Armchair Economics - "The Iowa Car Crop"

Landsburg's beautifully-painted metaphorical summary of the flawless argument of David Friedman illustrates politicians' and the general public's widespread ignorance and economic illiteracy, and simplifies a seemingly complex issue with some basic principles of economics.

Politicians and government officials hate technology. What? Yes, they hate technology in that they view international trade and its subsequent act of importing as being bad. International trade is simply a form of technology that is a product of a free market economy. I will try to do a longer post or two in the next few weeks on international trade, this one is just a simple illustration of one of the most significant basic principles of economics.

Everyone knows that we manufacture cars in the United States in factories, but most people don't realize that we also produce cars in fields in Iowa. We plant seeds from which the cars grow, a few months later the seeds turn into wheat which we harvest and load onto ships that disappear into the horizon of the Pacific Ocean. A few months later the ships reappear with brand new Toyotas.

International trade is merely a form of technology that allows us greedy self-interested Americans to get what we want. This is a good thing. The country of Japan and their factories and workers are all factors irrelevant to the welfare of individuals in America. The concept is as simple as wheat being converted into cars. As such, policies that prefer the first form of technology over the second are essentially policies that favor the manufacturers in Detroit over the manufacturers in Iowa.

Thus Detroit and Iowa are competitors, and a free market system allows production to be allocated to the most efficient producers when their marginal costs are equal, which results in a maximization of efficiency as well as a maximization of benefit to the consumer (individuals). Now obviously there are those that prefer an Impala from Detroit over a Corolla from Iowa, but essentially that is irrelevant here as well.

This example illustrates an important concept:  Trade theory dictates that if you attempt to protect domestic producers in a particular industry from foreign competition, you must hurt domestic producers in other industries. And in doing so, their is a net loss of total efficiency and total utility (benefit).

Next time someone asks you about your Toyota, explain to them how and why it was manufactured in Iowa and not in Japan.


Best,
Tyler