On Protectionism and Government Subsidies

Over a century and a half ago the great French political economist Frederic Bastiat penned a terrific little essay entitled “The Petition of the Candlemakers”. The 1845 piece was a brilliant demolition job of the illogic of protectionism. It was a fiendishly satirical look at the folly of governments propping up failing or inefficient industries.

He sought to make the case for candle makers and related workers, saying that they were facing unfair competition from the sun. If the government would only snuff out the sun or block its effects, he wrote, just think of all the jobs that could be saved, and all the new jobs that could be created in this industry. In the essay he said in part:

“We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival, which is none other than the sun, is waging war on us so mercilessly we suspect he is being stirred up against us by perfidious Albion (excellent diplomacy nowadays!), particularly because he has for that haughty island a respect that he does not show for us.

“We ask you to be so good as to pass a law requiring the closing of all windows, dormers, skylights, inside and outside shutters, curtains, casements, bull’s-eyes, deadlights, and blinds — in short, all openings, holes, chinks, and fissures through which the light of the sun is wont to enter houses, to the detriment of the fair industries with which, we are proud to say, we have endowed the country, a country that cannot, without betraying ingratitude, abandon us today to so unequal a combat.”

The idea that governments must protect struggling industries and businesses, regardless of the costs or the negative effects to others, is known as protectionism. I recently wrote a piece on the protectionist policies in the Australian book industry, and how Australian consumers are forced to pay much higher prices because of it.

Some wrote in comments seeking to defend the policy, claiming it is the Christian thing to do. Some were concerned about any job losses, and felt that we all should worry about any industry in decline. This is not the place to offer a full-fledged economic treatise on the merits or otherwise of protectionist policies, but let me offer a few thoughts about such concerns.

The truth is, there will always be industries in decline as life moves along. Some industries are no longer needed, or are superseded by newer industries, technologies, or consumer demands. Thus all industries need to adjust to changing realities.

Some businesses and industries can successfully make adjustments and continue to thrive, while others of necessity will have to be put out to pasture. As much as we may have liked the old horse and carriage mode of transport, newer transportation options simply rendered this obsolete.

Many would have complained at the time about job losses and so on, but progress needs to occur, especially if it results in things becoming much more efficient and cost effective. In the same way there would have been many disgruntled slide rule workers who felt a great injustice at seeing their livelihood undermined by the development of hand-held calculators.

The question is, should all of these obsolete or superseded industries receive government subsidies and protection, simply to keep some of these people in work, or should we teach them to adjust to the new realities, and offer them training in how to get another job in another area?

Some years ago I had a discussion with someone whose dad was an independent cabinet maker. He complained about how cheaper units were being produced and sold at places like K-Mart. That obviously put pressure on his dad, and affected his opportunities. In many ways he just could not compete with these bigger suppliers.

My reply to him went something like this: While no one wants to see anyone put out of a job, in the world we live in this will happen. There will always be trade-offs as new developments take place. The economy, like ideas, technologies and general knowhow, are always changing and morphing into different forms.

No one can expect to live in a stagnant, isolated bubble, unaffected by change which takes place all around them. Learning to adapt to new situations such as changing customer expectations and wants is part of how any business stays successful and stays afloat.

While it might be nice to get one of these hand-crafted cabinets, and keep this guy in business, most people – including me – simply can’t afford such items, and are very grateful for mass-produced units which may not be as nice but are a whole lot cheaper. I for one am grateful for places like K-Mart, where all kinds of goods and service are affordable for a relatively poor guy like me.

If you are wealthier or fussier you can go for the hand-crafted items. And there will always be a market for such goods. But most poorer folk like me really appreciate the fact that the mass-production of goods means that most things which were only for the rich just a century ago are now affordable to everyone.

So some trade-offs must take place here. Some people – including concerned Christians – might think it is the role of governments (that is, you and me, the taxpayer) to subsidise the cabinet maker so that he can keep his job. But should we taxpayers have to prop up everyone and everything in a changing world?

Or should people learn to adjust to the times, and meet the needs of consumers? If this cabinet maker can make a living by serving the fewer people who prefer his stuff, fine, but if he can’t, why should he expect me to subsidise his lifestyle? Maybe he needs to find a new job, or find a way to increase demand for his more expensive products.

