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" LIBRARY

UNIVERSITY OF
CALIFORNIA
SAN DIEGO



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17SS
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THE ECONOMIC BASIS



OF



PROTECTION.



BY



SIMON Nf PATTEN, Ph.D.,

PROFESSOR OF POLITICAL ECONOMY, WHARTON SCHOOL OF FINANCE AND ECONOMY,
UNIVERSITY OF PENNSYLVANIA.



PHILADELPHIA!

J. B. LIPPINCOTT COMPANY.

1890.



Copyright, 1890, by J. B. Lippincott Company.






CONTENTS.



CHAPTER PAGE

I. — Introduction 5

II. — The Premises of the Present Discussion 10

III. — The Growth of Economic Doctrine 17

IV. — Fallacies disproved by Time 27

V. — Natural Monopolies fostered by Free-Trade ... 45

VI. — What fixes the Kate of Wages 54

VII.— The Cost of Labor '. 64

VIII.— The Cost of a Passive Policy 71

IX. — Where Foreign Commerce is a National Loss . . 81

X. — Obstacles to Economic Progress 94

XL— The Future of Raw Material : 106

XII.— The Consumption of Wealth 114

XIIL— The Criterion of Efficient Production 126

XIV. — Shall the Ideal of American Civilization be Na-
tional or Cosmopolitan? 136



THE ECONOMIC

BASIS OF PROTECTION



CHAPTER I.

INTRODUCTION.



The discussion of international trade has always ex-
cited much interest, and must, for a long time, still
command the attention of all thoughtful citizens. A
great variety of arguments have been presented to the
public and many of them are already fully discussed.
Yet there seems to be a place and an opportunity at the
present time for a new discussion of this important
problem upon a more fundamental basis than is usually
found in former treatises.

We do not now need new facts so much as a discus-
sion of the relation of these facts to one another, and
the bearing of all this class of facts upon economic
doctrine. Above all, we need a discussion on a purely
economic basis. In the past very few of the writers
upon this subject have carefully separated the economic
arguments against protection from the moral and politi-
cal, and in this way the former is subordinated to the
latter. Many writers start also from the assumption

l* 5



Q THE ECONOMIC BASIS OF PROTECTION.

that the most fundamental right of property is that of
free exchange. They thus introduce premises which
are appropriate to other fields of thought. Deductions
from political dogmas are often substituted for a real
economic discussion, and in this way clear thinking is
subordinated to inherited feelings. Others assume a
moral tone, and assert as a fundamental doctrine that
protection in any form is a robbery, — that it takes from
one individual what it gives to another and thus
violates the rights of all. Such arguments, how-
ever great a force they may have upon persons of a
particular political and moral education, are really not
economic in their nature, and should be separated from
strictly economic discussions so that the real bearing of
industrial facts may become manifest.

My purpose is also to show the growth of economic
thought in its relation to the doctrine of protection.
There has been a gradual change in the fundamental
principles of political economy since Adam Smith first
brought the doctrine of free-trade into prominence.
Many of the doctrines of Adam Smith, upon which
his theory of free-trade rests, have been displaced by
other doctrines more in harmony with the present con-
ception of the doctrine of protection. Free-trade by
sinking into a creed has lost its scientific basis.

The older doctrines of protection were short-sighted,
in that they sought for protection merely for specific
ends. Some writers having in mind the growth of
population advocate protection that the nation of which
they form a part may grow more rapidly in population,
thinking that with the growth of population will come



THE ECONOMIC BASIS OF PROTECTION. 7

that growth in material resources upon which national
prosperity depends. Others again have emphasized
national independence, and have sought to show how
necessary it was for national welfare to be independent
of foreign nations in all important departments of
production. This point of view was especially impor-
tant at an earlier time, when the danger of war with
foreign nations was more prominent than at the present
time. Another class of writers have emphasized what
may be termed the " infant industry argument/' and
say that new industries need the aid of the government
to develop them in order that they can stand the com-
petition from foreign countries. This argument as-
sumes that the nation to which protection is applied
is less advanced in civilization than other nations with
which it has commercial relations, and that it is de-
sirable on the part of the new country to assimilate the
conditions with foreign countries.

