Freeman

ARTICLE

Serving Consumers

MAY 01, 1964 by W. M. CURTISS

Dr. Curtiss is a member of the staff of the Foundation for Economic Education.

This article is recorded in the "Seminar Library" series of LP records available from the Foundation for Economic Education, Irv­ington-on-Hudson, New York. $3.50. Write for complete list. Also available from the Foundation is a more detailed 80-page discussion by Dr. Cur­tiss of The Tariff Idea. $1.00.

Trade between one person and an­other probably has been going on as long as man had something he could call his own. In a peaceful society, two neighbors compare their respective supplies and wants, and find opportunity to swap to their mutual advantage. That’s really all there is to trade—one person giving up something he has for something he wants more. So long as the trade is voluntary and peaceful, both parties think they benefit from the deal. If not, why trade?

Now, it’s true, trade gets more complicated when money comes in­to the picture—and especially so if each trader uses a different kind of money. Distance and time and transportation also complicate the trade. Still further complica­tions arise when there are govern­ment licenses to cope with, and import quotas, and exchange quotas, and bi-lateral agreements, and most-favored-nation agree­ments, and a host of other restric­tions.

The first essential to orderly trade between people is private ownership of property. A man must possess and be able to de­liver what he offers.

Just why do people trade one thing for another?

Man attempts to satisfy his de­sires with the least possible ef­fort—a worthy trait indeed, so long as he does not tread on the equal right of others to do the same. This is the principle of con­servation, as applied to human ef­fort—and it is the basis of all economic progress.

In satisfying his desires, mod­ern man is constantly exchanging goods and services with other men. In making these exchanges, his urge is always to obtain some­thing which he values more highly than what he gives up.

But this trait in man’s nature sometimes leads to trouble. Some men think that the easiest way to satisfy their wants is to steal from others. And perhaps this would be so except for one thing: The victims resent it! In most socie­ties, of course, stealing is con­sidered a violation of the basic codes of conduct, ethics, and mo­rality; and, it is a violation of our first assumption, a person has the right to own property. If stealing is considered wrong in a society, it is natural that laws be passed to punish thieves.

One of the facts of life that makes trading desirable and use­ful is that most of the material things we want are always in short supply. There just isn’t enough to go round. It is for this reason that things command a price in the market and that per­sons find it desirable to trade and improve their position.

Consumption Follows Production

The material welfare of an in­dividual, a family, a group, or a nation is determined by the amount of goods and services at its disposal. Neither nations nor individuals can consume what they do not have. Thus, the material level of living which the people of a nation enjoy is measured by their production—plus or minus international gifts.

The American family has more material things than has the Chin­ese or Indian or Russian family because the American worker pro­duces more. The reasons for this greater productivity—capital ac­cumulation, private ownership, tools, and the like—are fairly well known. The point is that high-level consumption is based on high-level production and exchange—on abundance, not on scarcity.

Trade between individuals, of course, would never take place un­less each party to the trade ex­pected to benefit from the ex­change. When two men voluntarily agree to trade horses, it is certain that each believes he is to get something better than what he is to give up. Why else would either consent to the trade?

There seems to be a general feeling that when money is ex­changed for, say, an automobile, it is only the seller of the car who benefits. But doesn’t the buyer benefit as well? Doesn’t he value the car more than the money he gives up? If not, why does he willingly make the exchange?

Is it any different when the bargaining parties happen to live in different cities? Or in different states? Or in different countries?

Throughout history, and to a dramatic degree in the past one hundred years, men have become specialists. Suppose, for instance, that each person had to produce his own television set. Life just wouldn’t be long enough for him to do it. He would have to be an electronics engineer, a mining en­gineer, a metallurgist, a cabinet­maker, a glass manufacturer, a machine-tool maker—there must be hundreds of skills involved in building a television set.

But while he was mastering the skills necessary to produce his television set, who would provide him with food, clothing, and shelter? And how could he learn of electronics without books and the accumulation of years of re­search?

Not many decades past, practi­cally every working hour was re­quired just to provide the food, clothing, and shelter necessary to keep alive. Most people were farm­ers. There was precious little be­sides the products of the farm available to families, for the sim­ple reason that eight or nine out of every ten families had to work as hard as they could to feed and clothe the ten families. Specializa­tion? Yes, they had it in a limited way. But today in the United States it requires little more than one family in ten to produce enough food and fiber for all ten families. The other nine families can make television sets, automobiles, house­hold furnishings; they can be teachers, doctors, clergymen, or producers of a host of other goods and services.