It is the same in the book industry. All this protectionism seems to be doing is driving people to the cheaper overseas online outlets. I for one very much appreciate these places. I would be broke if I had to pay the exorbitant prices most Australian booksellers are charging. They need to become more competitive in their pricing, and make other changes (such as offering online services) if they expect to keep their customers and stay afloat. But if they refuse to make these adjustments, why should I worry about them, or be forced to subsidise their inefficiencies?

I would suspect that on most occasions, most people when they are buying will shop around and look for the cheapest prices. There is nothing wrong with that, and nothing un-Christian about it. I don’t know of very many people who deliberately pay much more expensive prices to show their ‘solidarity’ to someone who is less competitive and/or unwilling to make some of the required changes to go with the times.

If a person wants to in effect subsidise such workers or businesses that is up to them. But I – and most other people who seek to be sensible with their limited means – prefer to go where the best value for money is found. If others wish to offer charitable donations on the side to their favourite at-risk industry, they can feel free to do so.

But we should not expect governments (that is, our tax dollars) to bail out every failing industry, every inefficient business, and every unsuccessful organisation. That simply rewards mediocrity and inefficiency, and it is the consumer who suffers as a result. No business venture is guaranteed success – nor should it be. Life is always a risky enterprise, so why should any of us expect to be protected from failure?

One commentator on my earlier article about the book industry wrote this: “We are living in a different world now and those who try to keep living yesterday will go under. Remember Polaroid Cameras? That company in 2001 filed for bankruptcy protection with a share value of 28c. In 1997 it’s share value was worth $61.31. What went wrong in such a short time? Answer: Digital cameras. Polaroid refused to change to digital camera technology saying their unique technology would not fade away.

“The core product of any camera company is not their particular camera, (as Polaroid seemed to think), but rather an acceptable photo that the consumer can produce himself. Digital cameras are doing this now and cheaper and easier to.” This would be true of any number of areas.

It seems the foolish answer to all this is to expect governments to protect and subsidise such industries. But in a free market adjustments always have to be made, and there needs to be as much room for failure as for success. The consumer really should be king. I see no moral or biblical reason to argue for protectionism or government subsidies for failing industries.

Sure, help of various kinds can be offered. As I mentioned, retraining programs would be part of the assistance on offer. But it is illogical and not particularly moral to expect that every failing enterprise should be thrown a tax-payer funded lifeline.

bastiat.org/en/petition.html

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19 Replies to “On Protectionism and Government Subsidies”

  1. Recent comments on the current affairs programs re imported vegetables make a strong case for supporting our local growers. Who wants to ingest chemicals which have been banned on Australian agricultural for years but are still freely used in other countries of the world? Information out of China indicates that many employed in the growing of crops are actually political (read religious) prisoners with minimal standards of living. In this case, I prefer paying more for the product, knowing it is going to be better in the long-run.
    Vic Trudeau

  2. Good points Bill.

    Why is the question about us paying more for books to keep local book sellers alive rather than lifting the restrictions on imports that make books out here so expensive in the first place? Why do consumers and not the import restrictions get the blame?

    Protectionism on one industry usually means other industries inevitably suffer. Thomas Sowell

    “The number of jobs in the steel is exceeded many times over in industries making steel products, from automobiles to oil rigs, refrigerators, locomotives, etc., etc. Tariffs that save jobs in the steel industry mean higher steel prices, which in turn means fewer sales of American steel products around the world and losses of far more jobs than are saved.”

    Damien Spillane

  3. I agree with the thrust of your comments, Bill. There is only one proviso: that the trade playing field is reasonably level. For example, the same health regulations should apply to imported food as locally produced. It is not the case at present with imported produce being checked for a shorter list of pesticides. Also, artificially pegging of exchange rates in favour of exports (China) is something that needs to be addressed; this amounts to an anti-competitive (anti-free trade) practice. There are also monopolistic approaches to trade (e.g., the OPEC oil cartel) that distort the proper operation of free markets. It is a legitimate role of governments to work to overcome these distortions, otherwise it amounts to theft of the property of the citizens of the disadvantaged country.
    Don Batten

  4. You are correct Don Batten to point out distortions in the free market but the additional point is that we see them as distortions, not as normal parts of the market operation.

    As a slight contrast, I would emphasise Bill’s point that we seek the “best value for money” when we buy. But that doesn’t always equate to the cheapest price, if there are other factors such as customer service involved.

