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English factories get higher wages and work shorter hours than
the salaried men in German factories. The English agents in
foreign ports not only get higher salaries, but insist on week-
end holidays and on having several afternoons off during the
week in order to play golf and tennis, whereas the German
agent works continually every day and Sunday. In other words,
part of Germany's advantage has been her lower standard of
living. The free-trader would say, " Let 's wait and see how
long Germany can maintain her low standard of living after
she becomes as prosperous as England has been." It may be
that after she has enjoyed prosperity as long as England has,
there will come the same softening in her vigor, the same
desire for luxurious expenditure and leisure, and she will thus
lose her chief advantage in international competition. If it is
any comfort for the protectionist to point out that free trade
tends to overprosperity, and prosperity to softening, he is
welcome to it.



CHAPTER XXIX
PROTECTIONISM

The weight of the argument in the last chapter was over-
whelmingly in favor of free trade except in the matter of war
supplies. Sometimes, however, it seems as though the free-
traders were willing and able to answer all the arguments in
favor of protection except the real ones. They confine them-
selves, in other words, to the popular arguments which have
not now and never did have any support from serious students
of the problem. The following arguments may not appeal to the
popular mind, nor furnish much support to any particular tariff
bill. They do, however, outline certain possibilities of a protec-
tive tariff if the government really wants to go about it seriously.

Some possibilities of a protective tariff. 1 (i) A tariff duty
is not necessarily paid by the home consumer ; (2) a protective
tariff may be so framed as to raise wages ; (3) it may be so
framed as to attract labor and capital from the less productive
into the more productive industries, judged from the stand-
point of the community rather than from that of the individual
business man.

When the consumer pays the tariff. Whether the home con-
sumer pays the tariff duty or not depends upon whether or
not the tariff duty raises the price, in the home market, of the
article upon which it is collected. Whether it raises the price
or not depends upon whether it reduces the supply of the article
in the home market or not, it being assumed that the duty
will not affect the demand. The effect of a duty is ordinarily

1 The rest of this chapter is from a paper read by the author before the
American Economic Association and published in the Proceedings of the
association in 1902.

348



PROTECTIONISM 349

to reduce the amount of the article imported. The question
is, Will the home product then increase, as a result of the duty,
sufficiently to counterbalance the diminution in the amount
imported ? If the conditions are such that a tariff duty will
occasion an increase in the domestic product equal to the
diminution in the amount imported, the duty will occasion no
change in the total supply on the home market, and conse-
quently no general change in the price of the article ; but if
the domestic product does not increase sufficiently to offset
entirely the diminution in the amount imported, there will be
a decrease in the total supply on the home market, and con-
sequently a rise in price.

When the increase in home production offsets the decrease in
importation. The question then becomes, Under what con-
ditions will a tariff duty occasion an increase in the domestic
product sufficient to counterbalance the diminution in the
amount imported ? If the duty is laid upon an article not
producible at home under existing conditions and at existing
prices, there can manifestly be no such increase in the domes-
tic product, and the price will rise in consequence of the duty.
How large a share of the duty will be added to the price of
the article will depend upon the comparative elasticity of the
demand and the supply.

When the foreign producer pays the tariff. If the demand
is highly elastic, while the supply is inelastic, only a small pro-
portion of the duty will be added to the price ; that is to say,
an elastic demand means that if there is a slight rise in the
price of the article to the consumer, it will cause a great fall-
ing off in the amount purchased. In other words, the con-
sumer may be said to have considerable power of resistance.
On the other hand, if a considerable fall in the price which
the producer can get will cause only a slight falling off in the
amount produced, as will happen when there are considerable
differences in the cost of producing different parts of the sup-
ply, the supply is inelastic. When the demand is elastic and



350 PRINCIPLES OF POLITICAL ECONOMY

the supply relatively inelastic, the burden of a tariff duty will
be borne largely by the foreign producer and only to a slight
degree by the home consumer. Reversing the argument we
shall reach the conclusion that when the demand for the article
is inelastic and the supply relatively elastic, the burden of the
duty will fall largely upon the home consumer.

When a tariff is prohibitive. When both the supply and the
demand are very elastic, a tariff duty will tend to be prohibitive ;
that is to say, if a slight rise in the price to the consumer
would cause a large falling off in the amount consumed, and a
slight fall in the price to the producer would cause a great falling
off in the amount sent to the tariff country, manifestly neither
the producer nor the consumer can be made to pay the tariff
and the article will practically cease to be imported.

If the article is produced at home, but under the law of
expanding cost (commonly confused with the law of diminish-
ing returns), the presumption is that as much is already being
produced at any given time as can be produced at existing
prices. The one condition for an increase in the home product
is that there shall be a rise in price. It is evident that the
domestic product could not increase sufficiently to keep the
prices down, for the reason that if the prices were kept down,
there could be no increase in the home production. A duty
on such an article would raise the price of the article, and be
borne, in part at least, by the home consumer.

