Competing Intellectual Views on Liberalism and Protectionism from 1900-1940
Introduction
While there have many fluctuations in the level of openness in the international economy, one time frame that stands out for particularly rapid development is the period between approximately 1900 and 1940. In this time, there was a gradual worldwide shift to a more protectionist and isolationist international economy. While the debate about liberalism v. protectionism is one that has been present throughout history, this particular period was rather heated. As Johannes Overbeck writes, "Intellectuals often wield power through the spoken and written word. Experience suggests that when intellectuals have been converted to a set of belief, it is often merely a question of time for their views to become the driving force of politics" (1999). Economists and public intellectuals participating in this debate during the early 20th century include Frank Taussig, Arthur Pigou, Ludwig von Mises, Lionel Robbins, Benito Mussolini, John Maynard Keynes, and Reed Smoot and Willis C. Hawley. The policies being implemented during this time period by politicians on both sides of the Atlantic Ocean generally moved to a more protectionist stance. Although it is difficult to prove a direct, causal relationship between the writings of economists and intellectuals at the time and the evolving policies of different nations, it is nevertheless important to examine and understand what was happening in both the academic and political worlds.
Section Two: Historical Views of Free Trade
Economists in support of free trade
Adam Smith
It is somewhat unsurprising that Adam Smith would be included in the group of economists advocating free trade, as he is the most prominent economist of the liberal persuasion. Smith’s most recognized contribution to the field of economics is the theory of the invisible hand, in which society benefits through the individual pursuit of self-interest. He also wrote about the theory of absolute advantage, in which it is beneficial for countries to specialize in the product in which they enjoy an absolute advantage over other countries. Naturally, Smith also wrote on the subject of tariffs, and in this realm, his work focused on trade beneficial because it permitted a wider division of labor, enhanced wealth creation, and vent for surplus. He argued against protectionist policies because they created monopolies and provided incentives for capital to move towards unproductive sectors of the economy, and tariffs were a form of unfair taxes on citizens. Finally, despite all his opposition towards protectionist policies, Smith does highlight one area in which it is acceptable, even recommended, for a country to enact tariffs, and that is in national defense.
Trade was significant because it permitted a wider division of labor
As Overbeek writes, “Smith believed that foreign trade had an important function to fill. By enlarging the market and increasing the opportunities for a greater division of labor, foreign trade enhanced the creation of wealth” (36). The greater division of labor resulted from more opportunities for producers to sell their goods: “By opening an inexhaustible market to all the commodities of Europe, it gave occasion to new divisions of labour and improvements, which could never have taken place for want of a market to take off the greater part of their produce” (Smith, 41).
Vent for surplus theory
Smith writes, “Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand.” Smith is essentially arguing that having a foreign market will enable producers to become more efficient – “By opening a more extensive market for whatever part of the produce of their labor may exceed the home consumption, it encourages them to improve its productive powers, and thereby to increase the real revenue and wealth of society” (Smith, 41).
Monopoly and Diversion of Capital:
Smith articulates his argument against tariffs as such: “By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them” (Smith, 42). Additionally, once the monopoly is established it unsurprisingly “gives great encouragement to that particular species of industry which enjoys it” (42), and therefore continues to exist. Because of its prolonged existence, capital and labor will flow towards the monopoly, and away from other sectors of society in which it might be more effectively utilized, which is another reason why Smith was not in favor of protectionist policies. This was a disruption of the invisible hand; while “every individual is continually exerting himself to find out that the most advantageous employment… leads him to prefer that employment which is most advantageous to the society,” this does not happen with the existence of tariffs and import bans. These protectionist policies, which “give the monopoly of the home-market to the produce of domestic industry, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or hurtful regulation” (44).
Exemptions: National Defense
Like many economists following him, Smith believed that one appropriate instance to enact a tariff was in the national defense area: “The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The act of navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country” (47). He argues that the act of navigation is one of the wisest of all regulations in England.
David Ricardo
Background
Once David Ricardo had read Adam Smith's Wealth of Nations, he became increasingly interested in political economy, particularly England's Corn Laws. The Corn Laws, which had existed in some form or fashion for centuries, were "duties placed on grain imports or bounties placed on exports" (51). Ricardo focused his studies on the distribution of economic rent, and applied it to corn prices, arguing that eliminating the tariffs would either stabilize or decrease economic rents, leading to more capital accumulation (52).