    As long as we can compare like for like, then the cheapest overall price usually wins out. But sometimes we discover that buying purely on the cheapest price is a short-cut to poor quality, or a loss of availability, and not actually something we want to have.

    This isn’t obvious in consumer goods, but in big business, sub-contracting suffers from this problem. A couple of years ago a company called Ajax Fasteners went broke.

    It was “saved” because its major customers in the car manufacturing trade couldn’t afford to lose its services (it provides nuts, bolts, rivets and so on, and cars have to not fall apart, right?).

    I think it went broke because of purchasing manager incentive schemes where buyers at the car makers won bonuses for saving their company money. But a buyer can usually only save money by beating down the suppliers on price and delivery.

    So poor Ajax (and other similar companies like Teson Trims who used to make airbags and upholstery) were ground out of existence by something they may not have considered as the cause.

    To some extent, the big guys have realised the unintended consequences and eased the pressure, but the problem essentially still lurks in the background. That is, you can sometimes go too far in looking for a great bargain.

    John Angelico

  5. Bill,

    Can I ask, Can we compete with China without taking on China’s working conditions? Do we want to do that?

    I think not.

    I am happy for some form of protection, but how to do it without the excesses of protecting inefficiency and corruption, I don’t know.

    Michael Hutton

  6. Hi Michael,

    If the “we” in your question: “Do we want to do that?” refers to all Australians then let’s let them answer it through their purchasing decisions.

    Let’s let them choose either to pay more to protect Australian jobs and industries, or to take advantage of lower prices from overseas.

    Protectionist policies only serve to deny Australians the opportunity of answering the very question you have asked.

    Mansel Rogerson

  7. In 1982, I travelled to Asia for the 1st & only time. I saw then incredibly poor standards of living (intermingled with great wealth) and realised that in Australia, we could never be competitive with a country whose workers are paid so poorly and live in relative squalour. We can only compete with them if we are willing to accept similar standards of living as them.

    Bill wrote “I don’t know of very many people who deliberately pay much more expensive prices to show their ‘solidarity’ to someone who is less competitive and/or unwilling to make some the required changes to go with the times.”

    You now know of one more Bill. I readily support Australian farmers and pay higher prices. Grantedly, I am in a financial position to do so and have family in rural industries …

    Mansel, in response to Michael Hutton making a similar point to myself wrote “let them (Australians) answer it through their purchasing decisions.”

    Unfortunately, Mansel, people, Christians and non-Christians alike, often choose the best short term solution.

    Graeme Cumming

  8. Hello Bill,
    Most of the time I agree with your comments. However I can see where the “no protection” policy will end up in Australia. Cars will no longer be manufactured in Australia, to be replaced by death traps from places like China that don’t meet Australian safety standards. Manufactured goods may be getting cheaper as we decide to get everything from China but they certainly don’t last as long as goods produced ten years ago. Buying something cheap is not always the best value for money. I try to buy Australian as often as I can to help keep people employed here but it’s getting hard. If we start importing most of our food from overseas as well I do not think that this will be a good thing for the consumers of Australia in the long term, let alone the farmers.

    Regards,
    Michael Palma

  9. Thanks Michael

    But how is it good for Australian consumers to deny them choice and force them to only get more expensive goods? All I am arguing for is the right of people to have the freedom to choose what they do with their money. Some will buy more expensive local goods, some cheaper imports. That is a fundamental right which is worth fighting for.

    Bill Muehlenberg, CultureWatch

  10. Hi Graeme,

    You raise the argument for Protectionism that many people would choose short term benefits over their longer term interests.

    I think you’re right to some extent, but why I favour letting people choose through their purchasing decisions is because the alternative is surely worse; that is to have the government make the decision as to where the balance lies for all of us. This is worse in two ways:

    Firstly, history shows that even democratic collective decisions often are very far off the mark of where people’s long term interests actually lie [think about the government’s immigration policies over the last 30 years for a good example].

    Secondly, even if the government got the balance about right the problem would be that everyone would be forced into the same mould. In reality, individual A may strongly favour getting the best price and individual B may strongly favour helping Australian businesses at whatever cost. The net effect of all these individual preferences may closely mirror the government’s policy, but under a fixed policy both individual A and individual B would be forced to act quite contrary to their beliefs.

