The Iowa Car Crop
A
thing of beauty is a job forever, and nothing is more beautiful than a succinct
and flawless argument. A few lines of
reasoning can change the way we see the world.
I found one of the most beautiful arguments I know while
I was browsing through a textbook written by my friend David Friedman. While the argument might not be original,
David’s vision is so clear, so concise, so incontrovertible, and so
delightfully surprising, that I have been unable to resist sharing it with
students, relatives, and cocktail party acquaintances at every
opportunity. The argument involves
international trade, but its appeal is less in its subject matter than in its
irresistible force.
David’s observation is that there are two technologies
for producing automobiles in America.
One is to manufacture them in Detroit, and the other is to grow them in
Iowa. Everybody knows about the first
technology; let me tell you about the second.
First, you plant seeds, which are the raw material from which automobiles
are constructed. You wait a few months
until wheat appears. Then you harvest
the wheat, load it onto ships, and said the ships eastward into the Pacific
Ocean. After a few months, the ships
reappear with Toyotas on them.
International trade is nothing but a form of
technology. The fact that there is a
place called Japan, with people and factories, is quite irrelevant to
Americans’ well-being. To analyze trade
policies, we might as well assume that Japan is a giant machine with mysterious
inner workings that convert wheat into cars.
Any policy designed to favor the first American
technology over the second is a policy designed to favor American auto
producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a
tax or a ban on Iowa-grown automobiles.
If you protect Detroit carmakers from competition, then you must damage
Iowa farmers, because Iowa farmers are the competition.
The task of producing a given fleet of car can be
allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that
allocation that minimizes the total production cost.* It would be unnecessarily
expensive to manufacture all cars in Detroit, unnecessarily expensive to grow
all cars in Iowa, and unnecessarily expensive to use the two production
processes in anything other than the natural ratio that emerges as a result of
competition.
That means that protection for Detroit does more than
just transfer income from farmers to autoworkers. It also raises the total cost of providing
Americans with a given number of automobiles.
The efficiency loss comes with no offsetting gain; it impoverishes the
nation as a whole.
There is much talk about improving the efficiency of
American car manufacturing. When you have
two ways to make a car, the road to efficiency is to use both in optimal
proportions. The last thing you should
want to do is to artificially hobble one of your production technologies. It is sheer superstition to think that an
Iowa-grown Camry is any less “American” than a Detroit-built Taurus. Policies rooted in superstition do not
frequently bear efficient fruit.
In 1817, David Ricardo—the first economist to think with
the precision, though not the language, of pure mathematics—laid the foundation
for all future thought about international trade. In the intervening 150 years his theory has
been much elaborated but its foundations remain as firmly established as
anything in economics. Trade theory
predicts first that if you protect American producers in one industry
from foreign competition, then you must damage American producers in
other industries. It predicts second
that if you protect American producers in one industry from foreign
competition, there must be a net loss in economic efficiency. Ordinarily, textbooks establish these
propositions through graphs, equations, and intricate reasoning. The little story that I learned from David
Friedman makes the same propositions blindingly obvious with a single
compelling metaphor. That is economics
at its best.
*This assertion is true, but not obvious. Individual producers care about their
individual profits, not about economywide costs. It is something of a miracle that individual
selfish decisions must lead to a collectively efficient outcome….
Steven E. Landsburg