The stainless steel crowd - companies and unions - took it on the chin the other day in a little-noticed episode that says a lot about Washington politics and the economic problems facing the nation: the persistence of inflation, growing protectionism and our tangled trading relations with other countries.

Washington increasingly is a battleground for economic privilege and protection. As inflation quickens, energy shortages deepen and trade competition intensifies, more bottlenecks that there is less output for everyone, even though each group feels, probably correctly, that it's better off with its own special privilege.

This may be one of the great conflicts of modern democracies: the better a political system performs in representing the economic interests of constituent groups, the worse it may be at managing its economy. Indeed, one economist, Mancur Olson of the University of Maryland, has speculated along precisely those lines.

Olson believes that one reason why Japan and Germany grew so and more groups inevitably will descend on Washington to plead their special cases.

The "invisible hand" is at work - in reverse. More than 200 years ago, Adam Smith, the great Scottish economist, first contended that the universal pursuit of self-interest would result in the greatest common good.It was the classic argument for an open economy.

But the same rule applied to political intervention in the economy may work backwards. The universal pursuit of special privilege - import quotas, fuel allocations, legalized monopolies - may so encumber the system with inefficiencies and administrative rapidly after World War II is that the war and its aftermath destroyed the effective political power of many small interest groups, reducing the inefficiencies they imposed on their economies. Political stability in the United States and Britain, he thinks, may have led to the opposite effect: the multiplication of protected economic subgroups and, consequently, sluggish growth.

Such possibilities make the consideration of individual cases - such as stainless steel - all the more difficult.

By itself, of course, stainless steel is no big deal. It constitutes about 1 percent of total U.S. steel output and differs substantially from regular steel by its 11.5 percent chromium content. This makes it shiny, durable and resistent to corrosion at high temperatures, giving it wide use in consumer goods (cars, appliances and flatware) and industrial plants (nuclear reactors, chemical plants, refineries).

Still, there wasn't much political mileage in President Carter's recent decision not to grant the industry a three-year extension of import quotas. The United Steel-workers of America and the industry's 22 companies desperately wanted the quotas renewed and were strongly backed by the 165-member Steel Caucus in the House and the 38-member caucus in the Senate. And the impact on consumer prices of extending the quotas would have been small and invisible to the average consumer.

Viewed in isolation, protectionism often seems attractive. For stainless steel makers and workers, it performed spectacularly. Under the quotas, imports were reduced slightly in 1976 and could grow only 3 percent a year. Meanwhile, as the economy recovered from the 1974-75 recession, demand rose sharply.

The combination of these factors led to a large expansion of domestic production (up 60 percent since 1975), operating profits (up 280 percent) and jobs (up about 20 percent). Because the industry also started with high spare capacity, price increases were modest. The companies earned higher profits from higher sales.

Nor did the companies misuse the opportunity provided by protectionism. Instead of simply enjoying a respite from foreign competition, the industry shut down some of its less efficient plants and also modernized. Labor productivity has climbed significantly.

Finally - as the industry argued - any lifting of quotas would probably result in an immediate increase of imports. The world's stainless steel industry is generally reckoned by government officials to be operating at only about 70 percent of capacity. Without quotas, the U.S. International Trade Commission estimated, imports might rise from last year's 12 percent of domestic consumption to as high as 18 percent.

That Carter rejected these arguments - he's phasing the quotas out over the next eight months - is to his credit.

In microcosm, the stainless steel industry exemplifies the strains facing the economy at large. Stripped of its subtleties, the steelworkers want protection from imports so that higher labor costs - up 35 percent between 1975 and 1978 - can be passed along in higher prices without jeopardizing jobs. Companies want protection so that higher prices will maintain investment and profits.

This is the heart of the inflationary process: the wage-price spiral. With most of the spare capacity to make stainless steel gone, higher costs are almost bound to lead to higher prices - unless checked by competition. Naturally, workers and firms would prefer to avoid that check through collective political aciton.

Almost reflexively, they claim such protection as a natural right, arguing that foreign competition is increasingly "unfair." How, they ask, can profit-making U.S. companies compete with government-owned or -supported firms that subsidize or "dump": sell their products here at lower prices than in their home markets, implying captive sales there?

Given the increasing involvement of governments in their domestic industries, this is a legitimate question. But Americans refuse to see the possibility of answers other than their own.

In industries with worldwide overcapacity, such as steel, depressed prices and profits (or losses) are normal. And just because a government puts money into a company doesn't mean the company is necessarily a state welfare agency. Getting into any new business is an inherently risky, costly process. Private firms, too, usually suffer start-up losses.

But this distinction - between normal economic losses and continuing social subsidies - is difficult to make in both theory and practice. Combined with the natural drive of workers and companies to protect themselves, such ambiguities will continue to make economic life more political. Government intervention abroad inspires government intervention at home, And, sadly, if politics work better, the economy may work worse.