For more than a century, economists have been studying ways to make the law more efficient. Law and Economics Journal (a premier subject-specific journal) was founded in 1958, at the beginning of the 20th century.Number Economists of the 21st century Alfred MarshallA.C. Pigou, John Maynard Keynes, and many others studied how economics could influence legislation to improve outcomes.
But moving from “chalkboard” economics to the real world is a difficult endeavor. From Soviet grand planning to more mundane “market tweaks” like carbon taxes, we have seen economic policies fail to achieve their goals time and time again. There is a lot of literature on these failures, including knowledge problems identified by Hayek, public choice problems such as rent-seeking and other collective decision-making problems that readers of this blog will no doubt be familiar with. But there is also the problem of translating theory into something actionable. In economic theory, many terms are a bit different from common usage. Translating these terms into law is difficult. The example of dumping demonstrates this point.
A few words of explanation before we begin: I’m assuming here that the goal of legislation is improving economic outcomes defined in the neoclassical sense, i.e. maximizing total welfare. If this assumption doesn’t hold, my general point about the difficulty of reconciling legislation and goals remains the same, but the example changes.
Dumping is when a company sells below cost in order to drive out competitors and gain market share. It is argued that such practices are anticompetitive and lead to poor economic outcomes. Economists generally reject this argument (in fact, One of the first papers In Law and Economics Journal This is a classic work that dispels the myth that dumping is anti-competitive and not welfare-maximizing. To this end, there are laws at both the US federal government level and at the international level (World Trade Organization) that prohibit dumping by domestic and foreign companies.
but, Economic dumping (i.e. dumping as defined in economics) Legal dumping (i.e. dumping as defined by law). In economics, dumping is when a good is sold at a price below its average total cost. To economists, “cost” includes both explicit (monetary) and implicit (opportunity) costs. Explicit costs are easy to identify, while implicit costs are much more difficult. Despite having a clear definition, economic dumping is difficult to identify. Therefore, when laws are enacted to improve economic outcomes, lawmakers must use something more measurable. This is the legal definition of dumping.
Legal dumping is a whole different story. Legal dumping is simply when a product is being sold for less than the “fair price.” But what is the fair price? The Department of Commerce and the U.S. International Trade Commission (the two agencies responsible for investigating unfair international trade practices) have three ways to determine the fair price: 1) the price of the product in your home country, 2) the price of the product in the third country.rd 3) What is the “as constructed” price of the item (the cost of manufacturing the item plus a markup determined by the Department of Commerce)?
Please note that the legal definition of dumping is very different from the economic definition. In fact, the two represent very different practices. From an economic perspective, deviations from any of the three descriptions of “fair value” do not imply unfair or anticompetitive behavior. In fact, deviations may be competitive. and Welfare improvement! We must assume that prices vary across markets (demand and supply vary across regions). Furthermore, while economics considers the price of a good to arise according to marginal benefit and marginal cost, the legal definition of dumping assumes that the price is known in advance and that the function is simply an explicit cost.
The laws on dumping are vague, making it easy for corruption to occur. Companies use dumping as a hammer to competitionespecially Domestic Competition. The very measures meant to prevent unfair practices end up encouraging them. In short, by translating economic theory into law and attempting to positively steer outcomes, the law is producing the very outcomes it was meant to prevent! (For a detailed discussion of the literature on the anticompetitive nature of antidumping laws, see Criticism of free tradeChapter 5.
Someone might argue: “But you, John, are a cunning and handsome devil. It just shows that the law can be further strengthened. There is nothing difficult here.” But I don’t think so. Any good scientist accepts the fact that there are many unmeasurable things that influence our behavior. In economics, cost is one of those things. Costs are temporary, psychological, and subjective. Costs and their interpretation vary from person to person and from situation to situation. It is impossible for an outside observer to understand them. advance Knowing what the costs to others are. In fact, decision makers may not be aware of the costs they face. Legislation Must The reliance on proxy indicators such as accounting costs means that the information cannot be interpreted in the same way. As a result, translating economic theory into actionable law is a Herculean task.
Dumping is a particularly clear example of the difficulty of translating theory into law. But even when things go perfectly, there are always unintended consequences. On trade, the explicit purpose of the Trump-Biden tariffs was to raise domestic commodity prices to discourage imports. That worked as intended. But Reduction in exports Also occurredFinally, let me introduce what I call the Jordan Law of Unintended Consequences (named after fantasy author Robert Jordan): “The Law of Unintended Consequences is stronger than any written law. Whether or not what you do produces the result you want, it will have at least three unexpected, and usually unpleasant, consequences.” Path of the Dagger (Robert Jordan, p. 334).
John Murphy is an assistant professor of economics at Nicholls State University.
