Protectionism and the Destruction of Prosperity

Murray N. Rothbard

[Monograph first published by the Mises Institute, 1986]

P
rotectionism, often refuted and seemingly both parties—in this case Japanese producers and
abandoned, has returned, and with a American consumers—otherwise they would not
vengeance. The Japanese, who bounced engage in the exchange. In trying to stop this
back from grievous losses in World War II to trade, protectionists are trying to stop American
astound the world by producing innovative, high- consumers from enjoying high living standards
quality products at low prices, are serving as the by buying cheap and high-quality Japanese prod-
convenient butt of protectionist propaganda. ucts. Instead, we are to be forced by government
Memories of wartime myths prove a heady brew, to return to the inefficient, higher-priced products
as protectionists warn about this new “Japanese we have already rejected. In short, inefficient pro-
imperialism,” even “worse than Pearl Harbor.” ducers are trying to deprive all of us of products
This “imperialism” turns out to consist of selling we desire so that we will have to turn to ineffi-
Americans wonderful TV sets, autos, microchips, cient firms. American consumers are to be plun-
etc., at prices more than competitive with dered.
American firms.
Is this “flood” of Japanese products really a How To Look at Tariffs and Quotas
menace, to be combated by the U.S. government?
The best way to look at tariffs or import quo-
Or is the new Japan a godsend to American con-
sumers? tas or other protectionist restraints is to forget
about political boundaries. Political boundaries of
In taking our stand on this issue, we should nations may be important for other reasons, but
recognize that all government action means coer- they have no economic meaning whatever.
cion, so that calling upon the U.S. government to Suppose, for example, that each of the United
intervene means urging it to use force and vio- States were a separate nation. Then we would
lence to restrain peaceful trade. One trusts that the hear a lot of protectionist bellyaching that we are
protectionists are not willing to pursue their logic now fortunately spared. Think of the howls by
of force to the ultimate in the form of another high-priced New York or Rhode Island textile
Hiroshima and Nagasaki. manufacturers who would then be complaining
about the “unfair,” “cheap labor” competition
Keep Your Eye on the Consumer from various low-type “foreigners” from
As we unravel the tangled web of protectionist argu- Tennessee or North Carolina, or vice versa.
ment, we should keep our eye on two essential Fortunately, the absurdity of worrying about
points: (1) protectionism means force in restraint of the balance of payments is made evident by focus-
trade; and (2) the key is what happens to the con- ing on inter-state trade. For nobody worries about
sumer. Invariably, we will find that the protection- the balance of payments between New York and
ists are out to cripple, exploit, and impose severe New Jersey, or, for that matter, between
losses not only on foreign consumers but especially Manhattan and Brooklyn, because there are no
on Americans. And since each and every one of us is customs officials recording such trade and such
a consumer, this means that protectionism is out to
balances.
mulct all of us for the benefit of a specially privi-
leged, subsidized few—and an inefficient few at If we think about it, it is clear that a call by
that: people who cannot make it in a free and New York firms for a tariff against North Carolina
unhampered market. is a pure ripoff of New York (as well as North
Take, for example, the alleged Japanese Carolina) consumers, a naked grab for coerced
menace. All trade is mutually beneficial to special privilege by less efficient business firms. If
the 50 states were separate nations, the protection- conclusion, to one family? Why shouldn’t the
ists would then be able to use the trappings of Jones family issue a decree that from now on, no
patriotism, and distrust of foreigners, to camou- member of the family can buy any goods or serv-
flage and get away with their looting the con- ices produced outside the family house?
sumers of their own region. Starvation would quickly wipe out this ludicrous
Fortunately, inter-state tariffs are unconstitu- drive for self-sufficiency.