In case the duty is laid upon an article which is produced at
home under the law of diminishing cost (provided its production
has not been monopolized), a different result follows. In a case
of this kind the shutting out of a part of the foreign supply
increases the opportunities for the marketing of the home prod-
uct ; and since the home product can be increased without any
increase in cost, there is nothing to prevent it from increasing
enough to offset entirely any diminution in the amount im-
ported. In this case there is no reason to expect that the price
will be higher under the tariff than it would be without the tariff.



PROTECTIONISM 351

The shutting out of a part of the foreign supply is analogous
to a normal growth in the consumption of the article, at
least in so far as it affects' the home producers. They find
an increase in the consumption of their products, and it
makes no difference to them whether this is due to a decrease
in importation or to a growth in the normal consumption of
the article. Few economists would contend that a normal
growth in the consumption of an article which could be in-
definitely increased at diminishing cost would cause the article
to sell at a higher price. It is the position of this chapter that
there is no better ground for contending that a tariff duty on
an article already producible at home under the law of dimin-
ishing cost would raise the price of the article, or that when
there is no natural check, such as increasing cost, to the home
production, there is no reason why the home production may
not increase enough to make up entirely for any falling off
in the amount imported. 1

The case of monopoly. If, however, the article is one whose
home production is in the hands of a monopoly, the shutting
out of a part of the foreign product would increase the
monopoly's power over the home market and give it an oppor-
tunity to exact a somewhat higher price than would otherwise
be possible. There is a very widespread belief that a monopoly
fixes the price of its product according to a different principle
from that which is followed by a single producer in a competi-
tive industry ; but such is not the case. In either case the price
is fixed at the point which will yield the largest net income to
the producer. The difference is that the individual producer in
a competitive industry has to face a different set of conditions
from that which confronts the monopolists. The competitive
producer knows that if he charges too high a price for his
products, his sales will fall off rapidly, not only through the
unwillingness of the public to buy the product, but also through

1 In fact, there are reasons for believing that the price would fall. Cf.
Alfred Marshall, Principles of Economics, 4th ed., p. 525.



352 PRINCIPLES OF POLITICAL ECONOMY

the underselling of his competitors. If he held a monopoly,
he would know that a similar rise in the price of the product
would cause his sales to fall off less rapidly, because only one,
namely, the former, of those two forces would operate.

While both the monopolist and the competitive producer try
to sell at the point of highest net return, that point is likely to
be somewhat different in the two cases, because of the differ-
ences in the conditions which confront the two producers. The
competitive producer has two checks on high prices, where the
monopolist has one. Hence monopoly price is likely to be
higher than competitive price. A tariff duty which shuts out a
part of the foreign product removes one of the checks upon
the power of a monopoly to charge high prices, and changes
the location of the point of highest net return.

Can a tariff increase wages? Whether a protective tariff
can increase the price of labor or not depends first upon
whether or not it is possible, by means of a tariff, to increase
the demand for labor relatively to the demand for other factors
of production. If this can be done, labor will get a larger share
of the total product of the industry of the community. This
alone would not prove that the individual laborer would in the
end be better off. In the first place, the supply of labor might
increase correspondingly, either through immigration or by
natural means, and in this event there would be no increase
in individual wages, even though a larger share of the total
product did go to the payment of labor. In the second place,
the tariff might diminish the total product of industry so that,
even though the laborers did get a larger share of the total, the
absolute amount going to them as wages might be no greater
than, indeed not so great as, before.

As to the first objection, it needs only to be said that if the tariff
increases the demand for labor, that will tend to raise wages.
Whether or not this tendency will be counteracted by immigration
or by natural increase depends upon other conditions. If the
tariff stimulates immigration or increases the birth rate over what



PROTECTIONISM 353

it would be without a tariff, the presumption is that it does so
because it increases the demand for labor and raises wages, which
is all that this chapter contends for. Wages may or may not
be subsequently reduced to the old level" by other forces counter-
acting the tendency of the tariff. As the second condition, it is
hoped that the third part of this paper will show that a protective
tariff does not necessarily diminish the total product of industry.

