The unforgivable blunder is a failure to understand that the optimal tariff is really a hypothetical curiosity. It has never existed and can never exist. Moreover, it is really a terms of trade argument that owes its origins to John Stuart Mill. The theory assumes that the tariff country is such a big buyer of the good upon which the tariff has been placed that this action will bid down the price of the good abroad therefore forcing the producer to absorb part or all of the cost of the tariff, so moving the terms of trade in favour of the tariff country. This means that if

the foreigner bears the whole of the duty, the home production receives no protection, since the home price remains unchanged. (Gottried von Haberler’s Theory of International Trade, William Hodge and Company Limited, 1950, p.293).

It should be clear that the aim of this so-called tariff is to lower the price of the import and not protect a domestic producer. Furthermore, even if a country was in a trading position where it could impose an optimum tariff it would still be impossible to calculate the rate.

Gittins then makes another blunder. He tells us that

economists discovered long ago that the cost of protection to the economy — in terms of lost allocative efficiency — rises in proportion to the square of the tariff rate. For instance, a tariff of 2 per cent will have a cost of four, whereas a tariff of 10 per cent will have a cost of 100.

This is pure fiction. Economics is qualitative discipline and not quantitative one. The very idea that it contains theorems that operate with geometrical precision should be cause for derision. This nonsense is to be found in the so-called welfare triangle that is sometimes used to demonstrate the costs of tariffs. This approach purports to demonstrate that welfare losses grow in line with the square of the tariff. Hence, when tariff rates are low even a ‘significant’ reduction in the rates will yield few benefits. Three things here:

a) This approach still concedes that tariffs impose costs that exceed the alleged benefits. It follows from this observation that the tariffs should still be removed. This also implies that the costs of removing the tariff would be so small in relation to GDP that they could be easily accommodated.

b) The view completely ignores the fact the so-called costs of tariff removal are the product of protectionist policies, not free trade policies.

c) It should be clear that the whole approach is wrong through and through and suffers from what Professor L. M. Lachman scathingly called formalism: it confuses an abstraction with the real world, treats all costs as measurable and ignores the dynamic nature of the market by taking a mechanical view of resource allocation. (Ludwig M. Lachman, Macro-economic Thinking and the Market Economy, The Institute of Economic Affairs, 1973)

As Mr Gittins insists on using a concept that originated with Mill, let us therefore turn to that gentleman for further illumination. (John Stuart Mill, Principles of Political Economy, University of Toronto Press 1965, pp. 591-593). He stated that the three main gains from free trade were

1. “The direct benefits of commerce consist in increased efficiency of the productive powers of the world”.

2. “The direct benefits of commerce do not consist in a vent for exports, or in the gains for merchants… A country obtains things which it either could not have produced at all, or which it must have produced at a greater expense of capital and labour than the cost of the things which it exports to pay for them.

3. “Indirect benefits of commerce, economical and moral, are still greater than the direct”.

The indirect benefits stem from the fact that the reallocation of factors to more efficient lines of production increases productivity. As we can see, this is really an extension of the direct benefits of trade. He believed — as did most of his contemporaries — that the moral and intellectual benefits of free trade largely consisted of encouraging people in general to develop a more favourable view of those nationalities with whom they were now trading, and vice a versa. (Ibid. p. 594). As expected, Mill did not hesitate to condemn protectionism, declaring that

the importation of foreign commodities, in the common course of traffic, never takes place, except when it is, economically speaking, a national good, by causing the same amount of commodities to be obtained at a smaller cost of labour and capital to the country (Ibid. 914).

Unfortunately, Mill was inconsistent on some economic matters, including free trade. A flaw that his lucid and fluent style managed to conceal from a great many teachers and students. Gottfried Haberler’s classic Theory of International Trade dealt with all of the protectionist arguments, including the optimum tariff. (William Hodge and Company Limited, 1950, first published in 1933).

Note: Although I frequently refer to John Stuart Mill I should make it clear that I do so only on those points of theory where there was general agreement among his contemporaries. In the area of value, monetary expansion, the definition of money, interest, and the boom-bust cycle there were considerable differences of opinion among nineteenth century economists. Unfortunately, after 1848 Mill’s general view of economics tended to dominate the discipline to the detriment of advances in economic theory until the re-emergence of the subjectivist school in the 1870s.

Gerard Jackson is Brookes’ economics editor

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