Comparative Advantage

Specialization is made possible by what economists call "compara­tive advantage." We see this clear­ly in athletic events. Some per­sons are better than others at throwing a ball or batting a ball or passing a football or playing tennis or running or jumping. They have a comparative advan­tage and thus are specialists. The same is true of writing a novel, operating a typewriter or a punch press, or treating a disease.

Comparative advantage is sometimes the result of geography. A clear example is the production of bananas. Bananas can be grown under glass in the state of New York—and a few are. Of course, they are very expensive when grown this way. Through the co­operation of nature, bananas are grown at much less cost in Central America. That area, then, has a comparative advantage in the growing of bananas.

In a free, competitive market, the price of a commodity or serv­ice depends on what someone is willing to pay for it. So it is with the wages of labor. The employer must be willing to pay if he wants men to work for him. How much he will pay will depend on the labor market and indirectly on how much his workers can pro­duce.

Therefore, we find relatively high wages in a country where the productivity of the workers is high. Where we find an extremely low level of wages, we can be sure that the productivity of the work­ers is low.

The reason for such a tremen­dous difference in the production of workers in different countries can be told very briefly in one word, tools. Tools include plant and equipment, as well as the ac­tual machines the worker oper­ates. In the United States, it now requires an average investment of$16,000 to $20,000 to provide one industrial worker with tools. Some modern industrial plants cost as much as $100,000 for each worker employed there. Contrast this with a hoe or wheelbarrow used by a Chinese worker.

The Consumer Reigns

In an economic sense, the only reason for producing anything is to satisfy the desires of consumers. This idea seems simple enough, but it is often lost from sight as an economy becomes more and more complex and specialized. In a subsistence economy, where the producer is also the consumer, production is obviously for con­sumption. In such an economy, the family is acutely aware that it must produce food in order to eat; to provide its clothing, sheep must be raised or fur-bearing animals hunted. The family is both pro­ducer and consumer of everything it has.

The consumer is, in effect, the court of last appeal in a free mar­ket. He is the judge who convicts or acquits. He either accepts or rejects the goods and services of­fered—taking into account his own desires, his buying power, and the alternate products avail­able. He cares not a whit, at the moment, what it may have cost someone to produce the goods.

To ignore these decisions of the consumer is economic suicide—witness the demise each year of business firms which were guilty of ignoring or misjudging the consumer.

So, we know why people trade; we know the importance of special­ization and trade in providing peo­ple with an increasing amount of the material things they like; and we know that the only reason pro­duction and trade take place is to serve the consumer. With this background, let’s take a look at some of the road blocks that some­times get in the way of trade—that prevent a consumer from making the best possible exchange of whatever he has to offer for whatever it is he wants.

Trade Barriers

Years ago, piracy on the high seas was one of the road blocks to trade. Goods that got through had to bear the cost of those that did not. As a result, consumers got less for their money, or whatever it was they traded, than if there had been no piracy.

There are many kinds of road blocks today—most of them thrown up by governments—either in the exporting country or the import­ing country or both. Tariffs are just one of these road blocks and probably not even the most im­portant at this time. However, tariffs are pretty simple and once one has an understanding of them, other types of restrictions can be more easily understood.

Probably the most common ar­gument in defense of tariffs is that they keep our domestic wages high; that they keep wages in this country from being reduced to the level of wages in the countries from which we import. It is often put this way: "Tariffs protect us against the competition of low-paid foreign labor. If we accept their goods, we must accept their wage levels."

To begin with, we must not lose sight of the reason why wages in this country are higher than in some others. The level of wages depends upon the productivity of the workers. Our workers are highly productive, largely because of the tools with which they work. In countries where there is a limited accumulation of capital, the tools of the workers are limited. Thus, their productivity is low, and so are wages.

The level of living in a nation depends upon the amount of goods and services available for con­sumption. If certain individuals in a nation voluntarily trade some of their possessions for the products of another country, it follows that what they receive is worth more to them than what they give up. Otherwise, they would not trade. The total value of the goods and services available for consumption is greater after the trade. The level of living has been raised.