Owing to the limited space available it is necessary to assume
two premises as the basis of the argument for the proposition
that a protective tariff may be so framed as to raise wages
within the country, (i) The three factors of production land,
labor, and capital are combined in different proportions in the
production of different commodities. (2) A selected industry
may be stimulated and made to grow by means of a protective
tariff. Both these propositions could be proved if space allowed,
but neither is likely to be disputed by any considerable number
of people. Assuming them to be true, it is only necessary to
stimulate, by means of a protective tariff, the production of
those articles into which labor enters as the principal factor,
leaving unprotected those industries into which labor enters as
a relatively less important factor. This is a process of artifi-
cial selection in which the variation which makes selection
possible is found in the different proportions in which the
three factors are combined in the different industries. The
favorable variations, from the standpoint of the laboring class,
are those industries in which labor is relatively the more impor-
tant factor, and the unfavorable variations are those in which
labor is relatively the less important factor. In order to favor
the laboring class it is only necessary to select the favorable
variations ; that is, to build up by artificial means those indus-
tries in which labor is the principal factor. Even though this
should result in a corresponding injury to other industries,
there would still remain a net gain to labor.

Let us suppose, by way of illustration, that in industry A, at
a given period, the best results, from the standpoint of the



354



PRINCIPLES OF POLITICAL ECONOMY



entrepreneur, are ordinarily obtained by combining 1000 acres
of land, 10 laborers, and $100,000 worth of capital. These
yield a product worth $20,000. In industry B, to get a product
of the same value, the best results would be obtained from
combining the factors in the following proportions : 10 acres
of land, 20 laborers, and $100,000 worth of capital. Wages
and interest are assumed to be the same in both industries.
For the sake of simplicity, capital is assumed to bear the same
ratio to product in both industries, land and labor being the
varying factors. By building up industry B, even at the
expense of industry A, there will result a net increase in
employment of labor, though a corresponding decrease in the
employment of land. This increase in the employment of labor
means an increase in the demand for labor, while the decrease
in the employment of land means a decrease in the demand
for land. The result of this situation would be that a larger
share of the total product would go in the payment of wages
and a smaller share in the payment of rent.

In the following tables, I represents the conditions as described
above ; II, the situation after industry B has been expanded
50 per cent and industry A has been correspondingly contracted.





ACRES


LABOREKS


CAPITAL


PRODUCT


Industry A


IOOO


IO


$ I OO,OOO


$2O,OOO


Industry B


IO


2O


IOO.OOO


2O.OOO


Totals


IOIO


to


$2OO,OOO


$40,000













II





ACRES


LABORERS


CAPITAL


PRODUCT


Industry A


soo


e


$50,000


$IO,OOO


Industry B


IS


30


1 5O,OOO


30,000


Totals


; l C


-ii


$2OO,OOO


$40,000













This shows a decrease of 495 in the number of acres used and an increase
of 5 in the number of men employed.



PROTECTIONISM 355

We need here to guard against the possibility that industry
B, while using fewer acres of land, might require a kind of
land that is so very scarce that the rent charge would be higher
than in A. But this is not a necessary condition. It is quite
conceivable that the two industries would use the same grade
of land. It is even conceivable that industry B, in addition to
using fewer acres, would also use a more abundant kind of
land, where rents were less per acre. The whole difficulty could
be avoided by starting with the proposition that in different
industries rent charges, wages, and interest enter in varying
proportions. Then, by selecting for governmental favor those
industries in which wages, rather than rent or interest, form the
chief item of expense, the total industry of the country would
be affected favorably from the standpoint of the wage receivers.

It goes without saying that an entirely different result would
be obtained by selecting for governmental favor those industries
in which rent or interest formed the chief item of expense,
a result advantageous to the landlord or the capitalist, but dis-
advantageous to the laborer. It must be confessed also that
as protectionism has been applied in the past, especially in
England before the repeal of the corn laws, this result was
quite as frequently obtained as the other. There is some danger
also that it will be so in the future, owing to the better lobby-
ing facilities of the landowning and capitalistic classes. But
that is another matter.

Does a tariff favor the less productive industries? The
proposition that protection attracts labor and capital from the
more productive to the less productive industries has long been
one of the basic principles of the free-trade school, the rock
on which all protectionist theories were supposed to split. And
it must be conceded that unless this position can be success-
fully assailed, the free-trader will always have the advantage in
the argument.

The difficulty with the proposition lies in the double mean-
ing which is given to the word productive. In order to make.



356 PRINCIPLES OF POLITICAL ECONOMY

a true proposition of it, that word must be given a certain
meaning; but in order to make it a conclusive argument, it
must have quite a different meaning. From the standpoint of
the individual business man a productive industry is a profit-
able J industry ; that is, an industry which offers the oppor-
tunity of making a surplus gain over the cost of running the
business. From the standpoint of the community a productive
industry is one which increases the sum total of utilities. It
is the profitableness of the industry, rather than its productive-
ness in the latter sense, which causes labor and capital to go
into it. It is only by defining productive as "profitable" that
one can support the proposition that labor and capital will seek
those industries which are naturally most productive. In that
sense, and in that sense alone, it is quite true that protection
attracts labor and capital from the more productive to the less
productive industries.

