I’ve seen discussion circulating in the news about whether to include “Buy American” as part of the stimulus package. I think any economist would likely say that this is a bad idea. Protectionism stunts economic growth. Jobs are created by selling goods and services to other countries. Protectionism forces companies to spend more on commodities that may cost more to produce in America than somewhere else (i.e. steel). Those companies then have trouble selling their products in other countries, because their prices aren’t competitive with those that exist in a free market system. It also keeps us from having to be innovative and competitive. A protectionist society will lag free enterprise. These now mainstream economic ideas are brought to you courtesy of our Part 3 featured economist – David Ricardo. (Read Part 1 here and Part 2 here) (Buy the book here)
Ricardo did a lot to advance economic theory. He was a chief rival of Thomas Malthus (see Pt. 2), and often debated with Malthus in public (and the two became close friends – which often happens to be the case). One of Ricardo’s principle contributions to economics was Ricardo’s Law of Comparative Advantage. Todd Buchholz, as usual gives us a couple of great examples. One is the Corn Laws in Britain, in which Parliament enacted laws that forbade the purchase of grain from other countries below a certain price, virtually guaranteeing their workers a monopoly (sound familiar?). He builds on this example of protectionism with a Gilligan’s island analogy.
There are two tasks on Gilligan’s island (in the example), fishing and building shelters, and there are two people to do the jobs, Gilligan and the Skipper. The Skipper is actually better at both tasks, he can catch a fish dinner in 10 hours or build a hut in 20, while Gilligan takes 15 hours to catch a fish and 45 to build a hut. Adam Smith (see part 1), would say that the Skipper should just stay away from Gilligan, because he’s better at everything. On their own, the Skipper divides his time – 1000 hours to catch 100 fish and 1000 hours to build 50 huts. Gilligan works 3600 hours – producing 120 fish dinners in 1800 hours and 40 huts in his other 1800 hours. At this rate, there ends up being 220 fish and 90 huts. Ricardo suggests that they specialize – the Skipper spends all his time on huts (building 100) and Gilligan spends all his time fishing (catching 240). Thus, specializing increases the productivity of the island.
Gilligan ends up fishing because this is what he is least inept at (his comparative advantage). Gilligan does make a sacrifice by not building huts (his opportunity cost). Specialization is determined by whoever has the lower opportunity cost. Ricardo’s overall point, according to Buchholz, is that free trade makes it possible for households to consume more goods regardless of whether the trading partners are more or less economically advanced. In other words, trade is good – and protectionism is bad. And though I have assumed that everyone knows this – for some reason there are people in Congress who must not – because they’re still touting “Buy American” protectionist garbage (feel free to insert the profanity of your choice). They should listen to Ricardo (luckily for us, I’m pretty sure Congress reads my blog). Thanks for reading.
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You don’t say it out loud in your post, but the auto industry is also a good example.
Unfortunately economics is run by human brains and it’s impossible to separate rationality and emotion. It’s just the subject matter that determines which of the two contributes the most.
Since the job of congress critters is to not to do what’s best for the economy, but instead do what’s most appealing to those brains out there that vote to keep them in a job, the disconnect is deafening.
Great work with the Gilligan analogy BTW- the whole situation has that otherworldly sitcom feel where the laws of physics and the real world don’t seem to apply.
Patrick
This is an interesting article. I’ve never quite understood why we(countries and citizens) all act like separate entities. We are all one people. We’re all humans with the same goals, dreams, etc. Why not work together. Instead of America trying to be better than Russia or China, if we combine our forces and work together, it would be a much better world.
The Chinese are our brothers as much as the English are. We shouldn’t be debating ‘buy American’ we should be debating, buy they best product at the best price.
Nice Article.
-Nate