Avoid Traps with Adam Smith and Gordon Tullock

tariffs free trade government intervention gordon tullock

August 16, 2023

Adam Smith and Gordon Tullock argue for gradual change to protect those trapped by bad regulations but also avoiding those traps in the first place. 
In Book IV of The Wealth of Nations, Adam Smith endeavors to establish the case for free and open trade (“the obvious and simple system of natural liberty”) as opposed to “all systems either of preference or of restraint” (pg 687).  While Smith is a rather unabashed and ardent supporter of free trade (even at one point referring to the Wealth of Nations as “the very violent attack I had made upon the whole commercial system of Great Britain,” in a letter to Andreas Holt, the Danish Commissioner of Trade), he does argue the reforms need to be gradual.  Smith writes:
The case in which it may sometimes be a matter of deliberation [by legislators], how far, or in what manner it is proper to restore the free importation of foreign goods, after it has been for some time interrupted, is, when particular manufactures, by means of high duties or prohibitions upon all foreign goods which can come into competition with them, have been so far extended as to employ a great multitude of hands. 
(pg 468-469)
A sudden repeal of tariffs can cause disruptions.  For many workers, they may be temporarily laid off (although they would find work in the now-expanding sectors), but the fixed capital such as warehouses or other instruments of the trade will not easily be converted to new manufactures.  Thus: “the equitable regard, therefore, to his interest requires that changes of this kind [ie tariff elimination] should never be introduced suddenly, but slowly, gradually, and after a very long warning” (pg 471).  In this sense, we see a “conservative” side of Smith coming out: while he wants trade to move in a liberal direction, he does not favor a violent disruption to the status quo.  Slow, gradual changes are preferable.  Smith ends that paragraph with some advice:
The legislature, were it possible that its deliberations could always be directed, not by the clamorous importunity of partial interests, but by an extensive view of the general good, ought upon this very account, perhaps, to be particularly careful neither to establish any new monopolies of this kind, nor to extend further those which are already established.  Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder.
(pg 472)
In other words, Smith warns us about introducing any protections or preferences into the commercial system to begin with; repealing them can be difficult and a legislature that is affected by the “clamorous importunity of partial interests” will have difficulty removing them because of the partial interests that benefit from tariffs.  Real disorder can result from the repeal despite the gains from the repeal benefitting everyone.  We are faced with a poor trade-off: endure the disorders from the tariffs or endure disorders from repeal of the tariffs.

Smith’s advice is very similar to that given by George Mason University economist Gordon Tullock (1922-2014).  In a famous 1975 paper called “The Transitional Gains Trap,” Tullock formalizes the problem Smith discusses here.  Smith develops the logic from the case of tariffs, while Tullock focuses on taxi medallions.  Tullock ends with the same advice:
The moral of this, on the whole, depressing tale is that we should try to avoid getting into this kind of trap in the future.  Our predecessors have made bad mistakes and we are stuck with them, but we can at least make efforts to prevent our descendants from having ever more such dead-weight losses inflicted upon them.
(pg. 678)
Smith seems more optimistic than Tullock on the possibilities of escaping the trap, but both highlight the importance of not getting into the trap in the first place.  

We see the wisdom of Smith and Tullock in the political conversations of the day.  Protectionism is once again on the rise in the United States.  One of the main reasons given in support of tariffs is the displacement the tariff reductions of the 90s and 2000s supposedly caused.  These are real disruptions of the constitution of the nation that were caused by trying to fix other disruptions.  But the solution isn’t more disruptions; Smith and Tullock would argue against entering another trap.  

It shouldn’t surprise us that Smith has insights repeated by relatively more modern scholars.  In a 2017 Journal of Legal Studies article, University of Virginia law professor Paul G. Mahoney discusses all the ways that Smith’s insights from his Lectures on Jurisprudence found their way into the research of 20th century law and economics scholars.  Nobel Prize winner Vernon Smith and his coauthor Bart Wilson have repeatedly applied Smithian insights to solve problems in economics (see, for example, their book HumanomicsHere is a review of it by Maria Pia Paganelli.  That Smith’s insights are applicable to such wide-ranging fields as economics, law, politics, and psychology demonstrate what a polymath he was.