These various arguments have had great force at
particular periods of a nation's development, yet they
are not sufficient in themselves to form the ground-
work of economic doctrine. We now need a systematic
presentation of all these points of view, so that the
thought which lies at the basis of all of them may be
clearly seen. The new point of view should include
all these cases, and also be able to show the principles
upon which they rest. Protection now changes from a
temporary expedient to gain specific ends to a con
sistent endeavor to keep society dynamic and pro
gressive. Protection also ceases to be an isolated ex-
ception to the general passive policy which it has been



8 THE ECONOMIC BASIS OF PROTECTION.

popular to advocate, and becomes a part of a fixed
national policy to increase the value of labor with the
increase of productive power, and to aid in the spread
of knowledge and skill and in the adjustment of a
people to its environments.

I do not advocate protection in the case of our own
nation, for example, because we are a backward coun-
try needing a special means to bring us up to the level
of more progressive nations. In this respect I differ
from the older economists who advocated a protective
policy. They seem to imply that it is good for the
American people to approximate European conditions.
On the other hand, I would differentiate as much as
possible our industrial conditions from those of Europe.
We should not accept the ideal of European civiliza-
tion as that best fitted to American conditions. We
need most of all a new ideal which will conform to the
industrial phenomena which have become prominent in
America. It is especially important that we should
keep in mind that an ideal growing out of present
American conditions must harmonize with the dynamic
state of American society. In this respect our ideal
must stand in sharp contrast with the static ideal
advocated by most free-traders. The older theories of
economics have always pushed to the front the concep-
tion of a static society in which all the various elements
would harmonize, and thus form the highest state of
civilization. The ideal that I wish to emphasize, on the
contrary, is based on the changing dynamic conditions
which are necessary for any people to pass through in
its progress towards the highest possible social state.



THE ECONOMIC BASIS OF PROTECTION. 9

A dynamic theory of social progress is quite distinct
from a static theory of a passive industrial state. I
shall sharply oppose the ideal of the one theory to that
of the other, and in this way make prominent those
conditions which force nations to become more pro-
gressive, and to overcome the obstacles which tend to
bring them prematurely into a static state.

Contrary as it may seem to popular opinion, the
theory of a subject must always be developed previous
to any intelligent study of the facts. The truth of this
point of view has been verified by past experience,
and will find additional proof in the future. Just as
the cosmopolitan theory, advocated by Adam Smith,
upon which free-trade is based, was a theory for a long
time before it was carried into practice by the English
people; so at the present time believers in protection
need first of all a consistent theory of the causes of
national progress, so that all the facts with which we
are familiar may be brought in harmony with this
theory and thus form its verification in experience. A
leading purpose, therefore, in this essay, will be to
present an ideal of a society in a dynamic condition as
counterpart to the ideal of a static state. I shall feel
satisfied if I succeed in showing that such an ideal
corresponds to the leading features of American in-
dustrial conditions and is in complete harmony with
the best development of our industrial resources.
Whether we shall have a static or dynamic society is
really the centre of the discussion about the tariff. All
other issues are secondary to this, and can be decided
only when the main issue is out of the way.



CHAPTER II.

THE PREMISES OF THE PRESENT DISCUSSION.

It will be seen, from what has already been said, that
I am not a believer in the theory that there is but one
system of political economy, the doctrines of which
hold true for every civilization. Each nation in its
own industrial conditions has perhaps all the economic
causes at work which influence any other civilization,
yet the relative importance of each of these causes varies
with the industrial condition of each people. Not only
is this true, but the prominent causes operating in any
nation at one time are not likely to be the same as the
prominent causes which have operated in that nation
at a much earlier period or will operate in the same
nation in the distant future. For this reason, if we
wish to have the economic policy of any nation corre-
spond to the actual social conditions which are promi-
nent in that nation, it is not necessary to start with an
examination of all those theoretical causes which might
influence the economy of any nation. It will lead to
much better results if we confine ourselves primarily to
those causes which are prominent in the nation the
industrial conditions of which it is our purpose to in-
vestigate.