Consider, for a moment, a prod­uct made entirely by hand labor. Hand embroidery or other needle­work will illustrate. Assume that a woman in Italy working for a very low wage can turn out hand­made needlework comparable to that produced by an American woman working for a relatively high wage. It is obvious that the Italian product can be sold in this country for less than it would cost to produce it here. Does that mean that if we import the Italian prod­uct the American woman’s wage will necessarily be reduced to the level of the Italian woman’s wage? Not at all. Why is the wage of the American woman high? It is be­cause of the generally high pro­ductivity of American labor, which makes it possible for her to get a high wage in an industrial plant, in an office, in a profession, or in some other type of employ­ment.

It is true that, without trade barriers, hand embroidery prob­ably would be imported from Italy. The American producer of hand embroidery, unable to pro­duce and sell a comparable prod­uct at a competitive price, would have to turn to producing one of the many products for which a comparative advantage exists. The American producer might, for ex­ample, turn to machine production of an article to replace hand em­broidery.

This is typical of the readjust­ments which would be necessitated by a return to free trade. Workers and management alike, having be­come adjusted to production under tariffs, would have to improve their efficiency or find other out­lets for their skills.

Tariffs encourage the produc­tion of some things in which the country lacks efficiency and dis­courage other lines of production in which the country has a com­parative advantage. The total value of production, so far as consumers are concerned, is less than it would otherwise be—and this means that real wages are held down by reason of tariffs. So, rather than protecting domestic wages generally, tariffs lower real wages in all countries affected.

The Unemployment Issue

That is all very well, you may say, but wouldn’t a free trade pol­icy lead to unemployment? The prevention of unemployment is one of the usual arguments for tariffs.

This argument is expressed in a number of ways. One is that the removal of a tariff, after an in­dustry has become adjusted to it, will result in unemployment. An­other is that by means of tariffs we can put our people to work making the things we now import and thus create employment. Some say: "We do not want such-and­ such a country exporting its un­employment to us."

We have observed that if a tariff is removed, a protected in­dustry may be forced out of busi­ness by foreign competition. If this happens, the workers in that industry will have to find employ­ment elsewhere. In the embroidery illustration, it is not denied that the existence of the tariff permits some workers to be employed in embroidery manufacturing who would not otherwise be so em­ployed. But what is often lost sight of is that many other job opportunities not now in existence would become available in this country if people could buy the imported embroidery and spend their tariff money as they please. The money which the consumer formerly had to pay for tariffs could be spent to purchase or pro­duce new products or more of ex­isting products or services.

Tariffs turn a country toward self-sufficiency. A farm family might erect such a high tariff wall around its farm that there could be no trade in goods and services with outsiders. Certainly, no one would be unemployed on that farm, but neither would there be the high level of living the family now enjoys. If the tariff wall around the farm were removed, no one would necessarily be disemployed, and the farmer’s household would enjoy a vastly higher level of living—and so would outsiders.

The question of employment or unemployment, except for tempo­rary adjustments, has no place in a consideration of tariffs. It would be as logical to argue that the buggy whip industry should have been subsidized in order to keep its workers employed when there no longer was a demand for buggy whips.

The pattern of production with­in our own country is perhaps the best illustration of how free trade builds a higher level of living. Steel is produced in Pittsburgh, automobiles in Detroit, cotton in the South, meat and grain in the Midwest and the Great Plains, shoes in St. Louis, clothing in New England and New York—just to mention a few of the products and areas of specialization.

"Yes," you may say, "but tariffs don’t completely shut off trade." True, but they shut off trade to whatever extent they are effective. The effect of a tariff on wool is that we must employ more of our domestic resources in the produc­tion of wool than would be necessary if we imported more of it. A tariff on Swiss watches encour­ages the production of watches in our own country because it pre­vents their importation at a lower cost. And by keeping prices higher, such tariffs reduce our consumption of wool and watches.

Another argument for tariffs is that new industries cannot survive if they must compete with firmly established industries in other countries. It is said, "Give them a chance to get established, and they can then compete."