tional. But even with this clear barrier, and even And yet we must realize that this absurdity is
without being able to wrap themselves in the inherent in the logic of protectionism. Standard
cloak of nationalism, protectionists have been able protectionism is just as preposterous, but the rhet-
to impose inter-state tariffs in another guise. Part oric of nationalism and national boundaries has
of the drive for continuing increases in the federal been able to obscure this vital fact.The upshot is
minimum-wage law is to impose a protectionist that protectionism is not only nonsense, but dan-
devise against lower-wage, lower-labor-cost com- gerous nonsense, destructive of all economic pros-
petition from North Carolina and other southern perity. We are not, if we were ever, a world of self-
states against their New England and New York sufficient farmers. The market economy is one
competitors. vast latticework throughout the world, in which
During the 1966 Congressional battle over a each individual, each region, each country, pro-
higher federal minimum wage, for example, the duces what he or it is best at, most relatively effi-
late Senator Jacob Javits (R-NY) freely admitted cient in, and exchanges that product for the goods
that one of his main reasons for supporting the and services of others. Without the division of
bill was to cripple the southern competitors of labor and the trade based upon that division, the
New York textile firms. Since southern wages are entire world would starve. Coerced restraints on
generally lower than in the north, the business trade—such as protectionism—cripple, hobble,
firms hardest hit by an increased minimum wage and destroy trade, the source of life and prosperi-
(and the workers struck by unemployment) will ty. Protectionism is simply a plea that consumers,
be located in the south. as well as general prosperity, be hurt so as to con-
Another way in which interstate trade restric- fer permanent special privilege upon groups of
tions have been imposed has been in the fashion- less efficient producers, at the expense of more
able name of “safety.” Government-organized competent firms and of consumers. But it is a
state milk cartels in New York, for example, have peculiarly destructive kind of bailout, because it
prevented importation of milk from nearby New permanently shackles trade under the cloak of
Jersey under the patently spurious grounds that patriotism.
the trip across the Hudson would render New
Jersey milk “unsafe.” The Negative Railroad
If tariffs and restraints on trade are good for a Protectionism is also peculiarly destructive
country, then why not indeed for a state or region? because it acts as a coerced and artificial increase
The principle is precisely the same. In America s in the cost of transportation between regions. One
first great depression, the Panic of 1819, Detroit of the great features of the Industrial Revolution,
was a tiny frontier town of only a few hundred one of the ways in which it brought prosperity to
people. Yet protectionist cries arose—fortunately the starving masses, was by reducing drastically
not fulfilled—to prohibit all “imports” from out- the cost of transportation. The development of
side of Detroit, and citizens were exhorted to buy railroads in the early 19th century, for example,
only Detroit. If this nonsense had been put into meant that for the first time in the history of the
effect, general starvation and death would have human race, goods could be transported cheaply
ended all other economic problems for Detroiters. over land. Before that, water—rivers and
So why not restrict and even prohibit trade, oceans—was the only economically viable means
i.e., “imports,” into a city, or a neighborhood, or of transport. By making land transport accessible
even on a block, or, to boil it down to its logical and cheap, railroads allowed interregional land

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transportation to break up expensive inefficient prices on the market, wage rates are determined
local monopolies. The result was an enormous by supply and demand, and the increased
improvement in living standards for all con- demand by U.S. employers has bid wages up.
sumers. And what the protectionists want to do is What determines this demand? The “marginal
lay an axe to this wondrous principle of progress. productivity” of labor.
It is no wonder that Frederic Bastiat, the great The demand for any factor of production,
French laissez-faire economist of the mid-19th including labor, is constituted by the productivity
century, called a tariff a “negative railroad.” of that factor, the amount of revenue that the
Protectionists are just as economically destructive worker, or the pound of cement or acre of land, is
as if they were physically chopping up railroads, expected to bring to the brim. The more produc-
or planes, or ships, and forcing us to revert to the tive the factory, the greater the demand by
costly transport of the past—mountain trails, employers, and the higher its price or wage rate.
