The Importance of the Individual

The discrete nature of humans makes the individual the center of all market activity. They decide what has value and how much. Their actions based on those evaluations make free markets operate effectively and efficiently.

The subjective theory of value reveals that the individual plays the most important role in the development of all economic theory. The effective and efficient allocation of resources throughout an economy always depends on satisfying the needs and wants of individuals.

I will mention briefly some of the reasons why individuals are so important to understanding free markets:

Discrete Nature

Like all things in nature people will always remain separate. Individuals simply cannot form collectives. Communities of all sorts consist of networks of individuals. They have separate minds and the act separately. The subjective theory of value remains consistent with this fact.

Market Power

Because individuals provide the source and measure of value they also represent the predominant market power. All market transactions result from the actions of individuals. When organizations act, they do so as a result of the consensus of individual decisions.

The idea of individuals as a source of market power turns most economic theory absolutely on its head. Market power comes from the bottom of the hierarchy; not the top.

Inverted Cost Structure

The fundamental role of individuals inverts the popular model of market cost structure. The amounts that buyers willingly pay for goods and services determine the costs of retailers, distributors, and manufacturers, not the other way around. Goods cost what they do at every level of the production structure because of the demands of consumers for other products requiring the same resources.

When attempting to determine the cost of any good or service don’t look to the source of the resources used. Look to what buyers willingly give up to receive that good or service.

Determination of Market Prices

The bidding of individuals to purchase goods determine market prices. The competition between suppliers does not play the dominant role in holding down market prices. The bidding of individuals for goods actually stimulates competition between suppliers.

Determination of Wealth Distribution

Many people misunderstand the determination of the distribution of wealth. A good only has market value when individuals willingly offer something in exchange. The same holds true of the market value of resources. They only have value if they produce something for which individuals willingly exchange.

This fact holds true of the market value of financial assets. The ownership of a particular stock signifies wealth only because others desire to own that stock. Without legitimate demand — demand backed by substance — the stock becomes worthless.

Political Power

Like market power, individuals determine the source and level of political power. An individual gains political power when others delegate that person to exercise illegal or unauthorized force against another individual — or individuals. This does not change the original source of power i.e. the individual.

The role of the individual in the distribution of political power becomes important with a discussion of market intervention. I have previously defined free markets as those free of violent intervention—markets free of political power.

Conclusion

No process exists that eliminates the role of the individual in the operation of markets. Individuals determine what they value and how much they value it. No other source exists. As a result, the individuals reside at the center of the operation of any market.

I have only touched briefly on some of the aspects that make the individual so important to the development of economic theory. I will allude to the importance of the individual many times in the course of my blog posts.

Relationship of Value to Price

Value and price have a very close and important relationship. Value exists entirely in the subjective realm, whereas price provides objective evidence of an economic transaction. The price results from action taken based on value. It does not, as many people believe, provide a measure of value.

Value

As I have laid out in previous posts, value only exists as a subjective inference in the minds of individuals. It has no objective unit of measure — indeed the individual cannot quantify his own measure of value. An individual exposes his value preference only when he makes an exchange. When the individual makes an exchange he exposes his relative value to himself and anyone witnessing the transaction.

Exchange

When an individual encounters a good (A) that he values more than a good (B) that he owns he will seek to make an exchange. If the owner of good B values good A more than good B, these two individuals will make an exchange. The consummation of this transaction provides the proof that each party values what he gets more than what he gives up. If they don’t make the exchange, the original premise about who values what proves false. In other words, an exchange amounts to individual actions based on individual values. The result of that transaction provides objective evidence of the relative values of the two individuals. Keep in mind it only indicates relative values — in terms of more or less — and never quantifiable values. That evidence of value results in what we refer to as a price.

