Trade, Tariffs, and some Basic Economics

Why does trade occur? Fundamentally, trade takes place in order to better the lives of those participating in the trade. You trade money for food because you are hungry and money doesn’t taste very good. Each party values what they are trading away less than what they are receiving in return. That is why the trade occurs.

Another way to look at trade is that it increases efficiency. As people (and companies) trade, they move closer toward an optimized equilibrium. There is an economic principle known as marginal utility. The idea is that the more of a thing one consumes, the less valuable each subsequent unit of the thing becomes. If you are hungry, a hamburger may be very valuable to you. You might even be so hungry that a second burger sounds good too. But how about a third or a fourth burger?

If you were willing to pay $10 for the first burger, does that mean that you would also be willing to pay $100 for ten burgers? Of course not. The utility of the tenth burger is far below that of the first. The reason this is relevant to efficiency is because trade allows people who have more of something than they need to transfer it to someone who values it more highly. You were willing to pay $10 for a burger. Presumably so are others. You aren’t willing to pay $100 for ten burgers. What about $50 for ten burgers? It’s a better deal on a per-burger basis, but you still aren’t hungry enough to consume ten (or even five) burgers.

What to do with all those extra burgers? Trade, of course. At $5 per burger, you can now trade them to people who want them enough to pay $10 a burger and make a nice profit in the process. By the time the trading is complete, everyone in the room will have had a burger and everyone will be (presumably) more satisfied than they were before the trades occurred.

Another important economic principle here is the subjectivity of value. Value is not an intrinsic quality of a good. It is an externally ascribed quality that is unique to each individual. A burger is not objectively ‘worth’ $10. It is ‘worth’ only what someone will pay for it. If you are willing to pay $10 for a burger, that means you value that burger at a minimum of $10. Someone else might value a burger at $8. This means they would pay $8 for a burger, but no more.

So what does all of this have to do with tariffs? As we already discussed, trade increases efficiency. It allows people to balance their subjective values and surplus goods as the economy (which really just means all the people in the economy) moves ever closer to that optimized equilibrium. It never reaches 100 percent optimization, of course, because people’s wants and needs are always changing.

Government intervention in the economy reduces efficiency. Every tax (and a tariff is just a tax) and regulation serves to decrease the efficiency of trade. Remember the $5 burger you sold for $10? Now imagine a 10 percent sales tax being added to it. Now you either have to sell the burger for $11 to get the same $5 profit or you can still sell it for $10, but only receive $4.09 in profit. Either way, efficiency is lost because some of what is being traded is removed from the equation. In the next trade, either you or your customer (or both) will have less to spend.

In a free market, the more trades the better because even trades that only increase efficiency slightly are worthwhile. In a market saddled with government intervention, the loss added to every transaction makes some previously beneficial transactions impractical. The more taxes or tariffs that are added to transactions, the fewer transactions occur and the less efficient life becomes.

Some people who advocate tariffs believe in a concept called protectionism. This is the idea that if the inefficiencies of high taxes are added only to some goods (or to certain suppliers) of these goods, it will protect other goods or suppliers. Imagine that the 10 percent tax added to the burgers only applied to beef. Turkey burgers could be sold tax-free. This might seem to benefit sellers of turkey burgers as some consumers would see turkey as an acceptable substitute good for beef.

Why is this a bad idea? There are several reasons. The first is that the burger market with the tax on beef is still less efficient than the burger market with no taxes at all. The second is that the consumers who opt for turkey instead of beef just to avoid the tax are not as satisfied as if they had their first choice. A third reason is that the artificial advantage given to sellers of turkey burgers will discourage them from seeking out greater efficiencies or improving their quality or customer service. They don’t need to make these improvements, as their products are already cheaper thanks to the protectionist tax system.

Prosperity is maximized when efficiency in the market is maximized. Your dollars go further, your trades are more beneficial, and your options are expanded. On the other hand, wellbeing is reduced as government intervention increases. Every obstacle which is erected in the path of trade reduces the efficiency that promotes prosperity.

