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336 PRINCIPLES OF POLITICAL ECONOMY

the plant. In the same way, a subsequent fall of one tenth in the value of
the product would reduce the value of the plant by one half, while a fall
of one fifth in the value of the product would destroy the value of the
plant altogether. This may be stated as a general law to the effect that
a slight fluctuation in the value of a product tends to produce a violent
fluctuation in the value of the establishment producing it. Stated in still
more general terms, the value of producers' goods tends to fluctuate more
violently than the value of consumers' goods.

This law is capable of still further extension when we consider that pro-
ducers' goods are themselves produced by other productive agents. The
different parts of the shoe factory of the above illustration were produced
in other factories, and the fluctuations in the value of the shoe factory would
tend to produce still more violent fluctuations in the value of the establish-
ments producing the different parts, for the same reasons as were given
above. The law might therefore be extended so as to read, The farther
removed the producers' goods are from some consumable product, and the
more remotely their value is derived from that of some consumable product,
the more violent the fluctuations in value tend to be.

This would be the tendency until that stage was reached where the pro-
ducers' agents were no longer especially connected with one particular line
of production, and were not therefore affected merely by changes in price
of the one kind of consumable product.

It must be admitted that the fluctuations in the value of producers'
goods were never actually so violent as the foregoing illustrations have
supposed, mainly for the reason that not every rise or fall in the value of
products is believed to be permanent. But where the high or low price of
a product continues for some time, it invariably leads to a belief that it is
likely to continue ; and this raises or depresses the price of the productive
agent out of proportion to the rise or fall in the price of the product.

In this connection it is well to observe that while the immediate demand
for consumers' goods comes from consumers themselves, the immediate
demand for producers' goods comes from investors. Since their willingness
to invest depends, not upon the value of the gross product of the productive
agent, but upon the excess of that gross product over and above the cost of
using the agent, which excess has been shown to fluctuate more violently
than the total value, the instability of the investors' market is therefore
not altogether due to psychological changes on their part, but in a large
degree to the objective causes which affect the value of the things in which
they invest.

A slight rise in the price of consumers' goods will so increase the value
of the producers' goods which enter into their production as to lead to larger
investment in producers' goods. The resulting large market for producers'



ECONOMIC CRISES 337

goods again stimulates the production of such goods and withdraws pro-
ductive energy from the creation of consumers' goods. This for the time
tends to raise the price of consumers' goods still higher, and this again to
stimulate still further the creation of producers' goods. There is no check
to this tendency until the new stocks of producers' goods begin to pour upon
the market an increased flow of consumers' goods. This tends to produce
a fall in their value, which in turn produces a still greater fall in the value
of producers' goods ; and so the process goes. There seems, therefore, to
be a fundamental reason for the periodicity of industrial depression, which
can only be removed by such a complete knowledge and understanding of
the situation as would enable the business world to foresee the tendencies
and take measures to overcome them.

These observations regarding the law of value as applied to different
classes of goods may throw some light on the relative stability in the price
of a consumable article, such as sugar, in comparison with the price of such
an article as steel, which belongs to the class of producers' goods several
steps removed from consumers' goods. The market for sugar is mainly a
consumer's market, while the market for steel is mainly an investor's market.
A consumer's market depends upon the willingness of the public to consume,
while an investor's market depends upon their willingness to invest. As was
shown above, there are reasons, other than psychological, why an investor's
market must be more unstable than a consumer's market.



CHAPTER XXVIII
FREE TRADE

Advantages of exchange among individuals of the same
country. Freedom of exchange between individuals is so
clearly advantageous that practically no one advocates serious
restrictions upon it. Freedom of trade between different sec-
tions of the same country also is generally approved. It would
seem absurd for the South, which is peculiarly adapted to cot-
ton, to try to be entirely self-supporting, and especially to pro-
duce certain things, such as wheat, for which its soil and
climate are not so well suited as are those of other sections of
the country. No one would seriously advocate an interference
with the shipments of wheat and wheat flour to the South or
of cotton to the North.

Advantages of exchange among individuals of different coun-
tries. It is argued by a large majority of the students of econom-
ics that the same arguments which favor a policy of freedom
of exchange within the country are equally in favor of freedom
of exchange between different countries. The lines which
separate one country from another are frequently arbitrary
political boundaries and do not necessarily interfere with the
channels of advantageous commerce. These students would
hold that there is no more reason why there should be an
interference with freedom of trade across the St. Lawrence
and the Great Lakes than across the Ohio River or the Mis-
sissippi. If there are individuals in Canada who desire products
from the United States, and individuals in the United States
who desire products from Canada, there is no more reason
why they should be forbidden to make the exchange than there
is why two citizens from different states of the United States
should be forbidden to exchange their products.