History has shown that protec­tion in the form of tariffs imposed to protect infant industries is dif­ficult, if not impossible, to throw off. The protected infant never grows up to attain self-responsi­bility. And little wonder! In any industry, protected or not, there are firms which are barely able to stay in business—even though other firms in the same industry are operated profitably. If the crutch of tariffs is removed, these marginal producers must either improve their efficiency or go out of business. If they can do the former, why didn’t they do it be­fore the crutch was removed?

Those who use the infant-indus­try argument appear to place em­phasis on the virtue of industry, as such, rather than on the goods produced. They seem to be con­fusing means and ends. We must not lose sight of the fact that consumption is the sole end and purpose of all production.

Advantages of Free Trade

What, then, are the chief advan­tages of free trade?

The elimination of trade bar­riers would have three very im­portant beneficial effects:

1.        It would permit our economy to gain from the specialization and comparative advantage in pro­duction to be found all over the world.

2.        It would help the so-called underdeveloped areas of the world to help themselves. It would give them a better chance to produce and trade.

3.        It would be the best way to cement friendly relations between Americans and other peoples all over the world. How can one in­dividual become angry with an­other when they are permitted to trade freely and voluntarily, know­ing that both parties to the deal will benefit? In such trade, there is no danger of secret diplomacy, of playing special favorites, of handling other nations as pawns—pitting one against the other to seek a gain or even to attempt a precarious balance.

But what can we do about all these trade restrictions—not only tariffs but all the others? Isn’t it a difficult political problem? Of course it is, and it requires politi­cal answers—unfortunately. I say unfortunately because, too often, a political solution may not be the best economic solution.

The will to remove restrictions on trade can come about only through understanding—through the realization that restrictions do not yield the benefits claimed for them. Worse than that, they are harmful—harmful economically and harmful to the cause of peace, friendship, and good will, at home and abroad.

On the surface, tariff protec­tion seems to offer benefits to the owners and workers of a protected industry. When a tariff is first ap­plied, the producers of the par­ticular product affected have a price advantage which should be reflected in higher profits. But tariffs do not prohibit domestic competition within an industry. The higher profits attract new­comers to the field, and competi­tion tends to erase the gains from the special privilege. After this happens, the producers are back in their former competitive posi­tion. In order to maintain any benefit, they will have to continue to ask for new privileges as the old ones lose their power—much as a drug addict must use more and more of the drug to avoid the suffering it is supposed to relieve.

Thus, the so-called "benefits" of tariff protection are illusory—the only consequence of the tariff be­ing that the domestic owners and workers are competing with one another in an industry erected on a false base. The base is false and weak because it is supported by the threat of force—force which directs individual spending—in­stead of by voluntary choices. The force is directed against consum­ers, the friends and neighbors of those who seek special privileges for themselves. But consumers do not respond kindly to force or threats of force. They have only so much buying power, and they can­not be forced to buy more of everything. Nor will they buy a commodity as freely as before if its price is forced upward by a "protective" tariff. Thus, tariffs serve merely to put the whole economy on an artificial founda­tion instead of on a sound business foundation. No one really gains—and nearly everyone loses—by this arrangement. It stifles progress.

The Pain of Adjustment

Adjustments such as those which would be required by the removal of tariffs are taking place constantly in a free economy. When the automobile made its ap­pearance, the operators of livery stables and the manufacturers of buggies were inconvenienced. They had to turn to something else. But they soon found themselves bene­fiting in two ways: First, as con­sumers, they benefited generally from the automobile; and second, the new job opportunities within the new and expanding automo­bile industry were more attractive than those in a dying industry. Thus, the removal of trade restric­tions would not be as painful as it may at first appear—even to those who think they benefit from them.

To argue that tariffs cannot be removed when an industry or a nation has become adjusted to operating under trade restrictions is no different in principle than to argue against all technological change and advance.

Such arguments indicate, how­ever, that it is politically difficult to remove restrictions once they have become established. Powerful minority interests vigorously withstand changes of this type. "Tariffs should be removed grad­ually," say some, "in order not to offend too severely those who have a direct interest in the protected industry." This overlooks the per­sons who have long been offended by not being able to exchange to advantage. It argues that the of­fense to the consumer may be con­tinued without injustices.

A familiar argument is: "We are willing to give up our protec­tion if all others will give up theirs." As a political argument, this is fairly effective since it is practically impossible to face the combined forces of all minority groups. Economically, of course, the argument has no validity. The way to begin is to begin. The amount of human energy released by the removal of restrictions will be astounding.