The basis of an American political economy should
result from an examination of the present economic
10



THE ECONOMIC BASIS OF PROTECTION. \\

environment of the American people. We have promi-
nent in our present social conditions' many economic
causes, which although they may not be new, yet they
never have been the leading characteristic in the economy
of any people before the present time. The theory
which I shall advance will make certain assumptions as
to the prominent facts in American economy, and these
assumptions I wish to bring forward in an orderly
manner, so that the limitations of the discussion upon
which I am about to enter may be clearly seen.

First, I shall assume that the American people are
in a dynamic state. There is at the present time a
constant growth of population, and hence an increased
number of laborers must find employment in some way.
We must therefore continually seek for new oppor-
tunities for labor in which this increase of population
can find employment. I shall, in addition, assume that
the American people are in a more dynamic state than
that of other competing nations. Many of the obstacles
which keep the people of Europe static have little or
no force in America at the present time. We are not
bound down by the necessities of the military rule, nor
have habit and custom that force in keeping the people
in their old lines of occupation that is true of European
countries. As a result, the American people should
be more progressive than those of Europe. The soil
we occupy is newer than that of Europe, the mines of
which we make use are superior to those of foreign
countries, and these conditions, coupled with the spirit
of activity which fills the American people, should
push us along into a higher state of civilization much



12 THE ECONOMIC BASIS OF PROTECTION.

more rapidly than it is possible for the people of older
civilizations to advance.

Second, I shall assume that the American people are
not at the present time adjusted to their economic
environment. A large part of the inhabitants of
America have come from foreign countries, and even
those whose fathers or perhaps grandfathers were born
upon American soil have not yet lost those habits and
customs, those modes of thought, and those articles of
diet to which their ancestors were accustomed while in
Europe. Our agriculture must be dissimilar to that of
Europe, because our climate and soil are different.
The crops that flourish in Germany, France, and Eng-
land are not those best adapted to American soil. Even
the clothing which European nations use are not of
that character which is best suited to American climate.
The winters are not as cold as ours nor are their sum-
mers as warm. As a result, they can be comfortably
clothed in a way which would be entirely unsuited to
American conditions. In fact, Americans must adjust
themselves to a tropical climate in the summer and an
arctic climate in the winter, and in the end this
necessity will force them to modify their clothing in a
way that will make it quite distinct from that of
Europeans. Many other radically dissimilar economic
conditions to which American people must adjust them-
selves might also be pointed out which will make the
typical American of the future different from the typical
European.

Third, I shall also assume that at the present time
there is a strong tendency in America to increase the



THE ECONOMIC BASIS OF PROTECTION. 13

share in the distribution of wealth which goes to rent
and other natural monopolies. Economic theory has
not yet given due consideration to the strong tendencies
which are now present in American conditions to
increase the share of those who are protected from
competition at the expense of those who must compete
with one another upon equal footing. If American
conditions are such as to bring forward this tendency
to a much greater degree than has been shown in any
previous civilization, there must be, on the part of the
American people, a corresponding change in American
economic policy so as to adjust themselves to these
new conditions.

This premise is of especial importance in a dis-
cussion of the tariff, because it breaks down the chain
of reasoning by which the free-trade position is up-
held. Where producers and consumers deal directly
with one another cheap production results in cheap
commodities. Increase the waste of distributing com-
modities, or let strong monopolies grow up between
producers and consumers, and cheap production may go
hand in hand with high prices to consumers.* Under
these conditions increased cheapness on the part of pro-
ducers does not give a proportional benefit to con-
sumers. It may be wasted in useless competition or
pass into the hands of the monopolies which free com-
merce has created, by separating the producer so widely
from the consumer.