Price

The word price refers to the ratio of what a person gives up to what he receives. In other words, if Bill exchanges eight apples for four peaches, we can say the Bill’s per peach price equals two apples. A price only appears with the consummation of an exchange. If the owner of the peaches offers them at a ratio of three apples per peach, that does not amount to a price. It only amounts to an offer — or, if you will, an offer price. An exchange must occur in order to create a price. I realize that these examples seem almost ridiculously simple and somewhat unrealistic. Most transactions occur with the use of money and the price stated in terms of dollars and cents. Keep in mind that money simply exists as another good used as a medium of indirect exchange. The interpretation of “price” remains the same whether the transaction consists of a direct exchange — as in the case of Bill and his apples — or an indirect exchange — as with the use of money.

Interpretation

The price resulting from an exchange creates an objective indicator of the relative values for Bill and his exchange partner. After the exchange we can say with certainty that Bill values peaches more than apples. But, we still cannot quantify how much more Bill values peaches. Objective price information provides the basis for the development of effective and efficient allocation of resources throughout a market. When a price pattern develops in the market that indicates the existence of many buyers willing to trade apples for peaches at roughly the same ratio (price), peach producers who want apples know that a market exists for their produce. Money prices contain precisely the same information, however it can apply to a multitude of products exchanged indirectly. This information provides the foundation for economic calculation fundamentally important to the operation of free markets.

Conclusion

Knowing that people value goods on a individual subjective preference scale provides the basis for a sound fundamental theory of free exchange. It does not, however, provide us with any useful objective information. For useful information we must have the ratio of goods exchanged—which we refer to as price. By aggregating price data we can develop definitive statements about the relative values of the players in a particular market. We now know, with certainty, who values one good over another. Keep in mind that price does not measure value; it simply indicates the range of relative value. The price does, however, provide sufficient information for the effective and efficient allocation of resources in an economy.

Value Measure-Review

Because I will frequently return to the subject of value, and its measure, over the course of these blog posts I have decided to publish the text of the same article I posted May 16, 2016 (with some edits).

If individuals provide the only sources of value, how do those individuals measure value? Does every person have a standard unit of value to compare the economic value of one good to another?

In fact, value has no unit of measure. Unlike height, weight, volume, etc., people have no way to compare their values with those of other people — or, indeed, with the goods they value themselves. Value has no objective source; and value has no objective measure. Only the subjective preference scales of individuals provide a measure of economic value. An individual can only value one economic good more or less than another economic good. A person cannot quantify how much more, or less, he or she the values that good.

Example

Preferences
Hypothetical Preferences

A hypothetical example (see right) might prove useful. This list shows the preferences (listing the most preferred at the top) of one individual for some fruits in a selection at a specific time and place.

The order of these preferences might change in a different time or place. Also, this person cannot tell how much they prefer the peach to the pear.

Important Factors

I will touch briefly on several important factors about preference scales—like this example.

First, preference scales only exist in an instant. A person can prefer ice cream to cantaloupe in one moment and cantaloupe to ice cream in the next.

Second, the unit of measure (e.g. quantity, volume, length) of a good affects its place on the preference scale. A person might place a bowl of ice cream high and their preference scale but a gallon of ice cream relatively low.

Third, distance affects preferences. Goods nearby have more value than goods in the distance.

Fourth, time likewise affects preferences. A good in the present has more value than the same good in the future.

Fifth, each additional unit has less value than the previous unit — all at the same time and place in the same units. The second bowl of ice cream has less value than the first. The 100th bowl of ice cream has less value than the 99th, the second, and the first. Not after eaten, but in the moment when the individual decides to buy them.

Sixth, context — weather, hunger, social situations, etc. — has an effect on relative value. A cold man might place more value on an ugly coat than a warm man, who might prefer a more fashionable coat.

Other factors can affect value scales, but these are some important ones.

Summary

  • Individual preference scales provide the only measure of value.
  • Those preference scales have no units of measure; only ordinal ranking.
  • Preferences exist only at a point in time.
  • Many factors affect preference scales including space, time, units, and context.

In the next post I will address the relationship between value and price.

