Archive for December, 2012

Protectionism == Luddism

December 10, 2012

There is a strong economic analogy between offshore outsourcing and productive technology. Many people have erroneous understanding of such situations and promote mistaken policies, namely protectionism from trade and from technology.
This issue is reccurrent as many basic economic questions which need constant explaning. For instance, it came up recently in the presidential debate and last week in discussions of Apple possibly setting up factories in the US.

Back to the issue, let’s consider a factory as a black box. Every day some people go work there, it receives some resources as inputs, and it eventually produces outputs. Over time the technology it uses can be improved. Such investments allows the factory to produce more output by using fewer resources and less labor. They make society better off by pushing back the constraints of scarcity.

Now consider that the factory may be in a shipping yard and that the workers may be dock workers. The technology is trade.
Just like any factory, it requires engineers (to design the production line), managers (to coordinate the flow), workers (to handle and assemble stuff), resources (as inputs), technology (processes, information systems, shipping infrastructure) and time (to process the inputs into outputs).
From the outside, both look the same, they only differ in what happens behind the scene.
In both cases, the improvement allows the customer to get more benefits for lower costs (less or cheaper resources and labor).

Yet, just as Luddites were afraid of the effects of technology (automated looms), protectionists are afraid of the effects of trade. They both wrongly see temporarily displaced workers and the corresponding pain of adjustment as a threat to employment, they ignore the benefits such developments and specialization bring (see Ricardo’s difficult idea), and they seek narrow-minded special privileges for the party most visibly affected.

David Friedman and Steve Landsburg use the Iowa car crop to illustrate this point:

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First, you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and send the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars.

Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on ‘imported’ automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.