rafts, or sailing ships. American labor is more costly than Taiwanese
because it is far more productive. What makes it
“Fair” Trade productive? To some extent, the comparative
qualities of labor, skill, and education. But most of
Let us now turn to some of the leading protec- the difference is not due to the personal qualities
tionist arguments. Take, for example, the standard of the laborers themselves, but to the fact that the
complaint that while the protectionist “welcomes American laborer, on the whole, is equipped with
competition,” this competition must be “fair.” more and better capital equipment than his
Whenever someone starts talking about “fair Taiwanese counterparts. The more and better the
competition” or indeed, about “fairness” in gener- capital investment per worker, the greater the
al, it is time to keep a sharp eye on your wallet, for worker s productivity, and therefore the higher
it is about to be picked. For the genuinely “fair” is the wage rate.
simply the voluntary terms of exchange, mutual-
In short, if the American wage rate is twice
ly agreed upon by buyer and seller. As most of the
that of the Taiwanese, it is because the American
medieval scholastics were able to figure out, there
laborer is more heavily capitalized, is equipped
is no “just” (or “fair”) price outside of the market
with more and better tools, and is therefore, on
price. the average, twice as productive. In a sense, I sup-
So what could be “unfair” about the free-mar- pose, it is not “fair” for the American worker to
ket price? One common protectionist charge is make more than the Taiwanese, not because of his
that it is “unfair” for an American firm to compete personal qualities, but because savers and
with, say, a Taiwanese firm which needs to pay investors have supplied him with more tools. But
only one-half the wages of the American competi- a wage rate is determined not just by personal
tor. The U.S. government is called upon to step in quality but also by relative scarcity, and in the
and “equalize” the wage rates by imposing an United States the worker is far scarcer compared
equivalent tariff upon the Taiwanese. But does to capital than he is in Taiwan.
this mean that consumers can never patronize Putting it another way, the fact that American
low-cost firms because it is “unfair” for them to wage rates are on the average twice that of the
have lower costs than inefficient competitors? Taiwanese, does not make the cost of labor in the
This is the same argument that would be used by U.S. twice that of Taiwan. Since U.S. labor is twice
a New York firm trying to cripple its North as productive, this means that the double wage
Carolina competitor. rate in the U.S. is offset by the double productivi-
What the protectionists don t bother to explain ty, so that the cost of labor per unit product in the
is why U.S. wage rates are so much higher than U.S. and Taiwan tends, on the average, to be the
Taiwan. They are not imposed by Providence. same. One of the major protectionist fallacies is to
Wage rates are high in the U.S. because American confuse the price of labor (wage rates) with its cost,
employers have bid these rates up. Like all other which also depends on its relative productivity.

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 Thus, the problem faced by American employ- But what of the poor American TV firms,
ers is not really with the “cheap labor” in Taiwan, whose sales will suffer so long as Sony is willing
because “expensive labor” in the U.S. is precisely to virtually give their sets away? Well, surely, the
the result of the bidding for scarce labor by U.S. sensible policy for RCA, Zenith, etc. would be to
employers. The problem faced by less efficient hold back production and sales until Sony drives
U.S. textile or auto firms is not so much cheap itself into bankruptcy. But suppose that the worst
labor in Taiwan or Japan, but the fact that other happens, and RCA, Zenith, etc. are themselves
U.S. industries are efficient enough to afford it, driven into bankruptcy by the Sony price war?
because they bid wages that high in the first place. Well, in that case, we the consumers will still be
So, by imposing protective tariffs and quotas better off, since the plants of the bankrupt firms,
to save, bail out, and keep in place less efficient which would still be in existence, would be
U.S. textile or auto or microchip firms, the protec- picked up for a song at auction, and the American
tionists are not only injuring the American con- buyers at auction would be able to enter the TV
business and outcompete Sony because they now
sumer. They are also harming efficient U.S. firms
enjoy far lower capital costs.
