1/07/2012

01-07-12 - Protectionism

There are some basic economics that I just don't understand, and a lot of the times the accepted "right answer" conflicts with common sense.

One example is it seems to me that buying something locally made is better for the local area than buying something made far away. (for "locality" you may substitute "state" or "nation" or whatever region you want to divide things by).

For me this conjures bad memories of the anti-"Jap" "USA USA" crowd of the '80's that had "buy American" bumper stickers and such ; something in my moral fibers says you should buy the best quality cheapest product. But I don't think that's true.

Consider for the moment the case that there are two products, identical in price and quality. One is locally made, one is foreign made. I contend it is better for the local area (and usually better for you personally) to buy the locally made product. When you do that, the money goes to someone who lives nearby, who spends that money again, and that person spends it, again, etc. This makes the local area prosperous.

(in a purely selfish sense, whether or not making the local area prosperous is good for you or not depends on the details of your situation; if you are a merchant or an altruist, it is good for you; but if your business is international and you would prefer local property values to be low, it might be bad for you; we will assume for the moment that you want the local area to benefit).

So there is some value to buying local and keeping money and industry circulating locally.

So, even if the local product is somewhat more expensive, it still might be better overall if you bought that instead of the foreign product. You have to weigh the benefit of both; the region gains some utility from access to cheaper foreign products, but that is traded off against not circulating that money around the local economy. eg. there's some break even point (in terms of overall utility) ; maybe if the local product costs 20% more, that's the actual break even point.

Of course consumers should not have to make that decision themselves, they should just be able to buy the cheapest product. The correct way to fix that is with government - one of the valuable things that government can do is to make apparent price equal to actual price (eg. to make price proportional to utility, or to move long term costs forward, etc.), or to use laws to bias pricing so that logical purchasing decisions lead to the greatest overall utility (eg. putting penalties on products that help you but hurt others).

The obvious way to make the prices match utility here is either with tarrifs on imports, or subsidies for local production. This is called "protectionism" to attack it, but it seems to me it's just a way of getting the benefit of circulating those dollars locally.

I'm a little disturbed by my conclusion because it's awfully close to the anti-globalization crackpots who claim that modern government financial policy benefits "wall street not main street" (and other slogans).


Granted, in reality, it's too late to go back to pre-1990's protectionism. The cat is out of the bag. And of course in reality protectionism degrades into political gifts for corrupt corporations. But we can ignore those issues for the theoretical discussion.

Also, if you are an extremely altruistic chap you might question the whole goal of maximizing the benefit to your locality (nation/state/fiefdom/whatever). You might say the goal of policies should be to maximize the good for the world. But for the moment let's ignore that and assume that the government of a nation should act to maximize benefit for that nation.

16 comments:

nereus said...

Speaking as someone perhaps far to the left of you, I think the standard intonation for maximizing wealth (locally and globally) is to in general maximize comparative advantage. So the individual's strategy is: across constant quality sources for a product, pick the cheapest source. If that's local, great. Otherwise, somebody else can "do it better" even in the presence of non-trivial shipping costs.

This assumes that something else locally can be "produced better" than anyone else, and those other people want to buy it. And that everybody else is playing fair. The leftist observes that that is not always the case, especially when sources/sinks span development zones (developed vs. developing vs. basket cases).

cbloom said...

I don't think it's a political question at this point (I haven't brought up anything about unequal labor laws or unequal environmental laws or whatever).

It just seems to me that basically any time money leaves your area in trade, that's bad for your area, based purely on the extra value of money recirculating.

You could say something similar about money going to rich people - rich people are far less likely than poor people to recirculate money locally (or at all), so money going to poor people has extra value.

So for example if you are considering buying two equal products, both for $100. One of them was made by one employee that got $10 and $90 profit goes to the CEO, the other was made by ten people who all got $10 - you should prefer to buy the second one, because all that money going to local poor people will recirculate more in your area.

DareM said...

Coming from a country that was until the end of eighties living in its own protectionism bubble it scares me to think of locking up to the rest of the world again, for the sake of improving local economy.

Local business gets lazy, competition is gone, prices go up, quality down. But I guess I am talking about extremes.

Ian McMeans said...

Tariffs don't benefit your region. Here's a simple example how - if you're buying wheat, say, here's what your country owns before and after:

trading locally:
Before: farmer has wheat, you have $5
After: farmer has $5, you have wheat
no net change for your country overall.

Trading internationally:
Before: you have $4
After: you have wheat
Net change for your country: $1 of profit compared to local trade.

You aren't trying to maximize money in your country, your trying to maximize total *value*. Purchased goods count towards that, so if you can buy goods for cheaper than you can make them, you're better off buying.

When considering international trade, think of it like a new technology: if we're business competitors and I can build a car for $100, but you can get a car for only $50 with the "technology" of trade, you are producing more useful goods for our country than me - just like if you invented a machine that automated my expensive production method.

Tariffs only benefit local business owners, and harm local buyers more than they help producers.

Brian said...

I wonder about this also. I think economists argue that value globally is improved by eliminating tariffs. One could imagine various thought experiments that would show global trade doesn't necessarily benefit us locally. Consider unfriendly aliens who undercut all trades on the entire planet and then use the proceeds to buy up all the land... How does such free trade improve the local economy?

cbloom said...

Did you actually read my post at all?

(hint : the farmer does not just light his $5 on fire)

(thank you for providing exactly the naive first level analysis that I believe is wrong, and is obviously the starting point for my discussion, since I'm not like a complete moron)

cbloom said...

that was @Ian

Ian McMeans said...

I did read it, but I don't think I understood the argument at first.

