Sunday, August 2, 2009


Socialism is a term that seems to be bandied about alot these days. With a global recession provoking increasing criticism of free-market economics, the election of an egalitarian American president and our very own prime-minister handing out jobs like popcorn at a funeral, many a bourgeois might have cause for pictures of Marx dancing in his or her head. However, the allure of equality and common-sense calls for fairness often obscure the costs of socialist policies.

While I'm meant to know a thing or two about "economics", I often forget the incontrovertible evidence and arguments that best defend the free-market against the red tide. Thus, I shan't attempt to convince you of them here. Instead, with a simple model, and some supporting explanation and discussion, I intend to argue that a particular socilaistesque policy, while well meaning, is not at all rational and, worse, is - at least I shall argue so - immoral.

In order to lead the kind of material life of which I am so fond, I currently hold a part-time job. Some of my friends work full-time. Others have accepted positions that entitle them to fill out accurately, and with some pride, the blank square labeled 'occupation' on their census form. However, working life is not a privelege bestowed upon all. Up to March, 5% of all working-age New Zealanders capable of joining the workforce were unemployed ( Jobs, one might argue, define the kinds of people we are, empower us, in addition to improving our material welfare. On this basis, then, oughtn't all people be entitled to jobs? Sure: most developed countries actively discourage discrimination in the workplace, enabling access to employment for large portions of society. Nevertheless, this open access to employment is not enough, one might argue. People are not only entitled to jobs; jobs are a positive right: we ought to do all we can to ensure that every able bodied person is employed in order that their human dignity be respected.
Such arguments might well be held by those in favour of policies designed to drastically reduce unemployment, for example, John Key's recent announcement to create positions for many of New Zealand's unemployed youth ( I take it as relatively uncontroversial that such policies, defended on the basis of entitlement, fairness and/or equality (that is, equality of job opportunity), are typical of socialist-leaning types. As an example of a socialist policy designed to promote better outcomes for society (in this case fairness, or perhaps equality), I will show that no matter how well-meaning they are, such policies are inherently inferior to those that encourage a free-market (not necessarily a neo-libertarian free-market, but more free than a market directed or influenced by socilaist policies).

Economics is a dense subject area. It is strewn with complicated theories and often unintelligible empirical evidence. Hence, I wish only to work with a very simple model describing a socialist policy. We shall call this social policy "protectionism", by which I mean that a government (or society, if you wish) decides to enact a policy or policies that protect the jobs of those already employed and seeks to provide jobs for the currently unemployed. I suggest that a socialist would argue that such a policy is a "good" one, or the "right" policy, when compared to a non-protectionist policy (I don't wish to define "goodness" or "rightness" here, only to point out that based on the above discussion, socialists would tend to approve of a protectionist policy on the basis of it being "good" or "right").
Now, what are the outcomes of "protectionism" when compared to "non-proctetionism"? Let's say that protectionism is carried out by a government by subsidising New Zealand made goods (I am intentionally simplifying here: a subsidy is a payment from the government to a firm with no expectation of any reciprocal exchange; a New Zealand made good is one that is made here and is sold both at home and overseas). The effect of the subsidy is that New Zealand producers can now make their goods at a lower cost because they no longer need to pay for some portion of those costs (the subsidy pays that portion of the costs instead). This lightens the load for New Zealand producers: they can now afford to sell their goods for a lower price, meaning they can outprice overseas competitors and gain more customers than them. This increase in sales allows the producers to hire more staff in order to churn out more product. We thus get the desired result: increased employment.
"What's this? More New Zealand-made goods sold, cheaper goods for customers and more jobs? Producers win (they sell more and make bigger profits), customers win (the can buy goods at lower prices), the unemployed win (they are now employed). What's not to like?" we hear the socialist cry in support of such a policy. "This is clearly the right policy to implement".