and industries, which are prevented from
employing resources now locked into incompe- For decades, indeed, opponents of the free
tent firms, and who could otherwise be able to market have claimed that many businesses gained
expand and sell their efficient products at home their powerful status on the market by what is
and abroad. called “predatory price-cutting,” that is, by driv-
ing their smaller competitors into bankruptcy by
selling their goods below cost, and then reaping
“Dumping”
the reward of their unfair methods by raising their
Another contradictory line of protectionist prices and thereby charging “monopoly prices” to
assault on the free market asserts that the problem the consumers. The claim is that while consumers
is not so much the low costs enjoyed by foreign may gain in the short run by price wars, “dump-
firms, as the “unfairness” of selling their products ing,” and selling below costs, they lose in the long
“below costs” to American consumers, and there- run from the alleged monopoly. But, as we have
by engaging in the pernicious and sinful practice seen, economic theory shows that this would be a
of “dumping.” By such dumping they are able to mug s game, losing money for the “dumping”
exert unfair advantage over American firms who firms, and never really achieving a monopoly
presumably never engage in such practices and price. And sure enough, historical investigation has
make sure that their prices are always high not turned up a single case where predatory pric-
enough to cover costs. But if selling below costs is ing, when tried, was successful, and there are actu-
such a powerful weapon, why isn’t it ever pur- ally very few cases where it has even been tried.
sued by business firms within a country? Another charge claims that Japanese or other
Our first response to this charge is, once again, foreign firms can afford to engage in dumping
to keep our eye on consumers in general and on because their governments are willing to subsi-
American consumers in particular. Why should it dize their losses. But again, we should still wel-
be a matter of complaint when consumers so come such an absurd policy. If the Japanese gov-
clearly benefit? Suppose, for example, that Sony is ernment is really willing to waste scarce resources
willing to injure American competitors by selling subsidizing American purchases of Sony s, so
TV sets to Americans for a penny apiece. much the better! Their policy would be just as
Shouldn’t we rejoice at such an absurd policy of self-defeating as if the losses were private.
suffering severe losses by subsidizing us, the There is yet another problem with the charge
American consumers? And shouldn’t our of “dumping,” even when it is made by econo-
response be: “Come on, Sony, subsidize us some mists or other alleged “experts” sitting on impar-
more!” As far as consumers are concerned, the tial tariff commissions and government bureaus.
more “dumping” that takes place, the better. There is no way whatever that outside observers,

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be they economists, businessmen, or other analogy to “infants” who need adult care. But a
experts, can decide what some other firm s “costs” business firm is not a person, young or old.
may be. “Costs” are not objective entities that can
be gauged or measured. Costs are subjective to Older Industries
the businessman himself, and they vary continu-
ally, depending on the businessman s time hori- Indeed, in recent years, older industries that
zon or the stage of production or selling process are notoriously inefficient have been using what
he happens to be dealing with at any given time. might be called a “senile-industry” argument for
protectionism. Steel, auto, and other outcompeted
Suppose, for example, a fruit dealer has pur-
industries have been complaining that they “need
chased a case of pears for $20, amounting to $1 a a breathing space” to retool and become competi-
pound. He hopes and expects to sell those pears tive with foreign rivals, and that this breather
for $1.50 a pound. But something has happened to could be provided by several years of tariffs or
the pear market, and he finds it impossible to sell import quotas. This argument is just as full of
most of the pears at anything near that price. In holes as the hoary infant-industry approach,
fact, he finds that he must sell the pears at what- except that it will be even more difficult to figure
ever price he can get before they become overripe. out when the “senile” industry will have become
Suppose he finds that he can only sell his stock of magically rejuvenated. In fact, the steel industry
pears at 70 cents a pound. The outside observer has been inefficient ever since its inception, and its
might say that the fruit dealer has, perhaps chronological age seems to make no difference.
