On the Origin of Straw Men

Professor Don Boudreaux of George Mason seems offended that I mentioned Hayek while pointing out that a free-trade advocate wrongly assumed that costs stay fixed in a dynamic market. He wrote a letter in response. I’ll reproduce portions of it below. Boudreaux writes:

Michael Brendan Dougherty claims to find support for tariffs in F.A. Hayek’s article “Competition as a Discovery Procedure” (“Defending Dynamic Markets,” October 16). This move is as bizarre as claiming to find support for creationism in Darwin’s On the Origin of Species.

Mr. Dougherty’s argument is this: Because tariffs protect domestic producers from foreign competition, these producers will gain access to larger markets. These larger markets will then enable these producers to take advantage of economies of scale denied to them when having to share their markets with foreign rivals. As these firms produce at larger scales, their per-unit costs of production will fall and, voilà, prices will fall — thus justifying the tariffs!

Facepalm.

Nope. I never said or implied that Hayek supported tariffs in that article. What Boudreaux never states directly is that my argument was with John Puri’s contention that tariffs “must permanently raise prices to some extent,” because “the relatively higher domestic production costs that made the tariff ‘necessary’ in the first place remain constant.” He doesn’t defend Puri’s contention, either.

My argument was that we learned from Hayek that costs are not given, but discovered in markets — and they change as people respond dynamically. Boudreaux, without ever revealing or truly engaging with what I actually argued, seems to concede this later, when he writes, “It’s true that markets deal with, and find ways to reduce, the damage done by protectionism.” That’s my whole point: Markets can respond to tariffs by adapting and cutting costs, exactly the dynamism that Puri’s contention denies. The rest of Boudreaux’s argument is with something I didn’t write.

But there are parts of it I find curious and remarkable. For instance, the professor asserts that all I argued about was scale when what I said was that in the face of paradigm shifts and the changed incentives introduced by tax policy (tariffs), firms change their behavior. Some may enter a market, others may apply business or technical improvements — the price mechanism still works, even if it is not globally free of tariffs. Boudreaux likens protective tariffs to protecting students from failing grades. The fallacy there is obvious. Tariffs don’t abolish competition the way a guaranteed A does. Domestic firms still compete with one another, and imports still come in, just with a duty.

The one point he raises that I take seriously but that wasn’t the subject of my piece is a citation of Abba Lerner’s: If Americans buy fewer imports, foreigners have fewer dollars to buy our exports. Fair enough. He adds that whatever doesn’t come out of exports comes out of foreign investment here instead. But this is going further afield, a smaller trade deficit financed by less foreign borrowing is what tariff advocates usually say they want.

More curiously, the professor argues thus:

Hayek’s point in the article cited by Mr. Dougherty is that markets should be left as free as possible in order to discover the best outputs to produce and the best means of producing these outputs. This on-going discovery procedure takes account of as many relevant realities as possible, including the policies of foreign governments. Yet by imposing tariffs –- even stable ones –- the home government short-circuits the market’s ability to discover and implement these ‘best’ economic plans and procedures.

Did you catch that? In one sentence, he argues that Hayek teaches us that the discovery procedure of markets takes into account the policies of foreign governments (those include say Chinese industrial policy, Korean and Japanese state-backed shipbuilding finance, European subsidies). In the next sentence, he says that even stable tariffs “short-circuit” the market’s ability to function.

In other words, every other government’s tariffs and industrial policy are just facts the market routes around and incorporates. Only an American response short-circuits it.

Boudreaux concludes with the backhanded acknowledgement of what I actually argued — “that markets deal with, and find ways to reduce, the damage done by protectionism” — and then he analogizes this to an argument for hurricanes because people respond to them by coping with the damage. This analogy assumes what he has failed to prove or to engage with at all — that tariffs are all damage. But I suspect he won’t engage with that, because he doesn’t count domestic capacity, security, political independence from external constraints, or resilience against a foreign state’s whims as gains at all. That’s the real disagreement, and it has nothing to do with Hayek.