Each Small Exception Justifies the Next

Perhaps the greatest obstacle to the removal of trade barriers is the belief expressed by small groups of producers: "Yes, but our case is different; an exception should be granted in just this one instance." Grant a single excep­tion and the floodgates are opened to all sorts of pressure groups. The result will be a continuation of the political chaos which we now find in the area of trade re­strictions.

Basically, the issue of tariffs and other trade restrictions is a moral one. This is not to deny that it is also an economic issue. It is merely a matter of emphasis. Unless economic principles are in harmony with good moral princi­ples, they are not good economics.

Government grows strong and dictatorial by the granting of spe­cial favors. Trade restrictions are just another of the handouts which a government can grant, thereby increasing its power over individuals—to the detriment of all.

The moral basis for free trade rests on the assumption that an individual has the right to the product of his own labor—steal­ing is bad because ownership is good. This involves property rights. Property rights are human rights, and to try to distinguish between them is merely to play with words—and on emotions.

The right to own property in­volves the right to use it, to keep it, to give it away, or to exchange it. Unless this is possible, one does not own property. To lay obstacles in the path of ownership, use, or exchange of property is a viola­tion of the human right to own property.

Fallacy and Fact

Economists from Adam Smith down to the present have quite generally agreed that tariffs are bad economics. And it is not diffi­cult to discover why.

Tariffs and other trade restric­tions contribute to scarcity rather than to abundance. We are some­times fooled by the introduction of money into trade; but basically, it is the abundance of goods and services, widely distributed, that contributes to a high level of ma­terial well-being.

There is ample evidence that a high level of living in any country cannot be achieved without a high degree of division of labor—spe­cialization. Rather than a jack-of-all-trades, each person is the mas­ter of one. This calls for a high degree of cooperative effort and exchange. Production by this proc­ess rests on the principle of com­parative advantage—of produc­tion where conditions are most favorable.

A fallacy of protectionists is that employment, of itself, is a worthy economic objective. Em­ployment, however, is merely a means to an end—and the end is production for consumption. No doubt employment was high during the building of the Great Wall of China or the Pyramids of Egypt. A dictator can always achieve full employment. Hitler did it in Germany; and we had our leaf-raking projects.

But under freedom—freedom to produce and to trade volun­tarily—men will have just as much employment as they desire. Actually, tariffs have nothing to do with employment. Employment can be high or low—with or without such trade restrictions. Tariffs do not create better jobs for individuals. They simply tend to keep people working at jobs which are less productive of use­ful goods and services than they would be under free trade.

Protectionists have claimed that wage levels can be main­tained or increased by shutting out imports from areas with low real wages. Wage levels are de­termined by the productivity of labor. This, in turn is determined by the investment of capital in the tools of production. The products we import are more valuable to us than our exports; otherwise, the trade would not be made. Rather than produce the imported product here, our own labor is released to produce something we are better fitted to produce.

Failure to recognize that satis­faction of desires is the sole pur­pose and end of production has led protectionists to support tariffs, subsidies, and other meas­ures. Had we consistently followed such a policy, we would now be subsidizing 80 per cent of our pop­ulation in agricultural pursuits, as well as in the manufacture of buggy whips and candles. Eco­nomic progress cannot take place under such a system.

The removal of tariffs restores justice to consumers—to millions and millions of consumers. The fact that it may seem to result in a temporary inconvenience for a few producers is merely the cor­rection of an injustice previously established.

Free trade is such a simple solution for so many of the world’s ills. It doesn’t require endless hours of debate in the United Na­tions or the International Labor Organization or the Food and Ag­riculture Organization, or any other world-wide debating society. It requires only that one nation see the light and remove its re­strictions. The results will be im­mediate and widespread.

It isn’t necessary for all nations to agree jointly and simultane­ously to remove restrictions. If only one nation does it, some good is accomplished—both for itself and for its customers. A great na­tion, such as the United States, could do it and thus set an ex­ample for others to follow. It would not be meddling in the af­fairs of other nations; it would merely be looking after the best interests of its own citizens. And instead of being resentful, other nations would be grateful.

 

***

Ludwig von Mises

While government has no power to make people more prosperous by interference with business, it certainly does have the power to make them less satisfied by restriction of production.

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