The standard economic argument against tariffs is that, by eliminating foreign competition, they simply raise prices for consumers. While true, this argument barely scratches the surface of the problem and overlooks a critical reality: tariffs and protectionist policies do far more than just raise prices—they block the entrepreneurial discovery process that is essential for progress.
The problem with this perspective is that it is rooted in a static view of competition, drawn from mainstream economic models of perfect competition. This model defines competition as a market with numerous producers selling homogeneous goods, where none have any influence over price. Firms are seen as mere price takers, responding to market conditions rather than actively shaping them. In this framework, barriers to entry are assumed to only raise prices—either by reducing supply or increasing production costs—without fundamentally altering market dynamics.
However, this is a deeply flawed understanding of competition because it assumes perfect information—that all market participants already possess complete knowledge of prices, products, and opportunities. By assuming that all relevant knowledge is already known, this framework eliminates the very need for entrepreneurial discovery—the process through which individuals notice and act on gaps in the market, introducing innovations that drive progress.
In contrast to the static view of perfect competition, the theory of dynamic competition—championed by Israel Kirzner and Jesús Huerta de Soto—shows that real-world markets are driven by entrepreneurial discovery, not just price-taking. Entrepreneurs do not operate in a world of perfect knowledge; rather, they constantly uncover and create new information through their actions.
Kirzner and de Soto argue that markets are full of unnoticed inefficiencies and hidden gaps—where unmet needs and untapped resources remain disconnected. The marvel of the market process is that it translates these inefficiencies into profit opportunities. Competition, in this framework, is the process of alertly scanning the market for overlooked opportunities. And once an entrepreneur discovers and exploits an opportunity, it ceases to exist for others. By doing so, they are constantly discovering new solutions.
But here’s the key insight: the knowledge required for entrepreneurial discovery is not static, explicit, or centrally available. It is subjective, tacit, dispersed, and constantly changing—meaning it cannot be deliberately searched for in the way one might look up information in a database. So how do entrepreneurs find it? This is another marvel of the market: it transmits entrepreneurial knowledge through prices. Price fluctuations signal where opportunities might exist, guiding entrepreneurs toward inefficiencies waiting to be resolved.
So what does this have to do with tariffs and protectionism? Tariffs disrupt the dynamic process of entrepreneurial discovery in two key ways: first, by distorting price signals, they obstruct the vital flow of entrepreneurial information; second, by shielding domestic industries from competition, they stifle the creation of new knowledge that drives innovation and progress.
Growing up in Iran, I’ve seen firsthand the devastating consequences of protectionist policies. The government has long justified tariffs and trade barriers in the name of self-sufficiency, insisting that we don’t need foreign competition to thrive. But the result has always been the same: the suppression of entrepreneurial discovery, which prevents economic progress.
Iran’s heavily protected auto industry is a prime example. For decades, high tariffs have shielded domestic carmakers like Iran Khodro and Saipa from foreign competition. The result? Low-quality, overpriced cars and a road traffic mortality rate significantly higher than the global average. Without foreign automakers pushing the market forward, domestic producers had no incentive to innovate. They remained blind to new technologies, efficient production methods, and evolving consumer preferences. This same pattern extends to agriculture and other industries.
But the real damage goes beyond inefficiency and high prices—it’s the lost innovations and improvements that never happened. By blocking competition, protectionism prevents aspiring entrepreneurs from entering the market with better ideas, leaving society stuck in stagnation instead of progress.
Ironically, the government’s advocacy of self-sufficiency follows the same logic used to dismiss the impact of international sanctions. We are told that sanctions don’t matter because Iran is rich in resources and can produce everything it needs. But in reality, sanctions have cut off crucial knowledge and technological exchanges that could have advanced our industries. The result is economic decline—not due to a lack of resources, but due to a lack of access to the entrepreneurial discovery process that competition enables.
Tariffs, in this sense, are domestic sanctions—self-imposed barriers that block the flow of knowledge, stifle entrepreneurship, and sabotage economic progress. They stem from the same autarkic mindset that has kept Iran economically stagnant despite its natural wealth.
If we fully understand the significance of the entrepreneurial function, we will realize that suppressing it is a tragedy which means gaps will remain unnoticed and needs will remain unmet. Every restriction on trade and competition is a restriction on the human process of discovery—the process that has lifted societies out of poverty and created unprecedented prosperity where it was allowed to flourish.
Iran’s economic struggles are not just the result of external sanctions but of internal barriers that function the same way. Tariffs do not protect—they cripple. They do not strengthen an economy—they lock it in place. And worst of all, they ensure that the solutions to our problems remain in the unknown, undiscovered, and unrealized. Iran’s experience proves that economic progress does not come from protectionism—it comes from the freedom to discover
