When a competitor enters a market selling a homogeneous product and can undercut the price of the established producers, those producers' livelihoods are threatened.
Thank goodness this is the case. In a free market economy, the threatened firms often respond by searching for ways to increase efficiencies, attempting to access lower cost inputs, and improving on economies of scale and scope. In the long run, those firms that continually adjust to serve the consumer better than others survive for another day, while those that don't tend to fail and are soon forgotten.
When this process is played out across the entire economy, more goods and services are produced than would have otherwise, prices fall (resulting in a corresponding increase in purchasing power), and we become richer. That this process was relatively unhampered in the United States in the nineteenth century explains why the Industrial Revolution occurred here and why, over time, Americans grew in prosperity and their economy became the envy of the world.
Although one can go back to the Washington administration of 1789 for examples of government intervening in the market order, it was not until the Progressive Era that these interventions became institutionalized as official functions of government, and soon cartels and crony firms began to characterize and (increasingly) define the US economy. In the steel industry in particular, this has proved to be quite nefarious. Let's count some of the ways.
First, there are the unions. Steel was one of the first industries to be unionized. This in itself is not necessarily pernicious, but it became so once extra-market power, yielded by the coercive state, was used to anoint union workers over others. These workers became more resistant to change and less productive as it became increasingly difficult if not impossible to fire them. A primary reason why steel producing states became known as the Rust Belt is because while union productivity relatively declined and union wages relatively rose, capital and labor found itself more productive in other states. Both escaped the Rust Belt for better opportunities elsewhere.
Although opulent labor unions have spent tens of millions of dollars to force unionization on right-to-work states, ostensibly out of concern for working conditions there, the actual purpose is to remove relative differences in the cost of capital and labor so as to remove the advantages these states enjoy. Their solution, when faced with the consequences that result when workers' wages exceed their productivity, is to try to force the same wage-productivity outcome on potential competitors elsewhere.
Second, there are international trade effects. Although the American steel industry's glory days occurred in the first few decades following World War II, it was not to last as steel production, often employing superior technology, took root overseas. Managers of less-protected industries would have had strong incentives to respond with similar investments out of concern for shrinking market share, but such incentives are diminished when managers can depend on the government to impose protective trade legislation. Why renovate factories to match South Korean steel efficiencies when lower priced Korean steel can be countered with tariffs and quotas?
Such is the moral hazard of protectionism. It removes healthy incentives for favored industries to improve over time.
Finally, there's the role of prices. By forcing domestic steel prices higher than they otherwise would be, increased competition becomes inevitable as competitors react to heightened price signals the domestics themselves created. This "short-sightedness effect" plays out with short-run benefits to domestics but with long-run problems that often result in demands for new rounds of protection. It's a costly cycle that harms consumers the longer it is allowed to exist.
Higher protected prices also have the effect of increasing the search for substitutes such that, today, many thousands of products have been developed to replace goods that used to incorporate steel. That's great for those producers and the consumers they serve, but one wonders about the unseen goods not produced because resources were diverted to steel substitutes. Let's just say they do not show up in GDP calculations.
Talk of such destruction was probably not a feature of last week's steel rally in Alabama, where the federal flag flew freely and workers' signs proclaimed, "Keep It Made In America" and "#SOSJobs." Pat Summerlin, an electrician attending the rally, said protecting the industry was important since, after all, his plant and its workers support the community. "If I lose my job, that means I'm not spending money at your business. We're all connected."
Not if you balance increased spending of the well-connected with harmful and often unseen effects of protecting the domestic steel industry on everyone else. When you do, there is a net loss to society — a loss that reflects a profound and even steel-like ignorance of economics.
Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.
Christopher Westley is an associated scholar at the Mises Institute. He teaches in the College of Commerce and Business Administration at Jacksonville State University. Send him mail. Twitter @DrChrisWestley
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