338



FREE TRADE 339

The diversion of labor and capital from the more pro-
ductive into the less productive industries. The positive argu-
ment in favor of freedom of trade rests upon one or two
fundamental propositions. One of these is that the labor and
capital of any region tends of itself to seek those opportunities
and to develop those industries which are most profitable to
themselves. From this it would follow that any interference
with this process, or any attempt to develop an industry in a
region where it would not develop without special favors, must
necessarily be a mistake. It would merely divert labor and
capital from the more productive to the less productive indus-
try. Left to itself, labor and capital in the southern part of
the United States will go into the growing of cotton without
any governmental encouragement. This is a sign that cotton-
growing is one of the most productive opportunities of that
region. Any attempt to tax cotton-growing, and out of the pro-
ceeds to pay a bounty to some other industry, would merely
mean that a certain amount of the labor and capital of the
South would be diverted from the cotton industry, in which it is
most productive, into an industry in which it would be less pro-
ductive. If the new industry is not less productive, labor and
capital would go into it anyway ; if it is less productive, it would
be a waste of resources to divert labor and capital into it instead
of allowing them to go where they would naturally go.

Against this fundamental proposition of the free-trade
school the protectionists have never been able to launch a
successful frontal attack. They have, however, attacked the
policy of free trade at other points. The arguments which
they have been able to use have, on the whole, proved some-
what more popular than this severely simple doctrine on which
the free-trade argument is based. There are six popular argu-
ments in favor of protection, besides some others that are not
so popular, though perhaps of greater scientific weight. These
six arguments may be characterized as follows : ( i ) The balance-
of-trade argument; (2) the home-market argument; (3) the



340 PRINCIPLES OF POLITICAL ECONOMY

infant-industries argument ; (4) the standard-of-living argu-
ment ; (5) the anti-dumping argument ; and (6) the necessity-
for-military-supplies argument.

The balance-of-trade argument. By the balance-of-trade
argument is meant the old theory that a nation is rich when
it sells abroad more than it buys. There is a certain super-
ficial analogy between the condition of the private individual
and that of the nation. It looks at first thought as though the
private individual who was selling more than he was buying was
getting rich. This, however, is only an appearance. It is true
that so long as he is selling more than he is buying he is
accumulating money ; but unless he invests that money sooner
or later, it will do him no good. When he invests, he is really
buying something with it ; otherwise he merely becomes a
miser and hoards his money instead of using it. The indi-
vidual who saves or the individual who accumulates money for
a time, say for a year, may be prospering in the sense that
he is accumulating the power to purchase something else later
on ; but suppose that during the next year he invests all the
accumulations of the preceding year, then it will happen that
during this next year he will be buying more than he is selling.
No one will claim that he grows poorer by the process.

Similarly with the nation that continually sells more than it
buys, if it never buys anything from the outside with that
money, the money is of no use to it ; if it merely keeps it in
circulation within its own boundaries, it will have more money
in circulation, but no more goods. Everybody will merely mark
up prices and call himself rich. Sooner or later, however, this
process must come to an end, for if prices continue to rise
within the country, it becomes a poor country in which to buy
products. Foreign buyers will, so far as possible, go to other
markets for their supplies. At the same time it becomes a
good country in which to sell. Foreign producers will seek to
sell their goods within the country where high prices prevail,
and if the prices are high enough, the protective tariff ceases



FREE TRADE 341

to be a hindrance. The combination of these two processes
would speedily drain some of the surplus money out of the
country ; that is, when foreign producers sell large quantities
to the country, and foreign buyers buy small quantities, there
must come an equilibrium in prices so far as the com-
modities which enter into international trade are concerned.
There are some commodities and services which do not enter
into international trade, and the prices of these may remain
on different levels for considerable periods of time.

During the first year or two of the great European war,
which was inflicted upon an astonished world by the Turco-
Teutonic powers, Americans had an excellent illustration of
the fallacy of the balance-of-trade argument. We immediately
began selling vast quantities of supplies to the Allies, who
were defending themselves against attack and invasion. Their
productive power was diverted from the field of industry into
the field of war, so that they had very little to sell to us. The
consequence was that vast quantities of money had to be sent
in payment for the supplies which we sent to them. It looked
for a time as though we were prospering amazingly by this
process. Money was very abundant, but goods were becoming
scarce. It was not long before the people began to realize that
they could not live on money, that, after all, goods were what
they wanted. Some relief came when the United States began
to lend the money back again to the Allies, so that they could
purchase more and more supplies ; that is, some of the surplus
money, instead of being used in the purchase of ordinary com-
modities, was used in the purchase of foreign securities, including
the bonds of foreign governments.

