Meet Carl. He’s a shoemaker in the small country called Hypothetical. If you have read this, you’ve already become acquainted with him.
The country of Hypothetical has strict protectionist policies that shield national shoe manufacturers, including Carl, from foreign competition—particularly because foreigners have a comparative advantage in that field. The cheap foreign imports might strike a death blow to Hypothetical’s shoe-making industry; more than likely it will put Carl out of business.
Unfortunately, shoes are pretty expensive in Hypothetical. Around a tenth of the population walks around barefoot because of it. Another 89.5% of Hypothetical’s residents fare quite nicely, although they say they spend more on shoes than they wish.
When Hypothetical’s parliament decides to reduce import tariffs and restrictions, suddenly cheap shoes begin flooding the country. Some of them are low-quality, mass-produced nightmares that most would never purchase, but others are of comparable or higher quality than Hypothetical’s own products. Unfortunately for Carl, all of these shoes, even those of the highest quality, are cheaper than his own.
Soon only Carl’s most faithful customers are coming to his shop, now considered to have obsolete, over-priced shoes. Most consumers now buy from Nike, Carl’s main competitor.
Carl is forced to close shop.
This is a huge blow to Carl (and to his most faithful customers, who prefer his products). His friends, acquaintances, and anyone who hears his story can’t help but feel sorry for him: however, none of these folks are willing to stop buying from Nike. They would rather have shoes for the whole family than go back to scrimping for months to buy a set of boots from their friend Carl. They can’t go back to buying from him.
Carl’s means of income has basically collapsed before his eyes. His options are not very lucrative compared to his previous job: he narrows it down to either working for Nike or learning a different trade. Obviously this is a huge blow to him and his family.
Freeing up international trade has outstanding and worthwhile positive effects—as mentioned here—but it also has painful effects for some manufacturers. Overall, trade liberalization is beneficial; but as with every decision, there are some negative side effects. Oftentimes libertarians and capitalists downplay the fact that some will suffer when such trade decisions are made and that there are detrimental situations that can result from freeing up international trade.
In the end, the consumers and the 10% of Hypothetical’s citizens who had previously gone barefoot benefit, Carl is eventually scraping along in some other area, and the economy as a whole is on the rise.
Parliament, was it worth it?
Ask Carl and his fellow manufacturers, and for them, it’s no fun. In conclusion, the free market is not perfect nor is it painless. Sometimes positive reforms are agonizing to portions of the economy: cutting government spending has a detrimental effect on IRS agents—but that doesn’t mean cuts are unfounded or unnecessary, nor does it mean that the entire economy will hurt for it. Free market truths like competition, supply and demand, and pricing are other examples of occasionally non-enjoyable aspects of capitalism that are hurtful to some and beneficial to the rest—not ideal, but better than anything else available to mankind. Think of what happened to the United States piano-making industry, the horse-drawn buggy industry, the record industry, and even cassette tape manufacturers: innovation, improvement, and a better world at the expense of buggy-builders.
Carl deserves our sympathy. He’s an example of the effects of real-life economics, which can be unpleasant business. But as for the newly-shoed poor and the liberated consumers, they’re pretty ecstatic about Nike. You should be, too.