Economies of scale and economies of scope, bane of protectionism. (Part seven of seven so far. More coming.)

I return to my reasoned argumentation against economic protectionism after a brief absence. (See: “Don’t Grope, Profile!”)

Because I have decided to go one little step at a time, there are six previous installments of this series. All comprise the word “protectionism” somewhere in their titles.

Because, we are all richer, Luis, I , the Quebec farmer and Pierre are in a better position to buy German manufactured goods than we were before. In Pierre’s case, that could be a Mercedes (although what he really wants is a specific Japanese car). In the Canadian farmer’s case, it could also be a Mercedes, or a BMW motorcycle. In Luis’s case and in mine, it would be a small piece of either a Mercedes or a BMW motorcycle. All the same, it’s a start.

I, and Luis, and Hans, and Pierre are all more likely to buy a basket or two of organic raspberries than we were before.

If Pierre follows through with his intention to send his son to a pricey MBA program in the US, it could be in my area. The son will go to restaurants once in a while, on his newly rich father’s dime, of course. More dishes for Luis to wash.

It’s not obvious that my main occupation, selling at the flea market will improve at all, except through Luis, of course. Remember he earns more money. He might spend some of it buying a ten-dollar used bike from me at the flea market. Pierre’s son, studying for an American MBA, might buy a used desk from me at the flea market, making me richer.

Now, we need to make a small, very modest technical switch. Here is a generalization that is more often valid than not: The more you make or sell of something the lower the cost of making it or of selling it. A lower cost of something is equivalent to a pay raise for the consumer, or for the producer, or for both. The technical terms here are “economy of scale “ (production) and “economy of scope” (marketing defined broadly).

As Hans and his colleagues turn out more widgets, Pierre makes more wine, and the Canadian grows more raspberries, the cost of all will decline and someone will be richer. To be richer means being able to buy more. Lower prices are equivalent to pay raises. Your own experience will tell you that very often, that the someone who will be richer will be the consumer.

In my story, some people in the world got a de facto pay raise because a handful of economic actors took simple, reasonable steps of doing less of what they did badly and to do more of what they did well. If many economic actors take the same step and are allowed to do so without restriction, the collective gains become immense

Prosperity has increased in the absence of concerted effort. Above all, some people have a better standard of living, including more choice, without government intervention. What I have just illustrated is known in economics as the Principle of Comparative Advantage. It’s what economists do not explain well, I claim. This principle accounts for most of free trade, depending on the year. I have to give you this qualification because whether it does or not, on a given year, depends on the price of petroleum products. Trade in petroleum products is only a special case but a very large one.

Here are the necessary, unavoidable implications of this story: First, anything anyone does to impede and restrict either the switch from bad to less bad work, from good to better work, impoverishes everyone. Second, anything that limits the economies of scale or scope of producers everywhere impoverishes everyone.

The only class of actors in a position to do either on a consistent basis are governments, especially national governments. Barriers to entry into an occupation or an economic sector, over-regulation of economic activity, debilitating taxation, are examples of the first vice. Tariffs (special taxes on imports and sometimes on exports), import quotas, restrictions on international transportation, are examples of the second. Those are not exceptional instances of nefarious government activity; they are all around us all the time and taken for granted by many citizens and legislators. We think it’s normal for government to makes us poorer than we need be!

Before anyone sends me a censorious comment, I want to say that I realize there are circumstances when maximum production is not the only valid government objective. There are legitimate reasons to depart from the strict market economic policies that flow from my story in seven parts (so far). I am just intent on making everyone agree that such departures are always costly, no exception!

My narrative leaves out a couple of problems, important problems. Two main problems:

Who is going to blow leaves in the US when Luis quits doing it altogether ? How about the half of the dishes I won’t wash anymore because I have increased my flea market presence? Well, of course, Luis is now washing twice more dishes that I did before. Same question: Who is going to make sandwiches in Germany after Hans moves on?

As I have not found it necessary to tell you, some of the shifts in activity I describe may entail some people losing their jobs. For one thing, as a result of Hans’ enhanced productivity, some manufactured gadgets from Germany will beat in price for quality the similar gadgets made in Canada, in France, in the US, even in China. Read this again. I am not denying it.

About jacquesdelacroix

I am a sociologist, a short-story writer, and a blogger (Facts Matter and Notes On Liberty) in Santa Cruz, California.
This entry was posted in Socio-Political Essays. Bookmark the permalink.

4 Responses to Economies of scale and economies of scope, bane of protectionism. (Part seven of seven so far. More coming.)

  1. Dear Jacques:

    I really don’t have a comment regarding your recent commentary on “protectionalism”, rather I’m simply using this format to get an email to you, in that I couldn’t find your direct address.

    First, as usual, I did enjoy your show yesterday (Sunday the 21st), particularly the discussion regarding the cost to the taxpayer resulting from illegal aliens.

    While I realize that you have mentioned many times on your show that you have a large [unread] reading list, as I do, I still wish to draw your attention to an article I read this morning in the magazine “The New American”, dated Nov. 22nd, 2010 (a publication of the John Birtch Society) entitled “Illegal Aliens: Economic Consequences”.

    Contrary to the numbers you mentioned on your show, the article quotes a study done by “The Federation of American Immigration Reform” (FAIR) which concludes that the total cost to American taxpayers is nominally $113 billion annually. The study includes the costs associated with the children of illegal aliens, independent of the fact that according to our Constitution are US citizens–however, they still cost us money. If we subtract the monies that that the illegals pay in State and Federal taxes, the number works out to over $1000 per household in America (meaning the households of those citizens paying taxes, which is the proper subset of Americans to use in this comparison).

    This is no longer small change, as your numbers implied yesterday…

    The article does break down where the costs arise.

    So, if time permits, you might want to take a look at the ariticle.

    PS: I’m still waiting for a reply from you on our recent back and forth discussion on the topic of “hard vs. soft science”.

    Stephen Schindler
    Carmel Valley, CA

    • jacquesdelacroix says:

      Thank you, Stephen.

      FAIR is not a trustworthy source. It’s a highly partisan organization that I have caught in the past playing games. I can say this without remembering exactly what it was. I just scratched the organization off my respectable list the second time. It must stay there for at least ten years. The idea that there is only a subset of Americans who pay taxes is completely absurd. You, or FAIR must mean “federal income tax.” Illegal aliens can no more avoid excise taxes, gasoline taxes, sales taxes and real estate (through rents) taxes than I can. If it’s FAIR’s calculation, it’s another reason to scratch them off.

      The idea of including the children of illegal aliens who are American citizens may be valid. It’s even interesting. It assumes that absent illegal aliens’ children, there would be an equivalent number of children and young adults absent and therefore not requiring social services. The assumption is probably false, I am guessing but possibly not by much. If we make this assumption, we have to take into consideration also the fact that the American children of illegal aliens, like the children of legal aliens, begin early to pay into Social Security and into Medicare. I have already published a big think piece in a good libertarian journal. I don’t want to produce another one. (It’s linked to this blog, down on the right.)

      It seems to me that the main point I made on the air remains intact: People who think they are conservatives worry about the fox stealing a chicken while their real enemies ares setting fire to the chicken-coop, to the barn, to the stable and even to the farm house.

      Based on your useful summary, I don’t feel like adding the FAIR piece to my reading list.

      The reference will remain in your original comment, of course. I hope it’s a live link.

  2. Pingback: Economies of Scale and Economies of Scope, Bane of Protectionism. (Part Seven of Seven so Far. More Coming.) « Notes On Liberty

  3. Pingback: Romney on China (In The Last Presidential Debate of 2012) | FACTS MATTER

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