I guess with any transaction, both the buyer and seller will earn some profit. If you have tariffs, that's forcing all profit to go to locals, instead of getting split between a local buyer and foreign seller (or vice versa). That's what you were talking about with "keep the money circulating?".

It seems convincing, but it starts to seem crazy when you consider smaller groups and individual trades: is my family better off if I sell my car to my brother (for the same price) instead of to my friend?

Unknown said...

There are many ways to spin this, but they're all about the part you just say we should assume to start with (preferring the local area).

Global value is (presumably) optimized by buying cheapest, not favoring local.

Personal value might be optimized higher by favoring locals and increasing the local wealth for some people (but optimizing for cheapness may offset this some). However, this can't be true for everyone if global value is actually optimized by not favoring local, since it means the average personal value globally increases by not favoring local); on average personal value is optimized by optimizing global value.

And for you personally, your money from RAD doesn't come from the local area at all, so it's unlikely to optimize your personal value.

Basically, at heart you're assuming that the money you spend non-locally, which would recirculate locally, isn't offset by non-local-money recirculating locally. Obviouslly if you consider globally, it is on average. Whether it is or not in an individual case depends on things like trade balance.

If you're arguing for this as a generalizable choice ("everyone should do this"), then it doesn't make sense, but there's a prisoner's dilemna scenario to it. However, if you assume NON-generalizable, that you are the only person who is going to do this, then optimizing for local doesn't really increase local wealth by a significant enough amount to really matter.

cbloom said...

@ Unknown -

I think you're getting more at the real issue, but you make some mistakes.

For example :

"However, this can't be true for everyone if global value is actually optimized by not favoring local, since it means the average personal value globally increases by not favoring local"

Not quite. It may well be that the optimal strategy for each locality is to buy locally. This might create a lower total global value.

You incorrectly assume that the optimal solution optimizes global value - it does not. An equilibrium occurs when each individual rational actor is at a local maximum.

"And for you personally, your money from RAD doesn't come from the local area at all, so it's unlikely to optimize your personal value."

Well, maybe. Certainly in the naive dollar-weighted utility that is true, but a proper analysis needs to look at the true value return for me. I think there's a lot of value in living around people who have jobs, and living in a nice community of other educated people. Exactly how you balance all that is complicated and is really another topic.

"Basically, at heart you're assuming that the money you spend non-locally, which would recirculate locally, isn't offset by non-local-money recirculating locally. Obviously if you consider globally, it is on average."

I guess you're assuming that the total value of each locality is constant. If you assume that, then any outflow is matched by an inflow. (this isn't actually true in the short term in the world, but it's reasonably close to being true, so I'll run with it).

If we assume for the moment balanced flows; I think that roughly what's happening in the US is that we send money out for basic goods, and we take money in for IP rights, financial services etc. Essentially what's happening is the money is jumping up several levels. Maybe I'll do a separate post on this part of the issue because I think it's interesting.


"However, if you assume NON-generalizable, that you are the only person who is going to do this, then optimizing for local doesn't really increase local wealth by a significant enough amount to really matter."

It doesn't make any sense as an individual action. My question is essentially about government policy. If you assume that the role of government is to optimize well being for the locality, what should the financial policy of the government be?

Sean Barrett said...

But that's the prisoner's dilemma; if everyone engages in protectionism to force local spend, that may seem to optimize local value but I'm pretty sure economists are convinced that it doesn't optimize global value, which means at least for SOME people it's not optimizing local value (and, most likely, for everyone).

If a country unilaterally engages in protectionism maybe it's a win for that country, but other countries will respnod in kind.

(I don't know why the previous one showed up as Unknown, or if this one will. I switched to using a google account and for some reason it ignored the 'name' when I posted.)

Sean Barrett said...

I mean, just speaking practically, no cheap goods from china means the USA's quality of life would drop significantly--we would lose value there if we cut off all trade.

In practice it's more complicated because of trade imbalances.

cbloom said...

"But that's the prisoner's dilemma; if everyone engages in protectionism to force local spend, that may seem to optimize local value but I'm pretty sure economists are convinced that it doesn't optimize global value, which means at least for SOME people it's not optimizing local value (and, most likely, for everyone)."

Well, local maxima occur everywhere in economics and politics.

I'm not sure that this is a true "prisoner's dilemma" in the sense that the global maximum is higher for everyone than the local maximum.

I think it's quite possible that some mild protectionism would make some countries better off than they would be with free trade.

BTW this "protectionism" is not some fantasy. Every country in the world currently engages in *massive* protectionism in the form of local business subsidy. As I will clarify more in a later post perhaps.

Will said...

What do you think of local currencies e.g. W├Ârgl, WIR?

http://en.wikipedia.org/wiki/Local_currency#Historical_local_currencies

cbloom said...

Local currencies - quite interesting, I'd never heard of that.

Obviously it allows you to have a healthy local economy even when the larger economy is in big trouble.

brian said...

Others are kind of saying this in different ways but fundamentally it seems protectionism favors diverse, unspecialized local economies, and open global commerce more heavily favors specialization.

If you're buying things locally it keeps the money local, but if everyone's a protectionist, and you're a supplier, you can't supply more than your local region.

Straightforward economies of scale and geographic advantage (producing steel near ore reserves, e.g.) suggest regional specialization would maximize overall value.

Then again, Taleb argues in Black Swan that arbitrarily pushing mass specialization is a stupid fragility mistake that nature doesn't make, and by his logic, localism (via local currencies, say) may compromise on total value in the system, but the win in robustness from the redundancy more than makes up for it.

old rants