Economics 101?

I always have had a problem with economics. It inherently assumes some basis rules that humans will follow when producing and selling. Having spent time across a wide base of businesses there is only one thing I know; competitors can do really strange things.

Now in a piece in Cafe Hayek the author notes:

In one of the most astonishingly fallacious assertions in an essay teeming with astonishingly fallacious assertions, ..... writes “Critics claim tariffs will raise steel prices.  That’s questionable.  The opposite is more likely to happen, industry experts suggest.  Tariffs will shift demand to domestic steel, enabling plants here to operate closer to capacity.  That will bring down the unit price of American-made steel – not raise it.  That’s Economics 101” ... Here are relevant lessons that are really taught in Economics 101 ... First, shielding producers from competition makes the outputs they produce more scarce, thus raising prices.  Second, if it is true ..... that untapped economies of scale are available by expanding outputs, and that such expansions will lower prices and enable (in this case) American steel and aluminum producers to profitably charge lower prices than they now charge, then American steel and aluminum producers will so expand their outputs without any government prodding.  So why have they not yet done so? That is.... the current existence of untapped economies of scale is true, then the men and women who currently run American steel- and aluminum-producing firms should not be rewarded with protection from competition but, instead, fired for gross incompetence.

 First, I guess if you make more perhaps the price would go down. But that depends on how rational the manufacturer is. They often do not do what one would expect. How do they set a price? Tariffs are just a plain tax on one segment of suppliers. If that supplier can deliver at a lower price then the tax brings the effective price higher. Got that, I think. But is the price related to the cost? Is the supplier subsidized?

The second argument is that there are scale economies and if so then the domestic manufacturer could use them to compete with an import. This again assumes that the management is willing to risk this because the competitor could drop their prices and it becomes a price death spiral. No logic, just price competition. Then the customers may start to hedge on futures against price changes and so forth.

The problem with economics is that managers are not as rational as the economists think they should be. The often do "stupid" things, which leads to results which are against "theory" and then the other side does similar things.

The true argument is not looking at this dispassionately as an economist but trying to understand the management and their motivation, as well as the customer, as well as the financial markets. It is truly messy! That is why I find economics too neat for a messy world.