Keynes and Friedman believed tariffs were bad
The worldhas changed. Some of our thinking is stalled with the economicassumptions predating the industrial revolution. Marx saw that therewas a very real risk of the rich industrialist class exploiting thepoor. Marx’s thoughts on this exploitation was a bit about makingthe rich better off at the expense of the workers not becoming betteroff in the exchange. Marx was partially in error, but he wasessentially correct at the margins. Economists understand that weall make decisions weighted more towards immediate benefits. Is itexploitation for one with acceptable immediate resources to notsimply maximize short run decisions and thus prefer the longer termgains? This is not exploitation. This is the basic economicdifference between how nearly all the poor behave versus nearly allthe wealthy. To a great degree, this is also why corporation canafford to take the longer term view with planning and allocation ofavailable resources. Again, is this what Marx was speaking ofregarding exploitation? If so then Marx is correct and myinterpretation of Marx and his use of ‘exploitation’ may be inerror. (If you wish, just read the last paragraph. This may be toodrawn out and boring.)
An eliteclass holding power with land based wealth did not continue growth oftheir wealth and by extension their power. The economy was nowbecoming a cash based economy rather than an agrarian economy livingoff the land with minimal use of currency by the common man. Notevery land holder or even most land holders made the transition, butsome did make the attempt. The industrialists were a new elite classamong the educated, but not necessarily among the rich land owningclass of the elite. These industrialists were now becoming the newelite with growing governmental and judicial power.
We see thiswith European nobility who did not see the future via the industrialrevolution. Raw material extraction and food production were going totake fewer workers as the steam based economy and then an oil basedeconomy took off. In the short run there was a certain boost inpeople handling the shovels and using their backs to move anddistribute materials such as coal. This was simply a short runexpedient for the industrialists as mechanization took root. This iswhat Marx saw as exploitation. The shift in population to towns fromfarms also meant a shift in power to the loss of the landed elites. This was not exploitation though as Marx saw it. The land basedwealthy were simply attempting to hold onto power as their wealthbase was diminishing over time. This was simple economics as therelative demand for land decreased relative to opportunities forreturns with mechanization. In the end, Marx missed his opportunityto see the real problem.
The problemwas the laws protecting the landed wealthy were now being used toprotect industry. The very same type of change is now taking placewith unionized industrial workers and skilled union organizers andunion administrators. In a sense these people are the new landedgentry using the laws to protect their positions of power as itcontinues to erode away,
The rule oflaw in an agrarian economy was not going to work as peopleconcentrated into the town areas as factory workers. Patents thatwere needed to encourage new ideas on the simple items such as a plowwere now tools of exploitation today by giving monopoly protectionfar in excess of what was needed to encourage developing new drugs. To give a profit on a few thousand production items was not the sameas protecting ideas that meant pennies of profit on each item whenover hundreds of millions of produced items as a result of a singleidea. A single medicinal pill may be simply a fraction of a penny ofpatent protected profit, but when translated over billions pills,this is a real power of law. Is this still the protection we need? Reward should never be at the perpetual expense of the future generalpopulation. Yes, some people are better off with the drug, but manyare not. Yet we have socialized the cost over the entire populationand continue to protect the drug patents.
The Lord ofthe manor became courts and jails over time. The basic ideas of notkilling your fellow man were still moral imperatives to be enforced. The laws regarding theft and conversion of other people’s propertydid not substantially change from preindustrial revolution times, butperhaps the laws should change. And the changes need not be onesided. At the margins, people look at the short term benefits andare less concerned about the long term implications. Huge gains inwealth were made because of the tax system focused on tariffs ratherthat income assessment of taxes. Today’s tax system is morefocused on income. The patent protection has little to do withincome when the protections by amendment and updates can extend tothe very far future.
Our currentthinking is that tariffs are a form of protectionism and thus shouldbe avoided. Intellectual property rights used to need the firmestand longest time terms of protection. A reasonable rate of returnused to need decades to be profitable enough to encourage the risk ofresearch that may or may not prove to be profitable. Today, Googleand FaceBook, among others, use these patents to make entry intotheir business fields difficult and yet are some of our largestcorporations on the Planet.
Therevolution of the internet and cellular telephones is makingcompanies able to reduce costs by moving the intellectual rights fromcountries with weak protections on these intangible rights tocountries with firmer protections. The manufacturing of the physicalproducts can also be moved to countries with lowers costs ofproduction of the tangible products. Yet older workers cannot bequickly retrained as easily as production can be moved. How can aworker maintain their productive compensation without employerinvestments in their skill sets? Patent protection lasts nearlyforever and the workers are not protected and are simply allowed toage out of the system with declining incomes.
Today wehave issues with tariffs on international trade partially as a resultof these aging workers losing their jobs as the economy changes. Thenation remains highly productive as the younger workers have theneeded new skills. The older workers are cast aside as we are seeingin the General Motors layoffs. Subsidies to the company did not savetheir jobs. Tariffs on assembled autos will not save their jobseither.
Part of theproblem is an imbalance in international trade. Free trade is goodin the long run, but in the short run some sort of tariffs could be apotential and temporary solution. Specific tariffs such as on steelare not a good solution. Specific tariffs on companies are not a goodsolution for the same reasons. These give government administratorsplums to reward friends and punish enemies and thus are an inducementtowards corruption.. A better form of tariff would be against allimports from a country and assessed at predetermined rates based uponthe historic and expected future value of the trade imbalance. Sucha system of tariffs would need both announced starting conditions andending conditions before such tariffs could be initiated. This makesthe process less personal and less prone to corrupt practices. Eachcountry affected by such tariffs can then take actions in their owninterest to reduce the imbalance in international trade. Yes, thisis less efficient than open markets, but the markets are notcompletely open. Restrictions on movement of capital and peopleexist. Laws such as on labor can be used to create an imbalance intrade. Government manipulation of currency exchange rates are also aproblem. These and other problems should be left to the individualcountries to sort out. A country suffering an imbalance of trade canand should act alone via tariffs to help their own citizens.
Both Keynesand Friedman believed tariffs were bad, but not as bad as thealternatives. (Capitalism & Freedom, Milton Friedman, Universityof Chicago Press, 1962, Ch.3) Tariffs are a good tool when dealingwith the short term political problems involving older workers (whovote) when the problem is an imbalance in trade. Friedman discountedthis as a problem because the dollars were of no use to others if notspent, but the modern society allows foreign governments to hold thedollars as reserves. The dollar holdings are in lieu of atraditional commodity stockpile such as gold in the national vaultsto back the local paper currencies against speculation. A foreigncountry such as China can accumulate dollars or exchange them withthe Federal Reserve for treasury notes and with the notes still havea modest return on capital while partially backing their own papercurrency in circulation. The imbalance in trade can thus continuewith the aid by our own Federal Reserve. A general tariff on allimports from China might be sufficient to induce China to changetheir own trading policies so that the imbalance in trade disappears. The threat of future tariffs can avoided if other countries areaware that USA trade policy desires free and balanced trade. Tariffsare only a remedy to encourage changes in government policy so thattrade is in balance.