‘Stultum facit Fortuna quem vult perdere’
Fortune makes a fool of him whom she would ruin.
Publilius Syrus 1
There is a fundamental problem with Western academic economic theory which reveals a fundamental problem with Western intellectual theory and academia. It is not just political and economic hegemony that the US had, but also academic and intellectual hegemony.
Let us look more closely at the tariff issue as an example of this collapse.
We have three countries, A,B, and C.
They export and trade three goods 1,2 and 3 all priced at 100, total volume 200,000
They each have goods 80% of the components are unique to each country. Sales are 100,000 to each other (2) countries (Period -1) .
Step1 is the introduction of tariffs of 20% in country A. so that goods from country B and C, goods 2 &b 3, would now costs 120 in country A. There are two options that will be evaluated: option1 – the price effect is wholly taken by the consumers of country A.. Option 2 – is the price effect is wholly taken by manufacturers in the other country.
Step 2 In option 1 if the goods price in country A rises to 120, the quantity MUST fall, say to 80,000.
Now the manufacturers in countries B and C are faced with total sales of 180,000. For country B this is made up of sales of 100,000 to country C and 80,000 to country A, similarly for country C. This a serious loss of profit on sales to country A.
Step 3 Manufacturers in country B will seek in period 2 to increase sales to release the stock of 20,000 goods 2. It will not be able to increase sales to country A because of the high tariffed price of 120. Rather than that she will seek to increase sales to country C. If sales can be increased to 120,000 in country C by dropping the price by 5% to 95 then the total sales are back at 200,000. A similar choice faces manufacturers at country C.
Step 4: In option 2 if the consumer goods price in country A remains at 100 then sales price for country B becomes 80. Demand remains the same as before in country A but the profit for manufacturers in country B is much reduced if not negative and so the incentive to increase sales to country A is negative. On the other hand sales to country C are far more profitable than sales to country A. It becomes profitable to reduce sales to country A and make more sales to country C. From the manufacturer in country B’s point of view the most profitable option is to reduce sales to country A and increase sales to country C, even if this requires a reduction in price by 5%.
Ironically, the reduction of sales to country A was apparently the intention of tariffs so, as according to some, the reduction in sales was desired to increase local production in the US.
We should now consider a further point. Standard Western economics generally focuses on only two points: the effects on Country A and B. We need to consider the second order effects. What are the effects on imports in country B and C? If sales to country A reduce from 100 to 80, and the political intention of the US was to continue to decrease imports from country B, then country B must focus on sales to country C. But how is country C to pay for these increased sales by country B? An obvious answer is for county B to begin buying more from country C i.e. substituting purchases from country A with purchase from country C. This is not costing country B anything if everything is at world market prices but it is giving country C the purchasing power to increase purchases from country B. However, country C is faced with the same choices and wishes to increase sales to country B while reducing sales to country A. (For technical simplicity, we have remained in a world of barter.)
In this model of barter , country B and country C will reduce their imports from country A by 20,000 each in order to fund their trade partners increased sales of 20,000 to them. We have assumed that sales from country A are only 80% unique and at least 20% can be substituted by other countries. Overall sales by country A will reduce by 40 to 160. This reduction takes place without any introduction of retaliatory tariffs.
As Clarissa Hadden states the standard trope:
‘‘In the country that tariffs are imposed on targeted industries will face lower export demand. As their goods have become relatively more expensive in the importing country, it will lead to lower sales and lost market share, as consumers switch to relatively cheaper domestic goods. ‘ 2
As BCG then indicates the possibility of retaliation:
‘Tariffs alter the pricing dynamics of international trade. For example, they could raise the cost of imported goods, encouraging consumers and businesses to look for domestic alternatives. This may support certain domestic industries, but it can also contribute to higher prices for consumers and businesses, with second-order impacts on the economy and business confidence. Retaliatory actions from other countries may create a more complex environment for exporters and multinational companies to navigate. A collective escalation of trade barriers can also place a strain on the rules and norms of the global trading system.’3
Our model however has shown that retaliatory action is not necessary to produce the same result.
This failure on tariff analysis is not just about tariffs but is a tip of the iceberg on a larger issue. That core issue relates to another deep failure.
Western economics is based upon an idea of Comtean rationality. Human behaviour, particularly economic behaviour, can be determined by human interests. Laissez-faire was born in France through the adoption of the Chinese/Taoist concept of Wu-Wei. as Gerlach has shown. Wu-Wei emphasised the importance of ‘nonaction’. In the hands of Adam Smith this becomes the doctrine of a hands-off government and an invisible hand which will make all things good. By each actor seeking his own benefit they will, because of an invisible hand, produce a harmonious and optimal result.
Modern Western economics sought to prove this mathematically. This was a fundamental philosophical error. For any arbitrary line passing between points X1 -n a mathematical line can be drawn by formula. This mens that one can always map any historical data , which are often represented by a series of data points on a time field. This new mathematical formula is then claimed to have explanatory value. The first problem is that this formula will be seriously challenged to predict the next data point. A second and most important error is the concept that the mathematical formula represents rational decision making. Because the mathematical line follows conduct it is assumed it represents human causation. This is the core error. What is happening is that hidden assumptions are being built that allow the formulas to be interpreted using human interest as causative lines of interpretation. Western economists then get themselve drunk on the belief that they have now understood and can predict macro economic behaviour. When the hidden assumptions do in fact reflect an aspect of real present life economic predictions may be insightful. Whereas in medicine the pathways of action are based on chemical analysis.
This model shows that the likely result of generalised tariffs would be a decline in exports of the tariff wielding country and a diersion an substitution of trade by the other countries. It also highlights the failure of academic Western economics in confsimng mathematical mapping for explanatory work.
Endnotes
3. (Boston Consulting Group 2025)
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