Economics in one Lesson-Tariff
Hazlitt’s book “Economics in One Lesson” has been a popular one because it reveals some common fallacies that significantly influence our judgements. The principle and the logic behind it would be critically illustrated through my analysis, after which the example of free trade of furniture from China to the US would be analysed using Hazlitt’s theory to explain the benefits and losses of free trades.
The core ideas of the “one lesson” are that bad decisions often stem from only looking at the short-run effects while neglecting the long-run when making decisions of public policies, instead it is urged to consider the long-run and distantly related results with due care. Also we should be paying attention to the whole welfare of all groups instead of stressing some special groups’ interests (Hazlitt, 1979).
Hazlitt criticized the ignorance of long-term effects of market control of Keynesianism. He did admit that classical economists tended to make the mistake to ignore the benefits of certain groups in order to achieve long-term benefits for all groups. However, the more severe problem is that some bad economists, supporting government intervention, create some fallacies to propose some policies only favoring certain groups. These policies solve short-term problems with the consequences that making people suffer in the long run. Keynes said,” In the long run we are all dead” (Keynes, 1923). However, we don’t need to wait a long time to see the market chaos that they create.
Hazlitt’s theory is based on the classical view that the market has the ability to self adjusting, through which a social welfare optimum would be reached (Niman, 1987). Mises also demonstrated the vicious circle of government intervention – it often causes destructive consequences unintendedly, which the policy-makers realise afterward and try to make more policies to correct the error (David, 2004). Indeed, government intervention is like a shot into the market, only increase short-run demand, overlooking the long-run net benefits loss.
However, is government intervention all about misleading the public and creating market chaos? Is the invisible hand capable of solving all the problems? During the Great Depression in 1930s, it was Roosevelt’s New Deal programs, on the basis of Keynes’s theories, stimulated the economy. There are situations when the market fails to automatically allocate resources efficiently. These might be due to non-competitive markets, principal-agent problems, externalities and so on. Thus government intervention could be a method to correct the errors caused by market failure. Hazlitt did not mention market failure in this book.
As the debates going on in the academic field, both theories have their own advantages and disadvantages. An analysis of a current issue, trends of furniture import to the US, will be discussed according to Hazlitt’s theoretical framework.
In 2016 the most compelling event in the US is the election for president. As a competitive candidate, Donald Trump’s major campaign propaganda, drawing the attention worldwide, is to regain negotiation power, or even increase the tariffs by 45% when trading with China. He thinks that voting for China to join the WTO at the first place was a bad deal for America for it has caused the loss of tens of millions of jobs and the closure of more than 50,000 factories (The Campaign for Trump, 2016). Thus the total welfare of the US has decreased. Is it true that lower tariff reduces American’s benefits? To answer this question, a typical import item—furniture—would be chosen to illustrate the real gain and loss of a lower tariff.
The reasons that furniture is chosen to demonstrate the analysis are as follows. Firstly, as a labour-intensive manufacturing good, furniture is of lower price in China due to the access to cheaper wages, rents electricity and so on. Compared to the US, the price of per unit institutional furniture in China was 37 dollars whereas in the US it almost tripled in 2006 (Edwards & Lawrence, 2013). In other words, furniture is a good with comparative advantage in China. Secondly, the tariffs on furniture is relatively small even after the the Commerce Department of the US imposed tariffs on Chinese-made beds, nightstands and related wares in 2005 (Higgins, 2011). Finally, Chinese furniture has been a major source of American imported furniture, accounting for more than 50% from 2006 to 2015 (Bureau, 2015). To conclude, furniture is a typical trading good under Adam Smith’s theory of free trade, which is mentioned in Hazlitt’s illustration in Chapter Six.
To begin the analysis, several groups that are affected in the trade should be identified first. From the perspective of the US, the furniture factory owners, workers, importers and purchasers are most likely to be involved. From the perspective of China, it is highly possible that the exporters and furniture industry workers are affected in the trade.
In the short term, the so-called dumping furniture import caused significant loss in the furniture manufacturing industry in the US. The number of factories shrunk by 36% from 1998 to 2013 (US Census Bureau, 2015) and the job position lost by 56% in the same period, forcing thousands of owners and workers to seek another way to make a living. This might be the main reason why the US factories lobby the government and the workers protest free trade – the much lower prices of furniture hurt these groups’ benefits.