National Self-Sufficiency
Like many other economic liberals, Ricardo disagrees with the move towards protection in order to decrease “the dependence in which it would place us for an essential article of subsistence on foreign countries. This objection is founded on the supposition that we should be importers of considerable portion of quantity which we annually consume” (55). Ricardo’s opposition to this line of reasoning is two-fold: first, he doesn’t actually believe that a country will import a large quantity of an agricultural product, mostly because the price of the imported good would include transportation costs, thus driving the price higher, and “in proportion as the price rose abroad, it would become advantageous to cultivate poorer lands at home; and therefore, there is every probability that under the freest state of demand, we should not be importers of any large quantity” (55). The second part of his argument rests of the following logic: “suppose the case to be otherwise , what danger should we incur from our dependence, as it is called, on foreign countries for a considerable portion of our food?” (55). According to him, this situation of “dependence” is not dangerous because farmers abroad would grow food with English consumers in mind, and “it would be more in the interest, if possible, of the countries so growing corn for use, to oppose no obstacles to its reaching us, than it would be ours to receive it” (55). Thus, trade is mutually beneficial and any disruption would harm both sides. The combination of these arguments led Ricardo to argue that “We should, with as little delay as possible, consistently with a due regard to remporary interests, establish what may be called a substantially free trade in corn. The interests of the farmer, consumer, and capitalist would all be promoted by such a measure” (56).
Comparative Advantage
Ricardo’s most well-known and influential work was on the idea of comparative advantage, which is the argument that even in Country A enjoy an absolute advantage over Country B in producing both Good X and Good Y, as long as the two countries have different opportunity costs, it would be mutually advantageous for the countries to engage in trade. Ricardo uses the example of England and Portugal and the production of cloth and wine. England uses 100 men to produce cloth, and 120 men to produce wine. Portugal uses 90 men to produce cloth, and 80 men to produce wine. Thus, Portugal enjoys an absolute advantage in both wine and cloth; however, it is still in her advantage to trade with England. Ricardo makes the point that this is only possible between and not within countries, because if there was a substantial difference within one country, capital in the form of labor would flow towards where it could be most profitably employed. People are not willing, however, to move between countries as readily as they are able to move within their own country, thus a country will continue to enjoy an advantage in producing an item.
Jean Baptiste Say
Background
Main thesis of argument
- Law of Markets
Jean Say is most well known for what is commonly referred to as the “Law of Markets,” which stemmed out of a fear that any increase in output cannot be sustained for a substantial period of time. In response, Say postulated that “the production of goods and services tended of itself to generate purchasing power equal to the value of those goods and services” (Overbeek, 61). Therefore, “the very production of certain goods creates a demand for other goods, supply is potential demand” (Overbeek, 61). Say brings up the notorious circular flow diagram, in which firms pay wages to workers who then buy products from firms to illustrate how the entire production and consumption process is cyclical. Say’s argument against protectionist measures was based on the idea that if a country does not allow imports and thus pay foreign producers, those foreign producers (who are simultaneously consumers) will not be able to purchase exports from the home country.
Domestric v. International Trade
Say uses the example of a duty on coats and shoes. "What would the world say, if, at the dorr of every house an import duty were laid upon coats and shoes, for the laudable purpose of compelling the inmates to make them for themselves? Would not people say with justice, let us follow each his own pursuit, and buy what we want with what we produce, or, which comes to the same thing, with what we get for our products. The system would be precisely the same, only carried to a ridiculous extreme" (63).
Tariffs create privileged castes
"What, then are the classes of the community so importunate for prohibitions of heavy import duties? The public interset is their plea; but self-interest is evidently their object."
John Stuart Mill
- "The only case in which, on mere principle of political economy, protecting duties can be defensible is when they are imposed temporarily (especially in a young and rising nation) in hopes of neutralizing a foreign industry, in itself perfectly suitable to the circumstances of the country."
Main thesis of argument
John Stuart Mill is often known for his work regarding individual liberty, freedom, utilitarianism, and limited government. Many of his ideas about these subjects can be seen in his work about protectionism. Unsurprisingly, Mill believes in a limited role for government in enacting tariffs and protectionists policies. He disagrees and attempts to disprove the protectionist arguments of National Self-Sufficiency, National Defense,Protecting Native Industry, and tariffs as a method to raise revenue. These arguments reflect a belief in the free market and economic liberalism. The one area in which Mill does argue for protectionism is for Infant Industries.
Protecting Native Industry
One common argument for protection rested on the idea if a country was able to produce Product A domestically, it should either ban or discourage through high tariffs importing Product A from foreign countries. “The theory was that to buy things produced at home was a national benefit, and the introduction of foreign commodities, generally a national loss” (Mill, 84). He wrote, "To prohibit this importation, or impose duties which prevent it, is to render the labour and capital of the country less efficient in production than they would otherwise be" (Mill, 85). He considered tariffs on foreign goods as costly to the entire country, not only the consumers. "When the protected article is a product of agriculture, the extra price is only in part an indemnity for waste, the remainder being a tax paid to the landlords" (Mill, 85). Thus, Mill was in favor of international trade on the basis that it was the most efficient use of labor and capital.