My conclusions, therefore, are not meant to be gen-

*See my " Kational Principles of Taxation," page 4.
2



14 THE ECONOMIC BASIS OF PROTECTION.

eral ; nor shall I emphasize those general economic
theories which are true of all civilizations. I shall
restrict myself at the present time to a society in
which these premises to which I have referred are true.
Any marked change in these premises would bring into
prominence a new series of economic problems and
make invalid the conclusions which I draw from them.
If I have correctly analyzed the salient features
of present American civilization, then the conclusions
which I shall draw are valid of American conditions.
It is, therefore, quite possible that the best economic
policy for America may be very different from that of
other nations. In fact, this is what I should expect.
I do not desire to have the conclusions which I shall
present judged by foreign conditions, because our
economic conditions are so different from those of any
foreign nation that an American industrial policy must
be of a distinct type from that of other nations. To
show, therefore, that free-trade has been successful in
England does not prove that it would be beneficial to
us. The success of this experiment in England was
due to particular causes which cannot have much foroe
in America at the present time. Previous to that time
there had been no free-trade nation, and all civil-
ized countries needed a world's market. We all gain
by having the various national economies brought into
contact along many lines. This was impossible so long
as every nation followed a restrictive policy. England
was the first nation to open up a world's market, and,
as a result, not only all England became more prosper-
ous, but all other nations acquired an advantage from



THE ECONOMIC BASIS OF PROTECTION. 15

the free markets of England. The world now has
such a market. A second market of the same kind
would not have that effect on the development of in-
dustry that followed the opening up of the English
markets. One nation may make a great gain by put-
ting itself in contact with other civilizations and be-
coming a market for their surplus ; but a second nation
would find the field occupied. At most, we can hope to
divide this trade with England, or po-sibly to undersell
England in such a manner as to absorb this whole trade
to ourselves. The mere displacement of England by
America, while it might be of some advantage to par-
ticular classes in America, would not be a gain for the
whole world. The world's progress is now dependent
upon the development of internal resources, and not
of external trade. We need a systematic development
of all those opportunities for labor with which each
country has been endowed by nature. We must make
a better use of all our natural resources if the world
is to advance to a higher industrial state. Progress
must come from the development of large continental
nations, rich in natural resources. Small nations, de-
ficient in many of those natural resources needed for a
nation's development, must rely largely upon trade to
obtain those things in which their resources are defi-
cient. To such a nation the profits of trade can to a
large degree be accepted as the criterion of national
prosperity; but large continental nations must look
nearer the real source of national prosperity to obtain
their criterions. They must become successful by the
development of their natural resources. Their land



16 THE ECONOMIC BASIS OF PROTECTION.

and their mines must be opened up and the productive
capacity of each laborer must be increased. Only after
all the possibilities of land have been carefully in-
vestigated and the industrial qualities of the people
carefully examined, can they discover what national
policy will bring to them the greatest industrial pros-
perity.



CHAPTER III.

THE GROWTH OF ECONOMIC DOCTRINE.

So little attention has been paid to the history and
gradual development of economic theory that the pub-
lic have very misty ideas as to the relation of free-
trade to economic doctrine. The development of the
doctrine of free-trade is largely due to Adam Smith, or
at least we may say that he was the first one to present
it in a systematic way to the thinking world. Since
the groundwork of the creed of free-trade is to be
found in his writings and those of his disciples, I de-
sire to examine into the premises from which they
start, so as to show in what ways these doctrines have
been undermined by later economic progress.