Regulations are another form of mandated inefficiency that governments may inject into an economy. Imagine a new law which requires that every burger be sold with a bib. Who would want such a thing? The bib industry, of course. They would love this idea. Such a mandate might be justified as “saving thousands of jobs in the bib industry,” but would that actually improve the economy?

At first glance, it might appear so, but what is seen is often dwarfed by what is unseen. All the money spent buying unwanted bibs would be diverted from other uses. Every dollar that is spent requires forgoing other options. These rejected alternatives are the opportunity cost of your decision. A dollar spent buying a useless bib can’t be spent on something else that is more desirable or productive. These lost opportunities make the bib mandate a net negative for the economy, diverting resources that would have otherwise been used more efficiently.

There are more problems with the bib mandate, however. A protected industry has little reason to innovate or seek out greater efficiency. The bib industry protected by our hypothetical mandate would have no reason to improve their unneeded product or to adapt their industry in response to consumer demand. Those employed in it would not learn new skills or make any meaningful contribution to human wellbeing.

What of trade deficits? Advocates of tariffs often cite a supposed trade deficit as a justification for intervention in the economy. In short, a trade deficit is the amount by which a country’s imports (typically from one country) exceed its exports (to that country.) The idea that a trade deficit justifies a tariff is incredibly flawed, however. Think about it like this: You buy gas for your vehicle from a gas station. What does the gas station buy from you? According to the theory of a trade deficit, the total amount you spend at the gas station represents a “trade deficit” because the gas station (in all likelihood) isn’t buying anything from you. If you are like most people, the same is true of the grocery store, movie theater, and most other places you frequent.

Is this a bad thing? Not at all. On the contrary, attempting to balance your trade with every trading partner would lead to massive inefficiencies and impose all manner of hardship as you sought to trade your particular skills directly to suppliers of the goods and services required to keep you alive.

Instead, you trade your skills to those who need them, accept money in return as an intermediary, and then trade that money to sellers of the goods and services you actually desire. In this way, you maximize your earning potential by focusing on what you do best and obtain the things you need from those whose areas of expertise are different from your own. This idea is known as comparative advantage. If you are good at painting houses and not very good at sewing clothing, it makes sense to spend your time painting houses and using the money you receive for your painting to buy clothing from someone who is better at sewing. This is another way in which a free market increases efficiency.

Imagine if you had to make everything you consumed. Imagine trying to grow your own food, sew your own clothing (from cotton you grew yourself), and build your own house (from trees you cut down). Yes, people did that for centuries, but now imagine trying to do everything required for a comfortable life in the modern age. Can you make a car? A computer? A smartphone? Can you build an air conditioner or perform surgery on yourself?

Why is it that you can enjoy all of these things without knowing how to make or perform most or any of them? The answer is simple. Trade makes all of this possible. Thanks to trade, you can focus on the one thing at which you are the most skilled while still enjoying thousands of other goods and services provided by other people acting according to their comparative advantage.

Economics can be a complicated subject and many people don’t really understand why the economy works the way it does. That’s okay, but learning about economics and economic principles can also be very rewarding because it helps to explain so much about our world and about human behavior. Learning about economics also tends to make one recognize the foolishness of government intervention and central planning. Such interference not only does not improve human wellbeing, it quite literally cannot do so. The efficiency of the free market cannot be improved through taxation or regulation. The imposition of tariffs or mandates cannot get humanity closer to the equilibrium which all of our trades are chasing. The free market may not be perfect (which is ultimately a subjective opinion), but I truly believe it is as close as mankind will ever get to perfection.

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The Weakest Generation

“What is wrong with people today?”

It’s a question we hear frequently, in many different forms, but all are probing at an increasingly obvious observation. Previous generations entered their thirties with families, houses, and a decade or more of meaningful work experience under their belt. They bought used cars, built small starter homes, worked their asses off, and somehow made it work. Their families grew as did their homes, they got better jobs, started businesses, saved for retirement, and dressed pretty damn well doing it.

Contrast that with the weakest generation which can’t figure out why spending a quarter of a million dollars getting a sociology degree won’t make them happy and provide them the standard of living to which they believe they are entitled. Millennials have extended childhood from 18 to at least 26 (when the big mean government forces them off mommy and daddy’s healthcare plan), while they save nothing, own nothing (other than $50 T-shirts and $200 jeans), and wonder why “the system” continues to fail them.