Value Source – Review

On May 11, 2016 I posted an article describing the source of economic value. I revisit that subject because of its vital importance to economic reasoning.

In this post I will respond to some questions which have arisen since I posted that article more than two years ago. I’m sure that these questions are not all-inclusive. Thus, I will address the source of value when it becomes pertinent to other topics on this blog.

Validation of Source

How do we know that individuals are the only source of value?

Of all the sources that have been proposed for economic value, only the individual as the sole source holds up to logical scrutiny. Every other source, whether it be intrinsic value, labor input, or production cost, require some modification when looked at in detail. The only element consistently involved in the determination of value consists of individual people.

Economic goods seem to have different values under different circumstances and different uses. This fact negates the validity of any intrinsic value.

The production of nearly identical economic goods can require vastly different degrees of labor in terms of time and quality. Thus, no consistency exists in the labor theory of value.

Different producers of nearly identical economic goods can have significantly different cost structures. The cost of production theory of value also fails logical tests.

On the other hand, the existence of value always involves individuals.

Use or Exchange

Is there a difference between use value and exchange value?

Some theorists have attempted to distinguish between “use value” and “exchange value.” From the standpoint of source these distinctions make no difference. From the standpoint of the individual “exchange” consists of just another form of use. This provides yet another consistency in advocating that individuals provide the only source of economic value.

Value of Money

Does money have a different source of value than other economic goods?

Some people have the mistaken impression that money has a different source of value than other economic goods. This could not be further from the truth, for money consists of just another economic good (or the claim for an economic good.) The only significant difference on this good is that it’s held for the purpose of indirect exchange. It has, however, exactly the same source of value as does any other economic good.

Conclusion

Having a logically consistent source of economic value plays a critically important role in the development of logically consistent economic theory.

The development of reliable theories in any field of study relies on consistent fundamental premises. The same applies to the source of value in the development of any reliable economic theory. The only consistently fundamental premise in the development of theories of value consists of individuals as the source of value.

I shall return to the importance of this fact many times in the course of my blog entries.

Separate Individuals

I mentioned in my previous post that only separate individuals can determine value. In this post I would simply like to add emphasis to that point. It will take on critical importance as we study other aspects of economic systems.

Not shared value

We frequently hear people speak of shared value (or values). In fact, individuals cannot share values with other people. Each individual has only his own sense of value.

We frequently see situations in which evidence tells us that people actually do share value. Instead of shared value I would prefer to use the term congruent value. When a group of individuals have sufficiently compatible values, those people can act in concert—as if they shared a value.

Not group value

The mistaken concept of “group value” relates very closely to “shared value.” But, no such thing as collective (or group) values exists.

When groups of people act in as a unit it simply demonstrates that they have achieved a consensus for action based on their individual value.

Not by voting

Voting, in no way, creates a collective value. Voting simply reflects a way of either achieving a consensus, or imposing majority will. In such situations, only individuals cast votes based on individual value.

Not Markets

Although we frequently hear terms like market value, or the market values, the source of value remains the individual. This applies to all levels of the market: consumer level, distribution level, in various manufacturing levels. At each one of these levels only individuals determine value.

Conclusion

Without exception separate individuals make all judgments regarding value.

Keep this in mind, for it becomes very important in our further discussions about free markets.


Footnote
You might want to refer to The Wisdom of Crowds by James Surowiecki. In the book, contrary to what the title might lead you to believe, crowds tend to make accurate choices because of individuals making decisions separately.

Subjective-Value Theory

In a previous post I introduced the topic of Subjective Value. I used an anecdote to demonstrate how an individual in the process of shopping decides about value. In the text below I will define some of the important characteristics and qualifications of subjective value. Because economic value consists of a crisscross matrix of concepts, you may find some repetition in future posts related to value theory.

