The visible hand in economics

Protectionism: it’s instinct

Posted on: January 18, 2008

Steven Landsburg has an opinion piece in the NY Times today in which he extols the benefits of free trade and rails against the protectionists:

Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.

This strikes me as a bizarre analogy: how often does a community rally in support of local businesses when Wal-Mart or Woolworths moves in and puts the local dairy out of business? We read about such stories all the time in the newspaper and unsurprisingly so. Humans are tribal by nature and rally to protect ‘their’ people. In a small town the local dairy owner is one of ‘us’, while the new mega-mart represents a threat by ‘them’. On a national level instincts are similar: the people of a nation don’t like to see their own hurt by ‘them’ and are happy to support protectionist policies that protect ‘us’.

I don’t mean to claim that protectionism is beneficial to a country, but it does seem to be a natural consequence of our tribalism. As long as we have clearly defined nations each will try to protect its own. Of course, Landsburg may reply that a nation does benefit overall from free trade, even if there may be a few losers in the process. However, the loss averse nature of humans means that we will always take those losses harder than any gains of equal magnitude. It’s not crazy for people to advocate protectionist policies in spite of the evidence that they reduce welfare: it’s natural and predictable.

Other comment from Dani Rodrik, who points out that economists are really just laypeople when it comes to matters of morality but sides against Landsburg anyway, and Megan McArdle, who bashes the bashers.

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