Nothing could be more elementary or more incontrovertible
than that every country must in the long run pay for its foreign
supplies with its own products. If it happens to produce gold
and silver in large quantities, these of course must be reckoned
among its own products, and it may pay for a portion of its
foreign supplies with this gold and silver. In the long run,



342 PRINCIPLES OF POLITICAL ECONOMY

therefore, the country that restricts importation must necessarily,
and in exactly the same degree, restrict exportation.

The home-market argument. As to the home-market argu-
ment, this has been peculiarly effective with farmers. It has
been pointed out to them that unless factories are built up in
their own neighborhood, they must depend upon distant mar-
kets for the sale of their products. To sell their products in
these distant markets and get their own supplies back, it is
said, involves heavy expenses in the form of freight rates. If
these expenses, however, were so heavy as to overbalance the
other advantages and disadvantages involved, manufacturing
would be developed in the home market without any govern-
ment aid or interference. If, for example, the difference in
the cost of growing wheat in Alabama and North Dakota were
less than the freight rates from North Dakota to Alabama,
Alabama would find it advantageous, without any government
help, to grow her own wheat ; but if it costs, let us say, twenty
cents more per bushel to grow wheat in Alabama than in
North Dakota, and the freight rate is only ten cents, then it
would be very much more profitable to import wheat or wheat
flour from North Dakota.

The same principle would apply to manufacturing products.
If the difference in the cost of manufacturing a yard of cloth
in Kansas and in New England is less than the freight rate
from New England to Kansas, some cotton manufacturer
would be pretty certain to locate his business in Kansas in
order to save that freight rate ; but if the difference in the cost
of production is greater than the freight rate, then it would be
a mistake to encourage the manufacture of cloth in Kansas.
This principle would apply between different countries as
well as between different sections of the same country. The
home market, in short, is preferable to a distant market only
when, with a given amount of productive energy, more can be
produced by saving transportation than can be produced even
when goods have to be transported over long distances.



FREE TRADE . 343

The infant-industries argument. As to the infant-industries
argument, there is undoubtedly something to be said on the
side of protection. The argument is good, however, only on
condition that the infant industry, after it is once established
and ceases to be an infant industry, is then able to take care
of itself without further protection. If it is not, and if it con-
tinually needs protection, it becomes not a policy for the
protection of infant industries but a policy for the protection
of those that are in a state of senile decay. It is a policy for
keeping alive industries that ought to be dead.

There are two rather fundamental objections to a protective
policy based on the infant-industries argument. In the first
place, no matter how much protection is given to any industry,
there will always be certain establishments that are just on the
margin of bankruptcy. There will be men who are so poorly
qualified for managing a business, or who have located their
businesses in such disadvantageous places, that they have to
compete with more productive industries for their labor and
supplies, and are thus barely able to keep going. Any attempt
to double and treble the amount of production merely calls into
existence business establishments run by less qualified managers
or located in less advantageous positions, so that with respect
to business establishments it becomes a truism that " the poor
ye have with you always." Conversely, any attempt to take away
or reduce the amount of protection will necessarily mean bank-
ruptcy to those marginal establishments. They can always
bring pressure to bear upon Congress and can always show-
convincingly that they would be ruined if protection were taken
away. Thus the infant-industries argument sooner or later
inevitably becomes an argument in behalf of the small or the
inefficient producer. In the second place, as laws are made in
any democratic country, the lobby (which has sometimes been
called the third House of Congress) is a powerful factor. The
real infant industry is seldom able to support a powerful
lobby. Generally speaking, the larger and more prosperous the



344 PRINCIPLES OF POLITICAL ECONOMY

industry, the larger and more efficient the lobby which it can
support. This makes it extremely improbable that the infant
industry will get protection and extremely probable that the
gigantic industry will get it.

The standard-of-living argument. By the standard-of-living
argument is meant the argument that, since American laborers
get higher wages and maintain a higher and more expensive
standard of living than most foreign laborers, it is necessary
to compensate the manufacturer for these higher wages by
enabling him to get somewhat higher prices for his product.
From the free-trader's point of view this looks like putting the
cart before the horse. The reason why wages are higher in
one country than in another is because labor is more productive
in the one than in the other. If labor is more productive, the
laborer creates the product out of which his higher wages are
to be paid. We have had such an abundance of natural resources,
and, on the whole, compared with old and overcrowded coun-
tries, such a dearth of labor, that the marginal productivity of
labor has been high in this country. The unprotected industries
pay these wages as well as the protected. If a given industry
is not able to compete against agriculture and mining in hiring
labor, that is a sign that the industry in question is not as pro-
ductive as agriculture and mining. Therefore it would be a
mistake to tax the more productive industries in order to allow
a bounty or a higher price to the less productive industry. In
the past, at any rate, there have been so many opportunities for
poor people to go onto the land and work for themselves and
eventually become landowners that manufacturers have had
some difficulty in getting labor for their factories. In other
words, labor has found a better opportunity somewhere else.
Two methods have been resorted to by the manufacturers to
overcome . this difficulty. One has been the wholesale importa-
tion of foreign labor ; the other is the securing of protective
duties in favor of their business. It would seem that anyone
with a sense of humor could hardly keep his face straight