Individual Judgment

The word subjective has several varying definitions. Webster’s dictionary uses phrases like: peculiar to a particular individual; modified or affected by personal views, experience, or background; arising out of or identified by means of one’s perception. These definitions help with an understanding of the concept of subjective value. Economic value always consists of a judgment by a human mind. Because of that characteristic a person cannot quantify economic value. It has no unit of measure.

Reason for Judgment

The theory of economic value places no concern on the reason, or source, for any judgment of value. The economist does not concern himself with the influence of psychology, religious beliefs, or other internal or external influences. In understanding a theory of value, the economist only has to know that the judgment comes solely from the individual.

Ethical Values

The fact that ethical values do not play a role in economic value has particular importance. To argue that one economic choice has more or less value than another based on moral judgments has no bearing on the topic of subjective value. Whether the economic actor has moral or immoral intent based on the judgment of an outside observer makes no difference. For economic discussion, we must consider economic value is amoral — as opposed to either immoral or moral. A person’s ethical standards may have an influence on his judgments about value. But, from the standpoint of economic analysis it does not matter. The economist must accept that the individual values what he values for whatever reason. This point will become important when we discuss the various rationale for intervention. In brief, government cannot make people moral by dictating their economic behavior.

Rational Decision

People always make rational decisions when it comes to value, whether you agree with those decisions are not. In general, people always act rationally. The only times irrational behavior occurs consists of cases of Tourette’s syndrome, reflexive responses to stimuli, involuntary responses to environmental changes, and similar actions. Your disagreement — or anyone else’s — with a person’s value judgment does not make it irrational. We must consider it rational, if they have any reason whatsoever for their actions.

Separate Individuals

I must reiterate that only single individuals — or separate individuals — can make judgments about economic value. Groups cannot make such judgments. Voting on an action does not make it a group judgment. It only means that the individual members of the group have a sufficiently close value for the action that they can vote in favor of it. The person directed to take an action based on collective agreement must himself value that action. The fact that only separate individuals make judgments of economic value plays such an extremely important role in economic activity that I will devote an entire blog post to emphasizing this point.

Summary

The following points summarize this blog post:
  • Individual Judgment
Subjective value occurs only as the result of the judgment of an individual human mind.
  • Reason for Judgment
Economic analysis has no concern for the reason or source of an economic value judgment.
  • Ethical Values
The ethical values of other people do not provide justification for attempting to intervene in the economic value judgments of other individuals.
  • Rational Decision
People always make rational judgments as to value, whether you agree with them or not.
  • Separate Individuals
The individual nature of subjective value has far-reaching implication on economic systems.

Conflicting Value Theories

Since the beginning of economics as a specialized study, economist have realized that the concept of value lies at the core of economic theory. They have developed several value theories over the years but most of those theories have suffered from fatal flaws. The only theory that holds up to logical scrutiny is the Subjective Theory of Value. Before I address the Subjective Theory of Value I would like to mention some of the primary value theories that have been advocated over the years:

Intrinsic Value Theory

The idea that goods have intrinsic value— value contained within the good — seems rather appealing on the surface, but it runs into some severe logical problems. Does a hammer have the same value when being used as a paperweight as it does when it’s being used to pound nails? Intrinsic Value Theory would say the hammer always has the same value. But does that really make sense?

Despite its fundamental flaws the idea of intrinsic value lies at the heart of many other value theories.

The Labor Theory of Value

The Labor Theory of Value — associated primarily with Karl Marx — advocates that an economic good has value based on the amount of labor required to create it. Again, this sounds appealing. But, do identical cabinets have different values if one cabinetmaker takes twice as long to create his cabinet?

This theory obviously relies on the belief that labor has some sort of intrinsic value. Based on that premise one could argue, for example, that all workers should receive the same pay.

Marx had some clever ways to get around the handicaps of this theory. In the process of attempting to reconcile these handicaps he made this theory more inconsistent.

