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Tuesday, July 06, 2010

Smoot-Hawley is the Economists’ Munich?

I am certainly willing to acknowledge that there can be exceptions to the free trade is always good dogma you sometimes hear, particularly for developing countries, but for me the burden of proof will always be on those who want to restrict markets rather than those who want them to remain open:

Smoot-Hawley is the economists’ Munich, isn’t it?, by Eric Rauchway (under cc): Our friends in the economics departments (except the economic historians, and only some of them) have a thing about free trade, but only when, via Thoma, I read this remark by Tim Duy, did I begin to understand how it works.

And every right minded economist and policymaker knows unequivocally that free trade is good, and to even question that assumption makes one an ignorant heretic who has never heard of Smoot-Hawley.

To the extent that this is an accurate representation of how “Smoot-Hawley” works among economists (except the economic historians, and only some of them) this is very similar to the neocon deployment of “Munich”; to wit, “Every tough-minded analysts knows unequivocally that appeasement is wrong, and to even question that assumption makes one an ignorant heretic who has never heard of Munich.” The obvious problem is that in fact not all tinpot dictators are worse than Hilter!!!!1!!! Or at least, they generally don’t pose the same threat to world order as Hitler did. But if you want to look tough you say, “Munich!”

There is a similar problem with Smoot-Hawley. Yes, the Smoot-Hawley tariff is widely understood to have been asinine, but not because protectionism is everywhere and always wrong–rather, because protectionism in the specific context of the late 1920s, with an awful lot of money owing internationally and a number of countries desperately needing to trade with the US, was wrong.

If we think about this for five seconds we know it’s true, because in fact protectionism has, in various times and places, gone hand-in-hand with fairly brisk economic growth. Alexander Hamilton understood this; so did Henry Clay and Abraham Lincoln. Can it really be true that economists (except the economic historians, and only some of them) have willfully forgotten this? There are whole books on the subject. By economists (albeit economic historians).

Now, this was not and is not an argument that protectionism is always a good thing either, as a second’s contemplation of the phrase “infant industry” will disclose. And of course any historian, but especially an economic historian, should be able to tell you that once you impose a tariff, political shenanigans tend to ensure it remains in place and grows even well beyond the infancy of a protected industry.

But it appears “Smoot-Hawley” really is a kind of shorthand for the economists (except the economic historians, and only some of them) to say, what are you crazy? You let that happen and the next thing you know Hitler is invading Czechoslovakia.

All of which is peripheral to Duy’s main point, which is also fascinating, and depressing, and includes among other insights a solid entry into the “how do we periodize the last half of the twentieth century” sweepstakes:

Note that a number of trends all begin in the 1980s. Absolute manufacturing declines, the rise of persistent trade deficits, the decline in labor’s share of output, growing income inequality, and the Great Moderation.

There is I think a good argument that certain political and policy changes of the 1970s predate and cause these trends, but talking about when these trends become visible would, I think, be a good way to teach students about the shift in expectations from one generation to the next.

    Posted by on Tuesday, July 6, 2010 at 02:43 PM in Economics, International Trade | Permalink  Comments (100)


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