    Mansel Rogerson

  11. Hey Bill, unfortunately, while Australia thinks it is playing on a flat and level field, the rest of the world sits in the stands laughing. Economic rationalism has no place in the debate about imported Vs local farm produce. To say farmers should just sell up and re-train if they can’t compete, when other countries either have cheap labour and dubious farming practices, or are subsidised to the hilt, is hardly ensuring the security of our domestic supply. Look at the UK. They pay farmers to fallow their paddocks, just to keep supply and demand in check, because historically they have known food rationing and shortages. We don’t need to allow vegetables or meat into our country from untrusted or untested sources, because we grow the best in the world, and when it comes to food, we need to put enough protection in place to make any competition lift to an healthy and unsubsidised standard that does level the field.
    Mike Baimbridge

  12. No debate about protectionism in Australia is complete without reference to the man who for many years sustained a lonely struggle in the Federal parliament against protectionism, the late Bert Kelly. Bert was derided by his parliamentary colleagues at the time for his ‘Methodist zeal’ in arguing his case but it was that zeal that led him to oppose protectionism because he believed it was not only economically inefficient to protect one business at the expense of another but it was also morally wrong. Protectionism enriched some sectors of the economy but impoverished others.
    But if enough people start buying cheaper goods from overseas on the internet, won’t there be job losses? Actually, no, there will be job gains. Let me explain. If, for example, instead of buying $100m worth of items from Australian stores, we buy them for $80m from overseas, consumers – particularly Australian producers of other goods, now have an extra $20m in their pockets. It is what they do with that $20m that makes all the difference. That $20m creates more jobs than it loses. The removal of protection over the past 40 years has given the Australian economy a massive boost.
    Bob Day

  13. I think you have the wrong handle on the issue of protectionism Bill.

    The real issue is that it is NOT a free market, despite what the pundits suggest.

    In reality, what happens is that Governments (and largely the financial sector) decide for themselves which industries they think are competitive. Those industries which aren’t deemed beneficial are loaded up with regulations and starved of finances and resources. Mainly, it is perception, not reality.

    In most cases, governments magnify the inequalities (For example: why shouldn’t the GST be charged on imported internet purchases such as books, when it is the law here that every retailer/publisher must charge GST?). There are many instances in industries where industry is forced to adopt a standard which is not required or even desired by the market.

    There are further instances where those low prices are themselves a distortion. Who remembers when Japan flooded the market in the 70’s with cheap cars and electronics? What is the relative price of Japanese goods now? That cycle has repeated itself with Taiwan, Korea and will again with China. Economies work in 10 to 15 year cycles. Does the effect of 15 years of cheaply, dumped goods (an effective price war) mean that the local manufacturers are uncompetitive?

    History shows that those countries which maintain a strong manufacturing base are the most resilient and self-sufficient. It requires a governmental focus and directed investment over time to enable industries to weather these cycles. When you as a consumer, chase the cheapest goods you are placing the control of your future to others, and assuming they care enough about your well being to provide the goods that you need at a price you can continue to afford.

    What the consumer experiences at the checkout is more to do with the affects of socialism (with the government finger in every pie of local manufacturing) than the natural advantages of a free economy.

    Lennard Caldwell Clifton QLD

  14. Free trade is ultimately unsustainable because the passage of time shows that the developing nations eg China gain stronger currency, influx of money and then can buy your govt bonds, local business etc.
    It is self-defeating.

    Bring back protection. It worked and can work again.

    Michael Webb

  15. Thanks guys

    Just interstate now so cannot properly reply, but when I return I may have to do a few more articles on all this.

    Bill Muehlenberg, CultureWatch

  16. Bill,

    In response to Michael Palma you wrote “But how is it good for Australian consumers to deny them choice and force them to only get more expensive goods?”

    As our arguments with the “pro-choice” lobby show, choice may sometimes be good, but we do NOT believe that “choice” is the holy grail of ethical reasoning.

    Graeme Cumming

  17. Bob Day “… explain(s) …
    (1) buying $100m worth of items from Australian stores,
    OR
    (2) we buy them for $80m from overseas, consumers –
    particularly Australian producers of other goods, now
    have an extra $20m in their pockets”

    Bob, option 1 means that all of that $100m stays in the Australian economy and is spent here.

    Option 2, which you favour, means that $20m stays in the Australian economy and is spent here. $80m has gone overseas.

    This surely an argument for protectionism.

    Graeme Cumming

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