point on free trade. It seems particularly strange since I don’t know anybody who is more concerned about future economic growth and yet he is totally unwilling to integrate future growth prospects into his – most basic – understanding of free trade.

Al wants to trade with Jill.
Al grows corn, Jill builds cars.

Since Al has more corn than he needs, and Jill has more cars than she needs, the trade makes both Al and Jill happier.

Absolutely no one disagrees with this, so repeating it continues to miss the point.

The relevant question is: if all car production moves to Jill’s economy and all corn production moves to Al’s economy, are Al’s kids or Jill’s kids better off in the future with respect to potential for economic growth?

Take an extreme example to make the difference stark. Assume economy A makes riding saddles and economy B makes touch screen displays. Are these countries really equally positioned for future economic growth? Why can’t the theory of free trade admit that the possibility of such a situation arising?

Then the caricatures flow:

Protectionism is when George convinces his Uncle to threaten (anonymously) to beat Al senseless if he trades with Jill. Then Al buys from George, is less happy than he would have been, Jill is less happy than she would have been…maybe Al doesn’t buy at all, because it’s not worth the trade….but most likely, we’ve transfered a lot of value away from Jill (no corn), a little value away from Al, and a medium amount of value to George.

Similarly, free trade is when you have the biggest navy and you use it to make sure that you get the best possible trade terms. Or free trade is when two countries sign agreements protecting politically-connected industries. These statements are silly and unhelpful.

No one is proposing that Al be beaten. To recap, here are the proposal in un-caricaturized form (obviously these are idealistic, but we’re working theoretically here):

1) Free trade: all economies must be totally free from any trade distorting mechanisms (e.g. currency manipulations, VATs, etc.) and trade with each other without restraint

2) Protectionism: countries may impose flat, fixed tariffs and no income taxes

You might object that 2) is idealistic, but it has actually existed, whereas 1) has never actually existed.

You’ll notice that under both approaches, no one is beaten, the rules of the game are fixed and clear, and there is little room for political manipulation.

Obviously both approaches are hopelessly idealistic, but it’s not clear to my why a supporter of economic growth would clear favor one approach over the other.

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26 Responses to Caricature of the anti-free-trade position

  1. sconzey says:

    Good post. Damnable reactionaries, making me re-think what I thought I understood ¬_¬

    If we take this back down to the level of individuals; I can kinda see your point. In your last post on this subject I said “it’s self-evidently obvious for me to tax my fiancee for doing the laundry for me.” Later I thought about this and realised that: suppose I thought I could do the laundry more efficiently, in the long term. In the short term I would want to avoid letting my fiancee do it for me so I could develop my own skills. Eventually the comparative advantages change and I end up doing the laundry for her.

    Then I thought a bit more: this still doesn’t (alone) justify tariffs. In the above example I effectively impose a tariff on the utility I get from laundry-done-by-my-SO over laundry-done-by-me, but any attempt to impose such optimal tariffs across large groups of individuals runs into the socialist calculation problem.

    It’s not clear to me that the individuals in the agrarian economy have less potential for long-term growth than the individuals in the technical/service economy.

    What you touch on towards the end of your post is how tariffs compare to other taxes as a method of raising revenue. A rational profit-maximising government will want to minimise deadweight loss from taxation, and so would prefer property taxes to all other taxes incl. tariffs.

    • tenkev says:

      A rational profit-maximising government will want to minimise deadweight loss from taxation, and so would prefer property taxes to all other taxes incl. tariffs.

      This. I would rank the different taxes/government revenue sources in terms of deadweight loss this way. (Best to Worst)

      1. Fines for criminal behaviour/pollution
      2. User Fees
      3. Poll/Universal Tax
      4. Property Tax
      5. Tariff
      6. Sales Tax
      7. Estate Tax
      8. Income Tax

      • sconzey says:

        Does a poll tax have less deadweight loss than a property tax? I don’t actually know.

        If I remember correctly the list goes something like this: property, consumption, income, capital then corporate.

        Property taxes are easier to administer than poll taxes — people being hidable; when land isn’t. Property taxes are also easier to sell to lefties, because they’re naturally progressive — if you’re wealthy enough to own real property; you’re wealthy enough to pay tax.

      • Isegoria says:

        More specifically, such a government would prefer a land tax.