The Cost of Production Theory

The Cost of Production Theory tends to develop a circular pattern. If, for example, the value of a good offered to a consumer depends on the accumulated costs involved in its production, from where do those costs originate? This assumption leads back to the question about intrinsic value. Goods somewhere in the higher levels of the production structure must have an intrinsic value. Without that assumption no justification exists for costs at lower levels.

Where then do the original factors of production — land and labor — acquire their value?

Exchange Theory of Value

The Exchange Theory of Value argues that economic goods produced or held for the purpose of exchange have an exchange value separate from their utility value — or their usefulness to a consumer.

But why should the same economic good have two separate value attributes? If someone owns a chainsaw for the purposes of cutting wood, does that chainsaw’s value suddenly change when they exchange it for a Cadillac?

The exchange theory implies that any economic good has competing values based on what the owner intends to do with them. This idea makes it a rather inconvenient theory at best.

And, how do you measure a good’s value?

Monetary Theory of Value

The Monetary Theory of Value argues that value appears only in the form of monetary prices. This argument, however, has one fatal flaw.

The value of one economic good cannot be measured in terms of the quantity of another economic good (i.e. a money commodity) accepted for it in exchange. The measurement of anything, to be logically consistent, must share a common unit at any place or time. A mile represents the same distance anywhere on the earth. A pound weighs the same anywhere on the earth. A dollar, on the other hand, does not have the same value at all times and in all locations.

I have elaborated earlier on why money cannot act as a measure of value.

Power Theory of Value

The Power Theory of Value incorporates the influence of politics into market exchanges. Market prices, therefore, derive not from utility but from the relative power of the parties involved in the exchange. The ownership of capital represents the primary source of power.

We will see in our discussion of the Subjective Theory of Value that most value theories have the market power structure inverted. Power emanates from the consumer and not from the producer.

Subjective Theory of Value

The elegance of the Subjective Theory of Value lies in its 1) simplicity and 2) ubiquity.

  1. Economic value has only one source: the subjective judgments of individuals.
  2. This source applies to all economic goods in all situations at all levels of production.

The subjective theory provides the only consistent “measure” of value in any place at any time. That measure consists of the relative preferences of the individual judging the value. In the mind of any individual one economic good always has relatively more or less value than any other economic good.

No objective measure exists for economic value. It is only in the process of exchange, in the revealing of price, that any hint of that relative value becomes exposed.

Summary

I have provided only brief explanations for some of the more popular theories of value. If you want to understand them thoroughly, you can research these theories on your own.

Only the Subjective Theory of Value holds up to logical scrutiny. I will discuss this theory in greater detail in my next post.

 

A Return to Value Theory

After a prolonged hiatus, I want to return to my discussion of value theory. A workable theory for value plays such a fundamental part in economic theory, regardless of the school of thought, that it cannot be overemphasized. Because The Free Market Center Journal advocates the validity of the Subjective Theory of Value, which many people may find unfamiliar (or not fully understand), it deserves special emphasis. Because of its importance in understanding other economic concepts, I will return to the subject of economic value many times in future posts on this blog.

In a series of articles in the next few blog posts I will address some of the details and implications of the subjective theory of value. I will outline some of those topics here. Then, in the next post I will begin to fill in some of the details.

Conflicting Theories of Value

Although I don’t find any of them logically sound, I must acknowledge the other theories of economic value. I will attempt to describe some of those and explain why they are logically flawed.

The Subjective Theory of Value

In short, the Subjective Theory of Value says that the subjective judgment of individuals provides the only source of economic value. Without looking at motivation, psychological inclination, or other influences, only individuals can determine value. The measure of value, which cannot be quantified, comes from the preferences of those individuals.

The Source of Economic Value

How can the subjective judgments of individuals play such a foundational role in economic theory? I will answer that question in an article addressing the source of economic value.

The Measure of Economic Value

The next question becomes, how can an economic system operate effectively and efficiently with a value system measured only by the preferences of individuals — and preferences that only can be ranked on an ordinal scale? Even the individual cannot tell precisely how much more or less he values one economic good from another. Yet, clear explanations of all economic activity originate from this measure of value.

