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Suboptimal Understanding

(Don Boudreaux)

Commenting on Scott Sumner’s recent, excellent EconLog post on trade theory and policy advocacy, Warren Platts writes like a man who knows just enough economics to get economics wrong while giving the erroneous impression that he knows what he’s writing about..

Here’s part of Mr. Platts’s comment in response to Scott:

Interesting article, sir, but it ignores the main 19th century argument that was deployed against unilateral free trade. And that is the dirty little secret of trade theory: tariffs improve a country’s net welfare. That is probably why countries are reluctant to remove them, especially if they are not matched by reciprocal reductions in trade barriers.

Mr. Platts then goes on to reference Robert Torrens’s theory of the very special case of the optimal tariff, which Mr. Platts mistakenly presents in his comment as a general demonstration that (as he says without qualification) “tariffs improve a country’s net welfare.”

Here’s the comment that I left at EconLog in response to Mr. Platts’s poor understanding of both of the history of economic thought and of the theory of the optimal tariff:

Warren Platts:

You do not adequately grasp the theory of optimal tariffs. Although John Stuart Mill developed the theory earlier but published it only later, Robert Torrens is indeed the first person who explained in print that under certain circumstances the use by country A of tariffs set just right on particular goods can improve country A’s terms of trade – meaning that country A ends up receiving more imports in exchange for a given amount of its exports. (Note, by the way, that this outcome is quite the opposite of that which typical protectionists think to be desirable.) And such an improvement in country A’s terms of trade only improves net welfare in country A if the size of the benefits from the improved terms of trade are greater than the losses that necessarily occur because of the fall in total trade volume and reduced international specialization that are caused by the imposition of the optimal tariff.

Mr. Platts, you are mistaken about the policy implications of the demonstration of the theoretical existence of an optimal tariff. That demonstration, contrary to your portrayal of it, emphatically did not establish a case for a policy of free trade. The assumptions – including especially the ones used by Torrens – for the optimal tariff to improve the net welfare of a country are many and extreme. These assumptions are far too extreme to apply in reality. Therefore, most economists have wisely understood this fact as one that relegates the optimal tariff to the ranks of mere theoretical curiosa (although, apparently, Torrens himself wasn’t among this wise number).

All of the above (and more) is nicely explained in this 1987 article by the excellent historian of economic thought Tom Humphrey. Here’s Tom’s conclusion – one which is widely accepted among economists:

Except for Torrens and [C.F.] Bickerdike, these same economists also specified the basic shortcomings of optimum tariff theory. The theory, they noted, assumes unrealistically (1) that foreign countries will not retaliate with tariffs of their own, (2) that elasticities of supply and demand in foreign trade are not so large in the long run as to render the tariff ineffective, (3) that the optimum tariff rate can be precisely identified and skillfully administered, and (4) that politicians can resist pressures to raise tariff rates above the optimum level. None of these assumed conditions, they felt, were likely to be realized in practice. They further pointed out that a tariff can benefit no nation except at the cost of greater injury to others and is thus unacceptable from a cosmopolitan point of view. For these reasons they remained convinced that, despite the theoretical case that could be made for an optimum tariff, free trade was the best policy from a practical and moral standpoint.

……

One more point. Mr. Platts confesses to admiring Ian Fletcher’s arguments for protectionism. While I find Flether’s arguments to be weak and completely without merit, one of Fletcher’s least-objectionable positions is his endorsement of across-the-board tariffs (as opposed to selectively imposed tariffs, which Fletcher correctly understands fuel more rent-seeking than do across-the-board tariffs). But an optimal tariff by its nature is a selectively imposed tariff. Such a tariff is inconsistent with a policy of across-the-board tariffs.

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