        The supply of land is fixed, but the supply of buildings is quite elastic.

      • sconzey says:

        More specifically, such a government would prefer a land tax.

        Well, yes.

        Although I do so like the elegance and low administration costs of Moldbug’s market-based “mandatory purchase” system, I can’t see how one could exclude the value of the improvements from the tax.

        In practicality terms, I’m not sure how LVT could be made to work with things like prospecting and infrastructure. The supply of both of which is elastic, and yet would effect the value of land.

      • Sconzey-

        I think what you would have to make all property investments tax deductible up to the amount of increase in value of the property.

        So let’s say I had land worth $100k at time A. I then invest $300k in building a factory on that land. The land is then valued at $500k. I could deduct that $300k from my taxes, and thus only be taxed on a $200k valuation instead of a $500k valuation. If I start at $100k, invest $500k, but the investment is misspent and the property value only increases to $200k, I can only deduct $100k of the investment.

        This solution makes the system a little less elegant, but I think that it would create better incentives.

      • I’ve wondered if you could do an income tax in the same way Moldbug proposes doing the property tax.

        Each person would self-value their own life. You would then pay taxes at amount of the self-valuation times the tax rate. If you self-valued too low, the government could buy you as a slave, and then you would have to do whatever the government wanted you to do.

        So let’s say you were a really smart, capable person. You declare a very low self-value and decide to work at coffeeshops and work on your material for poetry slams. The government might decide you have more potential than that, buy you as a slave, and then require you to train for and obtain a higher paying job as an engineer. If you refused, you would get whippings. Of course, other people would see this example, and there would be great incentive to come up with an accurate self-valuation.

        (Note – I’m sure as heck not advocating such a system. I point this out to note that moldbug may dramatically underestimated how evil a real laffer curve maximizing, profit-maximizing sovereign could be)

  2. Handle says:

    As I said in my FTDW comment, there is another trade-balancing regime that is neither tariff based, politicized, idealistic, nor untried – Import Certificates.

    You can read Warren Buffet’s persuasive attempt at reincarnating this old system here.

    It’s basically a “balance of payments” and “responsible capital control” system. It prevents long-term imbalances from building up, and it’s these long-term imbalances that cause most of the problems Fletcher describes.

    I say “old and tried” system because it was used, for example, in the form of “Clearing Agreements” by pre-WWII Germany. Here’s Treasury Secretary Henry Morgenthau Jr. describing it in, Germany Is Our Problem:

    Clearing agreements were bilateral arrangements ostensibly designed to prevent exchange fluctuations. They did it by carrying on trade between the two countries at an agreed rate of exchange without either using the currency of the other. Each set up a clearing office. Importers paid to this clearing office in their own currency. Exporters were paid by the clearing office, also in their own currency. In the long run the amounts had to balance as between imports and exports and as between the two countries.

    A typical transaction between Germany and Poland would work out like this: A Pole sells a German a trainload of timber. The Polish clearing office pays its citizens in zlotys; the German timber buyer pays his clearing office in marks. In order to get its money back, the Polish clearing office has to be sure a Pole buys something in Germany of the same value as the timber — automobiles perhaps. When the Polish dealer buys German cars, he pays zlotys into his own clearing office; the German clearing office pays the German car manufacturer off in marks.

    If I’m not mistaken – mandatory balancing frameworks like these are also Moldbug-approved.

  3. rightsaidfred says:

    The relevant question is: if all car production moves to Jill’s economy and all corn production moves to Al’s economy, are Al’s kids or Jill’s kids better off in the future with respect to potential for economic growth?

    The hard Left takes this all the way, and they are against almost all trade, especially the trade of commodities for finished goods: such is exploitative. Those with the copper should build the jet engines. Think North Korea, Cambodia under the Khmer Rouge, and Mao’s Great Leap Forward. That those economies have not done particularly well just means they haven’t got the details right.

  4. aretae says:

    Contrarily…

    Future growth prospects are simple. The knowledge problem. Governments, like everyone else, suck at picking them. What we end up with is lots of guaranteed pain for Al, lots of guaranteed pain for Jill, some moderate benefit for George, and a theoretical suggested, but empirically contraindicated potential future benefit.

    • Foseti says:

      Agreed, but this is the point of a fixed and flat tariff. It basically says that you’ll try a little to keep everything.