As it turns out, sharing a downtown loft with a horde of dysfunctional roommates, taking an Uber every time you need to travel, and using Postmates instead of going grocery shopping doesn’t exactly create functioning adults.

There is plenty of blame to go around. Helicopter parenting, participation trophies, a lack of real-world experiences and work (whatever happened to summer jobs?), and the systemic failures of higher education have all played their part. Let’s talk a bit about the last one.

America’s modern higher education system has failed to provide marketable skills to an entire generation (going on two now) while massively increasing costs due to ever more bloated administration and taking on a host of projects designed to accomplish social goals rather than to prepare people to be productive. This is not an insignificant contributor to our country’s present sad state of affairs.

They’re depressed!

Every year or so, it seems that the estimated number of depressed people increases. Current estimates claim that 15 percent of the adult population will experience depression at some point in their lifetime. Could it be that the increase in depression is less about any fundamental changes in brain chemistry and more about people allowing themselves to sit around thinking about how bad they imagine their lives to be compared to whatever unrealistic and unrealized fantasies they have concocted?

People have always felt sad, had bad days, and sometimes felt like not getting out of bed. They did it anyway. They got up, put their boots on, did their damn job, took care of their families, and focused on what mattered instead of on their aversions and phobias. Busy people don’t have time for prolonged bouts of introspection and discontent.

I understand that mental health is important. It’s a core component of well-being, in fact, but I believe that people are looking in the wrong direction. Mental health and well-being are not being improved by our modern society—they are being made worse. This hyperfocus on “self-actualization” and other pseudo-scientific nonsense is (quite literally) driving people crazy. Life will never be perfect and happiness is a decision more than it is a reaction to circumstances or environment. Humanity (as a species) has long benefited from the structure of people getting married, having children, producing wealth, and training the next generation to do the same.

Today, people are questioning the basic science of their own existence, mutilating their bodies, attempting to restructure the primary building blocks of society and humanity, all while going into debt and rejecting fundamental biological imperatives. Humanity isn’t evolving at this point. It’s (over) thinking itself out of existence.

The downside of freedom

Let me go on record as being an unequivocal supporter of individual freedom. You absolutely have the right to do or not do whatever you choose so long as you do not aggress against the life, liberty, or property of others in the process. That said, it is still possible to use (or misuse) one’s freedom in a manner which is harmful to oneself and which, if widely adopted, could lead to the downfall of the human race. I’m not just talking about excessive heroin use, either.

Among millennials (although the trend is spreading), there is a growing tendency to question everything—even basic truths and fundamental realities. They question their genders and their sexuality, their purpose in life, their reason for existence. They search for hidden and higher meanings in everyone and everything, all the while condemning those who prefer a more forthright existence. Saving the whales is no longer enough—now they want to save the planet (perhaps the next generation will task themselves with saving the galaxy) as if they are the superheroes of their childhood imaginations.

The result is something of a lost generation. They are not aimless, exactly, but by taking aim at everything, they are effective at nothing. Rather than focus on the fundamentals of career and family, they search for meaning through social justice campaigns and wars against those who hold unpopular or traditional views.

And yet they are still unhappy and unfulfilled.

This situation can be vividly observed in millions of disaffected young Americans embracing the tenets of socialism as preached by a septuagenarian millionaire who has convinced them that their happiness is contingent on torpedoing the economy for short-term gain. Perhaps they will be happy when they are reduced to eating zoo animals as has happened recently in the “socialist paradise” of Venezuela.

What now?

The solution to these problems isn’t particularly complicated, but its implementation is far more difficult. The solution is a return to the proven principles of hard work and free markets that transformed America from an agrarian colony to an economic powerhouse unrivaled in human history.

Human beings thrive when they are busy and productive. Sitting around a coffee shop debating which pronouns most effectively convey one’s chromosomal ambivalence is not the key to happiness. We need purpose and ambition for our lives to have meaning. We need work and responsibly to give us a reason to get out of bed in the morning.

