There is a modern version of Adam Smith’s famous story of the beaver and the deer: if abandoning the production of two deer in the woods allows hunters, with the resources thus released, to capture one beaver, then there is an exchange ratio in the woods of two deer for one beaver; this is the opportunity-cost ratio.
If market prices do not correspond to this ratio, and if everyone is free and has the same opportunity to hunt beavers or deer — this is the perfectly competitive situation — resources will shift from whichever occupation is less profitable to whichever is more profitable, until the market price corresponds to the opportunity-cost ratio.
Then, if beaver producers join together in a monopoly and limit the quantity of beavers brought to market, one beaver may be exchanged for more than two deer in the market. Beaver production will be abnormally profitable, since the monopoly is able to prevent the unfortunate deer producers from entering the more profitable business of beaver production. Under these circumstances, there is clearly an implicit grant from deer producers to beaver producers.
As always when we look at the long-term dynamics of the situation, the case is less evident. It may be that the security and small surplus that the monopoly of beaver producers has allowed them to obtain — of course at the expense of deer producers — is used for research and development of beaver-production techniques, with a resulting improvement in that industry’s productivity that otherwise would not have occurred.
These improvements may even extend, according to the benevolent principle of external economies, to the deer industry, meaning that in the next generation everyone’s productivity will have increased and everyone will be richer. In this case, the structure of implicit grants appears to be a grant from the deer producers of one generation to the whole society of the next generation, including, of course, the children of the unfortunate deer producers of the first generation.
This seems somewhat more defensible than the case of mere grants from deer producers to beaver producers within the same generation. In fact, Schumpeter defended monopoly in this way, and there is certainly some indication that highly competitive industries, such as textiles, lag behind in technological development and do not carry out much research to increase their productivity.
On the other hand, sectors with a certain amount of monopoly power or political power, such as agriculture, and which therefore receive grants, either explicitly, as public subsidies, or implicitly, through monopoly prices, quite often use this grant to increase future productivity. All these considerations are questions, not answers: questions that we must ask in the real world. We cannot make any a priori assessment.
Another case very familiar to exchange economists is the tariff. The effect of a tariff has been widely analyzed by neoclassical and welfare economists. Here again, short-term redistributions are fairly evident, while long-term effects are somewhat uncertain.
A tariff is a tax on the import of a given commodity. It generally benefits producers and harms consumers of that commodity within the country, and harms foreign producers. It therefore represents an implicit grant from domestic consumers and foreign producers to domestic producers and foreign consumers.
Under conditions of universal full employment, it can be shown that the total benefit of the tariff is smaller than the total harm; that is, what the unwilling donors give is more than what is received by the recipients. Of course, if we start from a situation of unemployment, the case may be different. It is possible to imagine that the tariff may result in a general increase in world production, in which case the grant will be positively efficient; that is, what is sacrificed by the donors will be less than what is received by the grantees.
In the long run, the distribution of implicit grants may also change. If the protected sector has free entry, then the above-normal profits induced by the tariff will attract new firms and the returns of the sector will fall back to normal. Thus, they will not be better off, and domestic consumers will be somewhat worse off.
Foreign producers, if there is free exit, will ultimately not be worse off, since resources can be transferred out of the sector, bringing its profitability back to normal. Foreign consumers may be somewhat better off, and the final result may be, quite ironically, a small implicit grant from domestic consumers to foreign consumers.
We frequently encounter this principle, which might almost be called “implicit irony,” since almost all acts designed to benefit or harm one group of people often end up benefiting or harming other groups. For this reason, as we shall see, economic conflict is extraordinarily difficult to systematize.
