- From the Economist's online site, a thought-experiment designed to show the ultimate folly of protectionism. This item has also been picked up by the Atlantic's own Andrew Sullivan.
This isn't the place for a full discussion of the differences between the world as laid out in a first-semester ec course and the world as it actually operates. My unified field theory on the topic is in this Atlantic story, "How the World Works," from 1993.
But this is the place to point out the basic logic error in the "thought experiment." Here's what the Economist's site said:
"But the idiocy of the whole idea [of tariffs and protectionism] can be understood with a simple thought experiment, which I haven't seen used elsewhere.Here's the difference between commerce involving New York and New Jersey, and commerce involving, say, the U.S. and China. New York and New Jersey are in the same country. Why does this matter? Let's try a little thought experiment.
"If tariffs are such a good economic idea, then why stop at national boundaries? If they make everyone richer, why not have customs posts between New York and New Jersey? Cars entering and leaving the Lincoln tunnel would have to pay, on top of the toll, a surcharge on all the goods they contain. Why not, indeed, make New York and New Jersey self-sufficient in all their needs, making all their own cars, growing all their own food etc?"
Suppose you grow up in New Jersey. By the time you're looking for a job, the flow of capital, ideas, and innovation may mean that the best opportunities are in New York. Or Idaho, Or California. Sentimentally, perhaps you'd rather not move away from home. But in a pure economic sense, it doesn't matter in where the action is. You're free to move there. Within the national borders of the United States, there are only trivial, incidental impediments to citizens moving wherever they want. All "factors of production" -- money, material, people -- can flow freely throughout the country, for maximum efficiency. That's what the ec textbooks call for, and that's how it can work within a given country, or a free-movement zone like in Europe.
But it's not the same between countries. If you grow up in New Jersey and the real opportunities are in Shanghai, you can't necessarily move there. You may not be able to move there even if you grow up in Qinghai province, China. People do move across national borders, legally and illegally. Immigration is America's distinctive strength, so I'm glad as many move here as do. But in general, people's economic well-being depends very heavily on the industries and opportunities in the country where they are born.
Pointing this out doesn't prove protectionism right -- or wrong, as a strategy for developing a national economy. I'm on record as arguing that open Chinese-US trade has been good for both sides. But it does mean that the "thought experiment" makes no sense. There's a first-order difference between the flow of factors within a country and the flow between countries. I suspect this is the reason we haven't seen this powerful analogy "used elsewhere."