The beauty of a free market is that an individual’s drive is all that is required for success. It doesn’t require that one be born a noble or attend a royal academy. In a free market, those with talent and ambition have truly unlimited potential. Sadly, this seems to scare millennials rather than to inspire them. They want to turn off the market and replace it with a “universal basic income” so that everyone can be equally miserable in a life of perpetual navel-gazing.

I may be a millennial by age, but I have no desire to spend my life in morose self-absorption while blaming those who are successful for my mistakes and bewailing my life in a world that fails to acknowledge my genius. Life is too short to waste it wishing for an unobtainable reality—especially given how much happiness is available in our present reality to anyone with the gumption to take advantage of it.

I refuse to be a part of the weakest generation and to squander my life begging the state to care for me. I want no part of such a pathetic existence. I will make my own way in this world and I challenge others to do the same. Let’s return to the proven strategies that have successfully created prosperity for numerous past generations. They never stopped working. People did.

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Words Poorly Used #142 — Loyalist

A few days ago, I sent out a Facebook Friend Request to a person who had over 750 friends in common with me.  This person politely replied that we could not be friends since he was a “Trump Loyalist,” so he feared I would be offended by his posts.  Such offense would have been a certainty, but I was offended already by the language of the phrase, “Trump Loyalist.”  But let us be clear, the utmost problem is not Trumpism — it’s loyalism of any sort.

We can, however, momentarily address the lesser of two evils:  Trumpism is a temporary derangement.  I have suffered a few myself, first LBJ-ism, then a nearly neck-breaking pivot to Nixonism, then a Zombie-like knee-jerk to Carterism (more on this shocking passage at a later date).  Remember, that which can end, will end.

But can loyalism, an affliction upon humanity, end?  Merriam-Webster lists the following synonyms for “loyal:”

constant, dedicated, devoted, devout, down-the-line, faithful, fast, good, pious, staunch (also stanch), steadfast, steady, true, true-blue

These are also synonyms for unchanging, unstimulated, unfree, and unthinking.  I am a Jefferson aficianado, for example, but I am not a Jefferson loyalist.  In fact, our country (back when it had a minuscule government) was founded on the principle of anti-loyalism — the Declaration of Independence WAS a declaration of apartness from (premeditated disloyalty toward) the old order.  Loyalism, in a general sense, is constant dedication to the status quo (but I repeat myself.)

I am mostly gratified by insults toward POTUS, the current edition especially.  But I am the sworn opponent of loyalty.

— Kilgore Forelle

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Could Such a Man Care?

Nicolas Maduro now rules a land of chronic hunger, horrific crime, terrible fear, and mass exodus.  How does he maintain his dictatorship?  With a pact of steel between his ruling party, the military, the secret police, and on-site foreign allies – especially Cubans.  You would have to be mad to think that Maduro’s doing all this for the good of his people, or the good of the world.  His only credible motivation is power-lust gone wild.  Maduro is a pervert for power.

He’ll never admit this, of course.  He still claims he’s doing it all for the people and the higher good.  Here’s Maduro in an interview this February:

Venezuela is a country with dignity. We are patriots, revolutionaries. We have an ideology, that of Simon Bolivar. Our movement came from the depths from the Venezuelan people. We’ve been governing democratically for 20 years. Everything that we are, everything that we have, we have because of the popular vote.

Which raises a deeper question.  Namely: Deep in his soul, when did Maduro stray from the path of decency?

For Maduro’s former fans, it’s tempting to sigh, “Power corrupts.”  Power turns a good man bad.  He – like his mentor Chavez – started out as an idealist.  Yet ironically, he ended up a tyrant.

On reflection, however, this “ironic” account is absurd.  Think about the nicest, sweetest person you personally know.  Can you seriously imagine that this person, given power, would forge a brutal police state, destroy the economy, and cling to power with fire and blood?  I can’t.

Indeed, think about the average person you know.  You can probably imagine that this person would go along with great evil out of cowardice.  Still, would the average person you know take the initiative to commit these horrors?  That doesn’t make sense to me.

The lesson: Maduro was never an idealist.  Indeed, he was never an average person.  The average person in his shoes would have done far less evil, and relinquished power long ago.  What Maduro has done reveals what Maduro has always been: insatiably hunger for power.

