Murphy in the Library of Economics and Liberty

Here is a link to my latest column at the Library of Economics and Liberty.  A slice:

One last point on the national defense argument. If China, a national security threat and military threat for influence in the region according to President Trump’s economic advisor Peter Navarro were dumping steel in the U.S. market to gain some military advantage, the logical thing for the U.S. government to do would be not to encourage U.S. exports but, rather, to encourage Chinese imports. Since steel is a scarce resource, sending it abroad (i.e., encouraging exports) necessarily reduces the stock of steel in the United States, whereas imports increase it. If China is dumping, then it means that the product is being sent to the United States rather than being used in Chinese markets; for every unit of steel sent to the United States, that is one less unit that could be used for a Chinese war machine and one more for a U.S. war machine. The logical action for the U.S. government would be to purchase a lot of low-cost steel from China and simply stockpile it, thus depriving China of war materials while maximizing U.S. steel stockpiles. In the event of war, the United States would have a large stockpile from which to draw, while China’s would be reduced.

The Law of Demand in Action (or Why Monopoly Power is Fleeting)

Writing at Human Progress, Martin Tupy has an excellent article on the real effects of predatory pricing and monopoly.  Here is the upshot (although one should read the whole article.  It is excellent):

In a 2014 Council on Foreign Relations report, Eugene Gholz, an associate professor of public affairs at the University of Texas at Austin, revisited the crisis and found that the Chinese embargo [of rare earths to Japan] proved to be a bit of a dud.  Some Chinese exporters got around the embargo by using legal loopholes, such as selling rare earths after combining them with other alloys. Others smuggled the elements out of China outright. Some companies found ways to make their products using smaller amounts of the elements while others “remembered that they did not need the high performance of specialized rare earth[s] … they were merely using them because, at least until the 2010 episode, they were relatively inexpensive and convenient.” Third, companies around the world started raising money for new mining projects, ramped up the existing plant capacities and accelerated plans to recycle rare earths.

In other words, when faced with a sudden shortage, people compensated through other means.  It’s almost as if demand curves slope downward.

Monopolies are still subject to the whims of consumers.  They cannot raise their prices with impunity.  As prices remain high, people will innovate around them.  This indicates that the fear of predatory pricing, that a firm (or country) will seize market power and use it to jack up prices or manipulate people, are greatly overblown.