The Relationship of Value & Price

The answer to the question of how a complex economic system depends on a value system based on the subjective judgments of individuals comes from the relationship of value and price. When economic actors act based on their subjective preferences they create an objective measure of economic activity — prices. Objective prices that originate from the subjective judgments of individuals makeup the measure by which others can make economic decisions.

The Importance of the Individual

Because the individual provides the only source, and measure, of value, he plays a foundational role in the structure of any economic system. Ludwig von Mises referred to consumers (i.e. individuals) as having sovereignty in the market. He meant to emphasize the importance of the individual in the marketplace.

Placing the individual in such a prominent role turns many of the accepted models of economic structure on their heads. All economic activity, at all levels, seeks to satisfy the needs of the individual (a.k.a. the consumer).

In a future article I will expand on the importance of the determination of value by individuals.

Summary

This outline describes some, but not all, of the articles that I plan to write covering the subject of economic value. I will begin this series in my next post, but I don’t plan to treat the subject of value as if these explanations were complete. As questions arise — based on comments about this blog and topics that I address in the future — I will expand on the subject of economic value. I also plan to assemble the content of these articles in a more comprehensive discussion that I will post on The Free Market Center homepage.

 

Introduction to Complexity

In listening to discussions about markets and economics you seldom hear the word complexity. Most economic theory tends to be linear in construction. Markets, however, consist of very complex systems. Because of its importance in understanding markets, I want to offer a brief introduction to the concept of complexity. I will get back to this subject many times in the future. At this time, I want to address some basic concepts to encourage you to keep the complex nature of the markets in mind.

Definition of Complexity

You can sum up systemic complexity by the phrase “the whole amounts to more than the sum of the parts.”

This means that something happens in the relationship between the parts of a system that give it more and different characteristics than the aggregation of the parts in the system. Thus, whenever you hear comments about a system you should ask yourself, “how to the parts of the system relate to each other and how that relationship makes the whole different than the sum of the parts?”

Complex systems are generally divided into two types:

  • Complex Physical Systems
  • Complex Adaptive Systems

Complex Physical Systems

Certain fixed rules define the relationships that make a physical system complex. Machines epitomize complex physical systems. The rules of leverage, for example, apply in all applications of machine systems.

Given knowledge of the initial conditions of a physical system and the external forces applied to it, a person can predict the response (effect) with reasonable certainty.

Complex adaptive systems, however, do not have that level of predictability.

Complex Adaptive Systems

Unlike complex physical systems, complex adaptive systems have the capability of adjusting their own behavior. They can rewrite some of the rules. The behavior of human systems — i.e. complex adaptive systems with a human component, including markets — tend to have a range of unpredictability.

Similar to physical systems, a person can measure the initial conditions and the external forces applied to adaptive systems. But, unlike physical systems, the response of an adaptive system remains unpredictable.

Complex adaptive systems watch the results of their own behavior (self-referencing); they adapt their behavior based on prior results; and they create unpredictable results. In the simplest terms we can refer to this adaptability as learning.

Emergence

The word emergence refers to the manner in which the characteristics of the whole system develop from processes. The characteristic of wetness emerges from the process of combining hydrogen and oxygen in the proper proportions. The characteristic of “automobile” emerges from the process of assembling the component parts. And, the characteristics of markets emerge from the processes of production, consumption, and exchange.

In the first two examples the same characteristics will emerge with each iteration of the process. In the case of markets (complex adaptive systems,) new characteristics emerge with each iteration. The market continues to display the capability of learning as time progresses.

Counting the number of dollars changing hands in an economy provides little information about the emerging characteristics of the economy as a whole. Thus, the validity of economic statistics must continually remain the subject of doubt.

Conclusion

When you hear people making definitive statements about the behavior of markets, keep in mind that markets represent complex adaptive systems.