So what?  Well, while this is all clear in hindsight, Maduro used to have millions of fans all around the world.  Millions of fans who took his rhetoric at face value.  Millions of fans who thought he was a noble man.  And these fans would have called me paranoid and unfair for calling their idol a power-luster.

The fans’ error would have been understandable if Maduro were the first politician to start with idealistic rhetoric and end in savagery.  In fact, however, history provides countless examples of this pattern.  Which means two things.

First, while extreme power-lusters are a small fraction of humanity, they are a large fraction of successful politicians.

Second, regular human beings are awful at the detection of extreme power-lusters.  When humans hear flowery words, their impulse is to take them at face value, instead of reminding themselves, “That’s just what a power-luster would say – and politics is packed with power-lusters.”

You could object, “Well, popular gullibility is for the best.  If the man in the street assessed politicians realistically, political progress would be almost impossible.”  The tempting reply is, “Yes, but political disaster would be almost impossible too.”

This reply, however, gives gullibility too much credit.  Imagine a world where people were ever-mindful of politicians’ proclivity for power-lust.  What would happen?  Politicians would compete for popularity by promising and doing things that power-lusters hate to do.  Things like: Respecting individual freedom, welcoming dissent, defining crime narrowly, heeding international criticism, avoiding even the appearance of demagoguery, and yes – shrinking government and cutting regulation.  And given the documented dangers of politicians’ power-lust, that is just what anyone who cares about human welfare should be hoping for.

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Obsolescence

Nobody asked but …

One of the frictions that promotes change is obsolescence.  I have looked, this morning, at a drone photo of Hong Kong.  As a species blessed (cursed?) with rational problem solving skills, we seem at the same time to lack problem avoidance skills.  In Hong Kong the traditional problem solving algorithm will eventually kill Hong Kong.  There are too many people.  The solution that becomes a new problem is effected by people doing what Ludwig von Mises says they will do — seek to avoid unease.  Too many people in Hong Kong have an irrational need to remain in Hong Kong.  The unease they seek to avoid is the fear of living apart from Hong Kong.  The natural response, in any urbanization movement, is to act together in ways that will increase density.  Taller buildings increase the density of people who can live in them, while smaller compartments on each level increase the density of people who can live on each level.  Since the invention of multistory buildings, the answer to the problem of population has been to go up and to squeeze in.

Looking at Hong Kong, more than anyplace else, we can see a logical conclusion to the obsolecence algorithm.  Every available segment of verticality will be absorbed.  Horizontal shortcuts will enweb the complex, making it a hive.  Skyscrapers will approach the limits of structural capacity.  People will approach survival occupying only personal space-time.  But that’s enough speculation — we don’t want to gaze upon the Medusa.  The good news is as follows:

  • Misean behavior takes on infinite forms, paths, and interlocking consequences.
  • There are infinite mixtures of events and trends.
  • The requirement that human action arises from unease is not a stricture but an enabling prerequisite.  Anything, real or imaginary, that generates in any experience a feeling of unease will generate behavior hoped to reduce the unease.

Make no mistake.  This is not a description of a Leibnizian best-of-all-possible-worlds.  Hong Kong is a demonstration of the absurdity that will arise from a set of variables — the humanity in Hong Kong keeps fighting the battle of urbanization without asking do we need to change the pattern.  The pattern is obsolete.  A larger pattern applies — that which will end, will end.

— Kilgore Forelle

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Pangolins

Nobody asked but …

Once again, I have anecdotal evidence about humanity that is very dreary.  Mark Twain said, “Always do right.  This will gratify some, the rest will be astonished.”  The reason for astonishment seems to be that there are damned few who are compelled to do right — much fewer always to do right.

Take, for instance, the sad tale of the pangolin.  Statists will insist that we need states to prevent the illegal trade in pangolin scales, and consequently the extinction of the species.  I would ask, “How’s that working out for you?”

The thing is that it would be a long time before logic and order corrected the ills of the state — if ever.  But there is also the thing that statists are clueless about statism being necessary THOUGH evil.  Statism is useless AND evil.  Statism is wrong AND evil.  There is nothing that government does which non-government can’t do.

— Kilgore Forelle

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