FREE TRADE 345

while importing the cheapest kind of foreign labor to fill his
factory and at the same time demanding protection in order
that American labor might maintain its high standard of living.

The anti-dumping argument. As to the anti-dumping argu-
ment, there is a certain justification for it. By the anti-dumping
argument is meant the argument that an old and well-established
industry may, whenever it finds itself with a surplus product
which is difficult to sell in its own country, offer it for sale
in a foreign country far below the cost of production ; or, as
the argument is put in the country where protection is advo-
cated, the foreign producer may dump his surplus onto our
markets and demoralize the business of production here.

In so far as this dumping policy is temporary and spasmodic,
there is a good deal to be said in favor of the policy which will
restrict it. If, for example, a group of foreign manufacturers
were to dispose of a temporary surplus in this country far below
the cost of production, and keep it up spasmodically for a few
years, it might cause bankruptcy among our own producers
and discourage others from entering the business. As a result
we might find ourselves in a short time with no industry of our
own. Then the foreign producers would no longer need to dump
their surplus onto us, but could charge us a good high price.

On the other hand, if the policy of dumping a surplus
product onto us is a permanent one, there is everything to be
said in favor of allowing it to go on and allowing the home
industry to die out. It merely enables us to get permanently
a product much cheaper than we could produce it ourselves.
The labor and capital which would otherwise be engaged in this
industry would now better be engaged in some other. It has
been humorously pointed out that the greatest case of dumping
in the world is that of the sun, which sends us light and heat at
ruinously low prices. Inasmuch as it is a permanent policy of
the sun, we can easily adjust ourselves to it and dispense with
any industry which would propose to supply us with daylight
and summer heat.



346 PRINCIPLES OF POLITICAL ECONOMY

Not many years ago certain countries gave a bounty for the
export of sugar. This looked like a permanent policy for en-
couraging the dumping of a certain commodity on other markets.
The chief result was that England, a free-trade country, got an
abundant supply of very cheap sugar. This not only gave her
a cheap food product but enabled her to develop certain indus-
tries, such as the making of jam and marmalade, on a large
scale, and to sell the products of these industries on the markets
of the world, sometimes selling them back to the countries
which had given a bounty on the exportation of sugar.

The military-defense argument. So long as war is a possi-
bility the necessity for military defense will remain with us,
and so long as we must be prepared for military defense the
argument in favor of producing certain essential military sup-
plies at home, even at greater cost than they could be produced
abroad, will be overwhelming. It is obvious that at the very
time when we need military supplies most in time of war
we may not be able to get them at all if we depend upon for-
eign sources. This would apply not only to military supplies
in the technical sense, that is, goods and ammunitions, but also
to every article which is indispensable in time of war. It might
easily happen that a nation would fail in its military operations
by reason of a lack of some single military article like nitro-
gen or copper, and suffer a national disaster and humilation in
consequence. Until we can be reasonably certain that war has
been permanently eliminated, the argument for government en-
couragement of the production of every indispensable military
article is overwhelming. The free-trader really has nothing
effective to say against it.

Aside from these six arguments there are certain large his-
torical arguments that are frequently used by the protectionist.
It is pointed out, for example, that America has prospered
amazingly under a protectionist policy. It is, however, equally
true that England has prospered amazingly under her free-
trade policy. She became prosperous before her European



FREE TRADE 347

neighbors did, and outstripped them all, at least during the
first half century of her free-trade policy. Again, the protec-
tionist points to the recent rapid advance in prosperity and
industrial power of Germany as an example of the beneficence
of the protectionist policy. To this the free-trader can retort
that Germany's prosperity began with the formation of the
present Empire after 1870. The taking away of the tariff walls
between the German states and the establishing of a free-trade
area within the whole Empire created a much larger free-
trade area than had formerly existed. Secondly, the efficiency
of the German system of technical education has contributed
more than any other single factor to her prosperity. In the third
place, Germany has had the advantage of a lower standard of
living. England became prosperous long before Germany did,
and as a result of her prosperity wages rose, and likewise salaries
and all living expenses. The English workingman gets higher
wages than the German workingman. All the salaried men in



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 28 of 48)