      So, certain things will still leave – China for example makes t-shirts much less expensively than the US does. Other things will stay given a little boost.

  5. JManon says:

    But if it is a fixed, flat tariff, then how does it solve the problem identified with free trade theory? The tarriff not only protects industries with good growth prospects, but those with bad. In the example, a flat tarriff in economy B would protect its sucky, low-growth saddle makers at the expense of its saddle consumers. And B’s dominant touch-screen industry doesn’t need protecting, so B just ends up limiting domestic competition for touch screens for no future growth gain. Hard to see how a tarriff benefits B at all.

    And it is not even clear that the future growth gains to A will offset all the inefficiencies from the tarriff, but perhaps they might.

    Why, on balance, should any country assume that it has the right mix of growth industries and non-growth industries such that a flat tarriff will provide a net benefit? You know the tarriff will result in inefficiencies and misallocated resources, but you can only guess whether it will protect some future growth industry.

    For me, the purported fix to the knowledge problem seems disconnected from the underlying rationale for abandoning free trade.

  6. Gian says:

    Has it been shown that tariffs lead to higher future economic growth? Is it even possible to demonstrate such a thing?

  7. Ryan Harris says:

    I’m not following your argument at all. You seem to imply that with free trade, country A is going to produce something with little value (saddles), and country B is going to produce something valuable (touch screens), and all of the sudden country A will discover it’s product is outdated or its ability to innovate is limited, and country B will out-grow it? Is that right, or am I missing something?

    And allowing protectionism helps this situation, how? Seems to me like protectionism is what insulates the saddle maker from the market forces, allowing him to make more of his outdated saddles for longer than he should–assuming consumers don’t actually want saddles, or wouldn’t purchase that many of them.

    • Foseti says:

      I’m implying that the future growth prospects associated with producing touch screens are not equal with the future growth prospects associated with producing saddles. The latter are much lower.

  8. Can any of you quasi-experts (I’m not being sarcastic; relative to me I bet most commenters here are quite knowledgeable about Texas, or taxes, or whatever they’re called) evaluate Jim Bowery’s big idea? It’s kind of like Moldbug’s self-assessed property tax, but not quite.
    He mentions it here.

    Basically, anyone can bid on any piece of property. They better be serious bids, because the highest one (only) is held in escrow, and the property owner has to pay the going rate of interest on the bid, or give up the property and take the money. I think any bidder can do this, but the highest bidder in most cases I guess would be the government.

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  10. Agnello says:

    While not disproving your basic thesis, it is worth keeping in mind that any time one begins speaking about taxes,of any kind,one is always speaking about about “beating someone up” – like all government activities, tax collection is either force, or the threat of force,always.Since both models either implicitly or explicitly assume a government – that is the Rule of Law,and the security of private property which is necessary for free trade to exist – the real question is, “Against whom should this force be applied?”
    In other terms,should we tax at the very point of wealth creation by levying a tariff on “income from whatever source derived” or, tax only only those transaction which involve our relationships with other peoples and nations(The very sphere which we have supposedly created our government to shepherd)?
    Phrased in this way, I believe most economists who have resigned themselves to the conservation of political power – that is, those that live in the real world – will answer this question as you have.
    The arguments against tariffs on trade between nations,while internally consistent, always assume that no other more destructive tax will be employed in the absence of said tariffs .

  11. asdf says:

    Foseti, the issues one may take with your touch screen/saddles hypothetical are:

    1) The first principal component of the difference between economies is IQ. A low IQ nation will never produce touch screens.
    2) The second principal component is degree of state control. For countries of equal IQ, Hong Kong < South Korea < China < North Korea in terms of degree of state control.

    Once you take away factors 1 and 2, you will end up with a much more evenly matched situation like Germany vs. France (mechanical goods for consumer goods). In that scenario the argument for pure free trade is far more supportable.

    The point is that no tariff policy will change factors 1 and 2 — and a government powerful enough to enforce a serious tariff will move factor 2 in many other areas of the economy in a worse direction.

    • Foseti says:

      I’m not sure thinking about average level of IQ helps much here. In the US, we’ve decided to pay many people with low IQs unemployment benefits instead of having them work in protected manufacturing jobs. Is that better? Honestly, I don’t really know.

  12. Start a business

    Caricature of the anti-free-trade position | Foseti

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