However, we have neglected the fact that producers also sell their goods overseas. While one might be tempted to argue that a protectionist policy indirectly benefits overseas customers by giving them access to cheaper goods, overseas producers feel the pinch as less of their more expensive goods are purchased. As overseas producers are now selling fewer goods, they no longer need as many employees to make them: there are inevitable layoffs. This results in lower overseas incomes and thus these customers do not enjoy the benefits of cheaper New Zealand goods (notice, also, that this would also mean fewer customers to purchase New Zealand's goods, possibly reducing the number of sales).
Why would a foreign country put up with these effects? Surely they would be better off implementing policies to protect their own workers. How, then does the effect of both of these protectionist polices play out for each of the countries (if we assume, for simplicity, that we are only considering two nations: New Zealand, and some foreign country)? The model is drawn below:

Again, I have simplified things: the nunber on the left in each box represents the preference rank of the outcome for New Zealand (1 being the most preferred outcome, 4 being the worst), the number on the right representing the preference ranks of each outcome for the foreign country. Following the above discussion, clearly each country would most prefer to have its own protectionist policy in place, while the other country does not: this ensures more jobs, and cheaper goods in the home country (note that it causes a loss of jobs in the foreign country, hence, this being their least preferred outcome).
Why is it, though, that both countries prefer non-protectionist policies in both countries to protectionist policies in both countries? If both countries implement protectionist policies then the cost of producing goods in both countries decreases, thus granting neither country's products a competitive advantage over the other: there are no increases in sales for either country and thus no subsequent increases in employment for either country. One might argue that, at least, the price of goods in both countries has decreased, however, this reduction in price has come at the cost of the subsidy, a subsidy which is funded by the taxes paid by the very consumers who will supposedly enjoy the benefit of lower prices (note that the cost of employing civil servants to collect the taxes and redistribute them to producers will yield a net cost to the taxpayer/consumer. Moreover, basic economic theory notes that producers do not pass on all of the benefit of a subsidy to their customers, and thus even with a perfectly efficient government, taxpayers will not see a price reduction equivalent to that of the subsidy they paid out of their taxes). Clearly, then, a situation in which neither country employs protectionism is more desirable as there are no subsidization costs to the consumer, while employment remains the same in both situations. Protectionism, then, is not a "good" policy insofar as it does not produce the desired (by socialists) outcome (greater employment).

However, protectionism is worse than simply being a poor choice of policy, I argue that it is an immoral choice of policy. Following the reasoning I laid down in a previous blog post (, we can see that a country's shallow focus on the benefits to itself will lead to the relatively undesirable outcome where both countries will end up employing protectionist policies. However, this decision by each country imposes costs on the other: New Zealand's employment of protectionism forces the foreign country to pay taxes for a subsidy that has no effect on the economy and costs them more than if New Zealand were not to employ protectionist policies. This imposition of costs is not only irrational, but is immoral for there is not even an appropriate justification for such an imposition: the protectionist policy has no discernable benefit for New Zealand (or the foreign country). It is not as if New Zealand could claim "oh but at least OUR workers are better off for it", because this is not the case. We would be simply throwing money down the drain, only to force our foreign friends do the same. How can such a policy be the "right" thing to do? The imposition of such costs on others is not only wasteful, but immoral for those same wasted taxpayer dollars could have been spent on schools, hospitals, orphanges or bad-ass symphony orchestra accompanied shark-cum-laser light shows.
Socialist inspired protectionist policies, then, are not only ineffective, but are wasteful and needlessly impose costs on others.

Therefore, I implore you, next time you're discussing the domestic economy with Barack or John, or heatedly (read: drunkenly) debating with your local anarchist/communist/punk/socialist/Green-and-or-Maori-Party supporter, pick out your favourite Crayola and draw yourself a pretty little prisoners' dilemma explaining in far too simple terms the problem with socialist inspired economic policies. You don't have to be an economist, or even to have to finished high-school, you just need to think clearly (even simply) about just what it is that a particular policy/idea implies.

P.S. If you even remotely sympathised with this, go out and read some Ayn Rand. I'm sure you'll be delighted with her.


  1. Suppose some country, let's call it "ASU", uses slave labour to produce its goods at a lower cost and hence undercuts local businesses, putting local non-slaves out of work. Would you say a 'slavery tariff' to keep local jobs would still be bad? A more topical modern example would be the tariffs on countries that don't have sufficient environmental standards which are under consideration at the moment. (a Workers of the World Unite example would be labour standards I guess)

    New Zealand is already used as an example by Americans to try to persuade their government to get rid of agriculture subsides so I don't think you need to be too worried about the red menace.

    Re: PS. read this

  2. First, Oh-Em-Gee. That link is incredible. In love right now lol.

    Second, yes a slavery tarrif would be bad because in that case the policy doesn't go far enough: we shouldn't be purchasing slave-labour produced proucts at any price (regardless of the taxes imposed on such products). Though I wonder whether your example was meant to point in the direction of sweatshop labour. If so, then yes a "sweat-shop labour" tarrif would be bad because you would put sweat-shop labourers out of work that otherwise would have had jobs. A job with some income, regardless of how small that income is, is better than no job and no income.

