Gerard Jackson
BrookesNews.Com
Thursday 7 August 2003

Protectionist fallacies never die: they just go into cold storage until some third rate academic or ignorant journalist defreezes them. Evan Jones, an economics lecturer — the Lord help us — at the University of Sydney, launched a grossly misinformed attack against free trade in The Australian Financial Review (Tariff regime a tonic for the nation, 5/1/01). A reader now tells me that his own lecturer approvingly included Evan's article among recommended reading for the class.

That reader would now like my opinion. Okay, here it is. Jones correctly pointed out that tariffs caused British firms to set up subsidiaries in Australia. The implication is that tariffs increase net investment. This view was reinforced in a later paragraph in which he stated that in "all probability, protection fostered capital . . . Inflows and enhanced economic development …"

This is man-in-the-street economics.

What this lecturer in economics is saying is that protectionism caused a net inflow of capital that expanded national income and therefore raised real wages. But what really happened is that tariffs caused investments to shift from more favourable areas of production to less a favourable ones causing the price of their products to rise which in turn lowered local purchasing power or at least kept it lower than it would otherwise be. This means that there was no net gain from the tariffs because it they reduced consumers real incomes. Not a hint from Jones that he has the slightest understanding of this.

Taking a more realistic approach, one in which only part of the of the capital is imported with the rest being raised in the tariff country: land, machinery, labour, raw materials, etc., will have to be withdrawn from more valued lines of production. This will raise operating costs and reduce these factors output. Yet the leftwing Jones would have us believe, including, I presume, his students, that this wasteful use of resources has "economy-wide benefits".

Jones backed up his assertions by claiming that John Story demonstrated in 1933 that tariffs led to lower and not higher prices because of competition from domestic producers. What a silly statement. This is the first and only time I ever heard a protectionist argue that tariffs were needed to protect consumers from higher-priced imports.

The argument for non-revenue tariffs has never changed: tariffs are needed to protect domestic producers from lower-priced imports. If imports were too 'highly' priced this would have a twofold effect: 1) domestic production would be encouraged; 2) other foreign producers would be encouraged to expand their exports to the importing country thus exerting a downward pressure on import prices.

Now Jones asserted (his article was just one long assertion: free trade is bad) that at federation free trade meant that the economy would be left to "producing exportable — unprocessed foods and raw materials". This is not true. To convert raw materials into finished goods requires a complex capital structure consisting of stages of production. This structure is built on savings. In no at all do tariffs increase the quantity of savings.

Moreover, if Jones were right, protectionist Victoria would have led free-trade New South Wales. Instead we find that from the 1870s, when Victoria implemented a very restrictive tariff regime, NSW pulled ahead of Victoria in every economic measure, including manufacturing and wages. (Federation and protectionist fallacies)

Unfortunately, the ideological likes of Jones are not interested in facts that do not serve their political prejudices.

To put it bluntly, Evan Jones' views on markets and free trade are pathetic. In a letter to the AFR (13/7/200) he described Jonathon Keller as "a rather ignorant fellow" and called free trade theory "theory simplistic incoherent and inconclusive", "the product of ideology and self-interest" and "war by other means". What utter leftwing garbage. If Jones thinks the theory of comparative advantage is "incoherent" and "simplistic" then I challenge him to refute it.

Jones is a socialist ideologue who has resorted to abuse and gross misrepresentations in a desperate attempt to defend his absurd ideology. I doubt very much if the man has anything of value to offer in the field of economics.

Gerard Jackson is Brookes' Economics Editor