Meaning of the word productive. But in order to have any
weight as an argument this proposition must mean that pro-
tection attracts labor and capital from those industries which
create more utilities into those which create fewer utilities.
That is to say, the word productive must mean something
more than "profitable." The difficulty could be met only by
showing that a profitable industry from the standpoint of the
individual business man is always a productive industry from
the standpoint of the community. If this cannot be shown, it
would mean that labor and capital, if left to themselves, will,
in seeking the largest profits, sometimes go into the less pro-
ductive industries. There would then be a possibility that

1 For want of a better term the words profit and profitable are used in
the more popular sense, which agrees with the use of the terms by the older
writers on economics. Profit is made to include the surplus income of
an industry over and above the cost of conducting it. In this broad sense it
includes rent and every other form of surplus. A profitable industry would
therefore be one which would yield a surplus income of some kind. This
surplus is what attracts the director of industry, and it is the surplus-producing
power of an industry which determines whether or not labor and capital shall
go into it.



PROTECTIONISM 357

protection or some other form of government interference
might be able to attract labor and capital from a less produc-
tive industry, into which it would naturally go in pursuit of
profits, into a more productive industry, from which it would
naturally have been excluded by the smallness of the profits.
This possibility would become a reality if the relative profitable-
ness of the two industries could be reversed by some kind
of government discrimination.

The question then becomes, Are the more profitable indus-
tries always the more productive ? Manifestly not. Saying
nothing of certain lines of business which are acquisitive in
their nature and not productive at all, there are certain highly
productive industries which have very little power of attracting
individual enterprise.

To begin with an extreme case, there is the work of main-
taining lighthouses. This illustration is chosen, not because it
is supposed to be typical of those industries which are fitted to
receive protection, but solely because it serves to make clear
that there may be a productive industry which offers no induce-
ments for private enterprise. On the one hand, this work has
all the earmarks of a productive industry. It produces a real
utility ; this utility is of a materialistic sort and not moral or
social, as is that produced by educational and other similar in-
stitutions ; and it is produced by purely mechanical processes.
There is nothing in the nature of the utility produced, or its
processes of production, to distinguish this from any money-
making business. On the other hand, this industry offers no
incentive to private enterprise, that is, no opportunity for
private profits, for the one sufficient reason that the producer
cannot control his product. It will shine upon those who do
not pay for it as well as upon those who do. He is therefore not
in a position to exact a payment for his product corresponding
to its utility.

It will doubtless be objected that this is a case calling for
government ownership and operation rather than protection,



358 PRINCIPLES OF POLITICAL ECONOMY

and the point would be well taken. This is a business so com-
pletely devoid of opportunity for profitable enterprise that no
kind of protective tariff would be able to make it profitable.
Nothing but a subsidy could induce private capital to go into
it, and the subsidy would have to cover the whole cost. In that
case the government might just as well, it may be maintained,
own and carry on the business. But the difference between this
industry and one which would lend itself to protective measures
is one of degree only.

Industries differ widely in this particular : whereas one,
such as the maintenance of lighthouses, produces a utility that
cannot be controlled at all in the interest of the owner, another
produces a utility of such a nature that the owner can exact
full payment from those who use it, while still another pro-
duces no utility at all, but is purely acquisitive in its nature.
An example of the last (not to come too near home) would be
the medieval baron who took possession of a natural ford or
a mountain pass and set up his castle and went into the busi-
ness of collecting toll of all who passed that way. 1 These three
industries do not belong to sharply differentiated classes, but
they shade off gradually into one another. That is to say, there
is a gradual shading off from the business which creates utilities
far in excess of any amount which the owner of the business
can collect, to the business which can collect a revenue far in
excess of any utility actually created by it. Here again we have

1 This is a business to which the principle of " charging what the traffic
will bear " appjies beautifully. What the traffic will bear is, in this case, deter-
mined by the superiority of the ford or pass compared with the poorest
ford or pass over which traffic could afford to go. Let us assume that in-
stead of merely collecting toll the baron spends some trifling sum in the im-
provement of the passage, still charging what the traffic will bear. His business
then becomes slightly productive, but its productiveness is small as compared
with its profitableness. Then let us assume that he gradually increases his
expenditures for improvement of the passage until the utility created approxi-
mates more and more nearly to the charges collected ; at each stage of the
process his business will represent some type of business actually carried
on among us to-day.



PROTECTIONISM 359

a form of variation which makes artificial selection possible,
the favorable variations being those industries which come
under the former description.

No complete harmony of human interests. In considering



Online LibraryThomas Nixon CarverPrinciples of political economy → online text (page 29 of 48)