The criterion of prosperity which Adam Smith uses
is that of profit of the individual. If an exchange is
profitable to the parties directly interested, he assumes
that it is beneficial to the nation. In this way the in-
dividual profit of producers becomes a criterion of na-
tional prosperity. Under the new conditions of pro-
duction which have arisen since the time of Adam
Smith, a sale profitable to the producer does not indi-
cate that it has been also advantageous to the public in
the way that a like sale for a corporation would indi-
cate the advantage of all the stockholders. We have
no means by which the advantage derived in an ex-
b 2* 17



18 THE ECONOMIC BASIS OF PROTECTION.

change can be divided among the various groups of
producers in the way a stock company divides the pro-
ceeds of its sales. In fact, it can often happen that the
advantage of one party in an industrial operation may
result in a disadvantage to the other interested parties.
Adam Smith, in his investigations of the productive
power of nations, also confines himself too exclusively
to the division of labor, and continually emphasizes the
importance of this feature of modern production. He
regards the division of labor as the cause of national
prosperity. Subsequent investigations show the disad-
vantages of the division of labor, and that the increase
of productive power is often antagonistic to the use of
men and of land for one thing only in the May which
Adam Smith advocates.

Passing from the position of Adam Smith to that
of Ricardo, we have a great advance in economic doc-
trine. Ricardo also was an advocate of free-trade, and
some of his arguments are particularly emphasized in
free-trade discussions. It is, however, unfortunate for
the validity of these arguments that they are based on
that part of the doctrine of Ricardo which has since
been discarded by modern economists. The economic
man of Ricardo harmonizes nicely with the free-trade
conception of men. If man were as simple in his
mechanism as Ricardo supposes, and had but one in-
dustrial quality developed, the social conditions which
would result would harmonize fully with free-trade
doctrines. In the same way Ricardo's conception of
land brought out that use of land which free-traders
emphasized. If all the land of the world were merely



THE ECONOMIC BASIS OF PROTECTION. 19

wheat land, then we should have an economic basis
upon which free-trade might rest. We now know that
the economic man of Ricardo was merely an ideal and
not the actual man which we find in society, or even in
any possible society with a high civilization. Men
have numerous industrial qualities, all of which must
be developed if they are to make the most of their
economic environment. We know also that Ricardo's
conception of land was as faulty, or perhaps I should
say as ideal, as that of his economic man. There is no
land from which society can acquire any considerable
advantage as long as it is used for any one purpose.
The cultivation of wheat or any other single crop soon
deteriorates the qualities of the soil. Land does not
have any indestructible qualities which will allow its
use in any one way without serious economic disadvan-
tage. For these reasons that conception of men and
land, of which Ricardo makes so much use, cannot be
accepted as the basis of a progressive national economy.
So far as free-trade has such a conception as its basis, it
is not a policy which will lead to the greatest increase
of the productive power of any nation ; and the reliance
which free-traders still have on this point of view has
put them out of harmony with the later growth of
economic doctrine.

While free-traders have accepted and relied upon
that part of the doctrines of Ricardo, which have been
proved false by later investigations, they have neg-
lected to show the relation of the doctrine of free-
trade to those parts of the economy of Ricardo which
have been proved to be true. The leading doctrine of



20 THE ECONOMIC BASIS OF PROTECTION.

Ricardo is that of rent, and the study of rent has
brought into prominence natural monopolies that in-
terfere with the natural distribution of wealth. It
has never been shown that the doctrine of free-trade
leads to good results so long as a large share of the
wealth produced is acquired by the owners of natural
monopolies. The doctrine assumes that prices of all
commodities stand in direct relation to the quantity of
labor needed to produce these articles. If there were
no natural monopolies this might be true, but as soon as
the owners of natural resources secure as rent a large
part of the productive power of the nation, the prod-
ucts of natural monopolies no longer exchange with
other commodities in proportion, to the quantity of
labor needed to produce them. When rent becomes an
important factor in the distribution of wealth, the sim-
ple hypothesis upon which free-trade rests is no longer
true. This part of the theory of Ricardo is now an-
tagonistic to the free-trade doctrines based upon the
other part of his theory which has since proved false.

From Ricardo's time economic theory and the creed


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