An extremely larger number of interactions come together and emerge as the new characteristics of the market. As a result of information conveyed through the pricing mechanism, the various parts in a market will adjust their behavior and a whole new system will emerge.

Because of their complex adaptive nature, no one can predict the results of any intervention into a market system.

Trade Deficits: An Introduction

President Trump’s threat to impose tariffs on steel and aluminum has triggered a blizzard of articles for and against the proposal. Instead of parroting what has been said by others — mostly empirical evidence, I want to give you the tools with which to understand the issue behind the proposed tariffs: “trade deficits.”

Definition

To discuss the issue intelligently we must first come up with a definition for a trade deficit. In the simplest terms:

A nation incurs a trade deficit when it exports less than it imports.

Problems with the Definition

Nature of Exchange

To test the logic of the concept of trade deficits we must examine the nature of exchange. I plan to discuss exchange in far more detail in future blog posts. For now, I consider it sufficient to state that in every exchange both parties gain. Each party values what it gets more than what it gives. Otherwise no exchange will occur. Thus, neither trader could suffer a deficit. Each ends up better off than before they made the trade.

Measure of Trade

I have been careful not to use a unit of measure in stating a simple definition of trade deficits. I have done that because no unit of measure exists for quantifying the goods and services imported and exported. Bureaucrats and most economics express trade deficits in terms of the amounts of money that change hands. Not the amount of goods.

Those figures describe only that—the amount of money that changes hands. They tell us nothing definitive about the benefit (or detriment) to the general economy. They simply cannot tell us that.

Individual Transactions

The definition of “trade deficit,” as normally stated, presumes that the nation trades as a monolithic entity. Trades, however, do not occur between nations. Trades occur between individuals within nations.

I repeat. Aggregating the amount of money that crosses international boundaries provides no useful information about the benefits of individual trades.

The Consumer Pays

All economic transactions ultimately serve to satisfy the needs of consumers. If consumers do not have the willingness or ability to pay for lower order goods (“consumer goods”), transactions involving higher order goods (“producer goods”) would not occur. A market for steel exists only because steel ultimately contributes to the production of consumer goods. Rolled steel produced by a steel plant has no market value, if it ultimately doesn’t produce a product purchased by a consumer.

This means that not only do consumers ultimately pay for all voluntary transactions, they suffer the negative influences of intervention in this voluntary process. Income taxes, sales taxes, use taxes and — important for this discussion — tariffs, all distort the costs incurred by consumers. Taxes also distort the prices of goods. As a result, they distort the distribution of the resources used to produce those goods.

Complexity

Economies and markets all exhibit an irreducible level of complexity. This means that no one can accurately predict the effects of market intervention. Tariffs, for example, may have the direct and immediate effect of prolonging the life of inefficient domestic operations. When all the influences and feedbacks are taken into consideration, however, no one can predict for certain who will bear the ultimate cost. We can only say with certainty that some consumer, in some market, will bear the burden of tariff imposition.

Political Language

Politicians love to throw around phrases like “level playing field” or “trade deficits.” By doing so they manufacture nonexistent problems. No such thing as a “level playing field” exists in any market. Markets by their very nature work to level the playing field, but, like the mythical idea of equilibrium, they never achieve that objective.

The “trade deficit” also has a misleading connotation.

When you look behind the shroud of rhetoric, you realize that no such thing as a trade deficit exists. The idea only manifests in the minds and books of accountants (a topic for another day). In the process of trying to solve nonexistent problems we usually make problems worse.

Conclusion – Your Decision

I would say unequivocally that tariffs inflict damage on the members of any economy.

I don’t want you to take my word for it. Ask those who believe in trade deficits how either party in the exchange of goods suffers a deficit. Ask them how any intervention that helps one group of people, by force, does not simultaneously harm another group of people. Asked them how only politicians have the mental capacity (or clairvoyance) to understand all aspects of highly complex systems.

Ask these questions and then decide whether you believe in the concept of trade deficits.

Then you can judge whether tariffs will help anyone.