    Environmental standards are a bit different. Without going into too much detail (wikipedia can fill in the gaps), environmental degradation as a result of production is what is usually called a "negative production externality": a person not party to the trade of the goods is affected by the trade in question (e.g. Tuvalu gets flooded because the U.S buys cheaps toys from Chinese factories that pump out gases that contribute to global warming). Dealing with (environmental, or otherwise) externalities is something that many economists are concerned with and does not fall victim to the criticism of socialist policies that I used here.

    And yeah I realise that we're not exactly on the verge of a East/West ChCh split, but I often come across people extolling the virtues of socialism and since it's often hard to convince people with economics (simply because it can be complex or hard to prove in an argument type situation) so I figured a different treatment might help (even though the prisoners' dilemma came out of an offshoot of economics...).

  3. Would you say that trade tariffs and protectionism are analogous to minimum wage laws?

    I mean there are superficial similarities, in that both are concerned with denying unfettered competition and laissez-faire capitalism and with increasing the well being of workers within a certain country. But on the other hand, there are pretty obvious differences. For instance, tariffs are applied to the goods themselves, whereas the minimum wages laws apply to the producers of goods.

    Or am I showing myself up as the completely naive art student I am by completely misunderstanding the issue altogether?

  4. ben, you're right that minimum wage laws are also restrictions on voluntary market transactions.

    the differences between, say, import tariffs and minimum wages is who pays the cost and who benefits. import tariffs benefit local producers of that good and the government who collects tariff revenue. consumers pay the cost of this policy in the form of higher prices at shops, and, unfortunately, the cost to consumers will outweigh the benefits to producers and the government.

    minimum wages benefits low-paid workers--often middle-class teenagers working part-time--but also makes it harder for someone to become a low-paid worker in the first place--it increases unemployment. minimum wages don't directly cost the government anything, but do cost firm owners, and consumers of firms that produce using minimum wages. these consumers of firms such as takeaway shops, and budget retail, tend to be poorer to begin with. like with tariffs, minimum wages benefit a minority, and harm the majority, but the harm to the majority is spread out so that no one person feels the pain very much. therefore no one really blinks an eye at a $0.50 minimum wage increase. sure, it makes us all worse off, but the cost to me is not really worth complaining about or researching the effects of a harmful-but-well-intended policy.

    also, james, while i agree with most of what you've written, i'm not sure about your table. why would it be new zealand's least-preferred outcome to be unprotected while the foreign country is protected? it depends on what specifically the 'protectionism' entails, but it is certainly possible to illustrate that a foreign country that subsidises its, say, car production can drive down the price of cars to an extent in which the other country's consumers benefit at a level greater than the costs to its producers. i imagine this depends on both countries' size and industrial composition, but perhaps an exception worth noting. the table will not always look like the one you've drawn.

  5. if socialism was really a prisoner's dilemma as you've drawn it, then protectionism is the rational response for new zealand. while it will inevitably lead to a bad equilibrium (in the upper-left-hand corner), new zealand's best option, given foreign's likely rational response (protectionism) is to become socialist.

    luckily, i don't think trade is a prisoner's dilemma.

  6. Darian, exception noted. This wasn't meant to be a high-level analysis in the first place and so as long as the way I've drawn the dilemma roughly represents what's going on (e.g. that a foreign country imposing protectionist policies COULD put a bunch of us out of work and mean that we are not able to afford the now cheaper foreign goods flooding our market) I think it serves my purpose.

    Wet: it might seem like a rational response will lead us into the dilemma (if we follow traditional self-interested notions of rationality), however, I argued in another post that this is not the truly rational response. If rationality is the decision making process by which we seek the best outcomes for ourselves, then we can do better than the protectionism-protectionism outcome. By assuming that we are both TRULY rational (as I have defined it) we can assume that neither one of us will defect and thus it will be in both of our best interests not to employ protectionism. This outcome is rational because in recognizing that my action imposes a cost on you which you can return to me, I choose an action that lowers this cost to you/me and end up with a better outcome as a result.

    You're probably right about not being a prisoner's dilemma, but then this wasn't meant to be a highly detailed/accurate portrayal of the world. I don't know enough to give one of those.