“unfairly,” sold his pears “below costs,” figuring The first protectionist movement in the U.S. was
that the dealer s costs were $1 a pound. launched in 1820, headed by the Pennsylvania iron
(later iron and steel) industry, artificially force-fed
“Infant” Industries by the War of 1812 and already in grave danger
Another protectionist fallacy held that the from far more efficient foreign competitors.
government should provide a temporary protec-
tive tariff to aid, or to bring into being, an “infant The Non-Problem of the Balance of Payments
industry.” Then, when the industry was well- A final set of arguments, or rather alarms, cen-
established, the government would and should ter on the mysteries of the balance of payments.
remove the tariff and toss the now “mature” Protectionists focus on the horrors of imports
industry into the competitive swim. being greater than exports, implying that if mar-
The theory is fallacious, and the policy has ket forces continued unchecked, Americans might
proved disastrous in practice. For there is no more wind up buying everything from abroad, while
need for government to protect a new, young, selling foreigners nothing, so that American con-
industry from foreign competition than there is to sumers will have engorged themselves to the per-
protect it from domestic competition. manent ruin of American business firms. But if
In the last few decades, the “infant” plastics, the exports really fell to somewhere near zero,
television, and computer industries made out where in the world would Americans still find the
very well without such protection. Any govern- money to purchase foreign products? The balance
ment subsidizing of a new industry will funnel of payments, as we said earlier, is a pseudo-prob-
too many resources into that industry as com- lem created by the existence of customs statistics.
pared to older firms, and will also inaugurate dis- During the day of the gold standard, a deficit
tortions that may persist and render the firm or in the national balance of payments was a prob-
industry permanently inefficient and vulnerable lem, but only because of the nature of the fraction-
to competition. As a result, “infant-industry” tar- al-reserve banking system. If U.S. banks, spurred
iffs have tended to become permanent, regardless on by the Fed or previous forms of central banks,
of the “maturity” of the industry. The proponents inflated money and credit, the American inflation
were carried away by a misleading biological would lead to higher prices in the U.S., and this

5
would discourage exports and encourage bonanza is already coming to an end, with the dol-
imports. The resulting deficit had to be paid for in lar becoming cheaper and exports more expensive.
some way, and during the gold standard era this We conclude that the sheaf of protectionist
meant being paid for in gold, the international arguments, many plausible at first glance, are
money. So as bank credit expanded, gold began to really a tissue of egregious fallacies. They betray a
flow out of the country, which put the fractional- complete ignorance of the most basic economic
reserve banks in even shakier shape. To meet the analysis. Indeed, some of the arguments are
threat to their solvency posed by the gold outflow, almost embarrassing replicas of the most ridicu-
the banks eventually were forced to contract cred- lous claims of 17th-century mercantilism: for
it, precipitating a recession and reversing the bal- example, that it is somehow a calamitous problem
ance of payment deficits, thus bringing gold back that the U.S. has a balance of trade deficit, not
into the country. overall, but merely with one specific country, e.g.,
Japan.
But now, in the fiat-money era, balance of pay-
ments deficits are truly meaningless. For gold is Must we even relearn the rebuttals of the more
no longer a “balancing item.” In effect, there is no sophisticated mercantilists of the 18th century:
deficit in the balance of payments. It is true that in namely, that balances with individual countries
the last few years, imports have been greater than will cancel each other out, and therefore that we
exports by $150 billion or so per year. But no gold should only concern ourselves with the overall
flowed out of the country. Neither did dollars balance? (Let alone realize that the overall balance
“leak” out. The alleged “deficit” was paid for by is no problem either.) But we need not reread the
economic literature to realize that the impetus for
foreigners investing the equivalent amount of
protectionism comes not from preposterous theo-
money in American dollars: in real estate, capital
ries, but from the quest for coerced special privi-
goods, U.S. securities, and bank accounts.
lege and restraint of trade at the expense of effi-
In effect, in the last couple of years, foreigners cient competitors and consumers. In the host of
have been investing enough of their own funds in special interests using the political process to
dollars to keep the dollar high, enabling us to pur- repress and loot the rest of us, the protectionists
chase cheap imports. Instead of worrying and are among the most venerable. It is high time that
complaining about this development, we should we get them, once and for all, off our backs, and
rejoice that foreign investors are willing to finance treat them with the righteous indignation they so
our cheap imports. The only problem is that this richly deserve. w

MURRAY N. ROTHBARD (1926–1995) was professor of economics at the University of Nevada, Las Vegas and vice
president for academic affairs of the Ludwig von Mises Institute.
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