National Self-Sufficiency
Protectionists often employed the logic that protectionist policies helped their country become self-sufficient, which was considered to be a good thing. Mill characterizes their argument: “The plea of the Protectionists has been so often ans so triumphantly met, that it requires little notice here. That country is the most steadily as well as the most abundantly supplied with food, which draws it supplies from the largest surface” (Mill, 88). Mill responded to the Protectionist argument by explaining how it is unrealistic to believe that (assuming a country imported its food from a variety of other countries) there would be a time in which a country would be at war with every single country it imported food from. Thus, even if a Country A went to war with Country B and therefore lost all food imports from Country B, it does not mean that Country A would not be able to import food from Countries C,D,E,F,etc. Furthermore, “Growers of food in other countries would not be as anxious not to lose an advantageous market, as we should not be to not be deprived of corn” (Mill, 88). Trading food is a two-way street in which both producers and consumers lose if trade is interrupted, making such an interruption highly unlikely according to Mill.
National Defense
On the topic of raising protectionist tariffs in the name of national defense, Mill acknowledged that protectionists sometimes have a valid argument, specifically referencing the Navigation Laws of England, which pushed for the “necessity of keeping up a nursery of seamen” (Mill, 87). He says that the goal is “worth the sacrifice; and that a country exposed to an invasion by sea, if it cannot otherwise have sufficient ships and sailors of its own to secure the means of manning on emergency an adequate fleet, is quite right in obtaining those means, even at some economical sacrifice in point of cheapness of transport” (87). However, Mill continues and says that the “ends which may have once justified Navigation Laws, require them no longer, and there seems no general reason for maintain this invidious exception to the general rule of free trade” (88). His overall position on protectionist policies in order to increase national security appears to be against them, albeit for a few exceptions.
Tariffs as method to raise revenue
Mill’s final argument against tariffs addressed tariffs enacted in order to raise revenue for a country. He finds this argument problematic in that the public will be forced to pay a large amount so that the government can collect a small amount: “To make the public pay much that the treasury may receive a little, is no eligible mode of obtaining a revenue” (89). Additionally, he disagrees with a revenue tariff because he believes that the tariff will discourage the importation of the taxed good, and if no one is buying the taxed good, then there is no revenue to collect: “It can only operate as protection in so far as it prevents importation; and to whatever degree it prevents importation, it affords to revenue” (89).
Infant Industry
Mill begins his section on Infant Industry with the quotation at the top of this page. His argument relies on the idea that the only reason that some countries experience an advantage in one industry is sometimes solely due to the fact that Country A began producing Product X before Country B did, thus it has "present superiority of acquired skill and experience" (89). Because producers lack the experience and knowledge gained through such experience, they are at a disadvantage, and "it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burden of carrying it on" until the producers are brought up the necessary level of expertise and knowledge. This can be best achieved through a protective tariff. Instances that warrant this protection only include "cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should producers ever be allowed to expect that it will be continued to them beyond the time strictly necessary for a fair trial of what they are capable of manufacturing" (90).
Economists in favor of protectionism
Alexander Hamilton
- "Hamilton thought more in terms of national honor, strength, security authority, orderliness and prosperity. He favored a powerful central government and vigorously states the case for government intervention." -- Johannes Overbeek, Free Trade versus Protectionism,1999
Alexander Hamilton, who is often considered the father of “economic nationalism,” presented a report titled “Report on Manufacturers” to the United States House of Representatives in 1791, and many protectionist arguments draw on content from this report. Jonathan Overbeek writes on the subject of the report, “This document has served to promote more extreme protectionist ideas and olicies than Hamilton himself ever contemplated” (159). The Report to Congress is divided into two sections: the first argues in favor of establishing an economy built around manufacturing, and the second part outlines what policies will be most conducive to attaining his goal of an industrial economy.
To explain why countries, in this case the United States, should aim to industrialize, Hamilton provides seven reasons:
- 1. An increased division of labor
- 2. An extension of the use of machinery
- 3. Additional employment to sections of the community ordinarily not suited for agriculture (i.e. women and children)
- 4. The promotion of immigration
- 5. A widened scope for the diverse talents and abilities of people
- 6. The furtherance of the "spirit of enterprise"
- 7. The expansion of the home market for farm products
More importantly for the sake of this project, the second half of the Report describes what the US government should do in order promote the development of a manufacturing sector. Hamilton bases his recommendations for protectionist policies on beliefs about human propensity to change careers, the existence of protectionist barriers existing in foreign countries (infant industry argument), and the failure of the invisible hand. Hamilton’s views on human nature are the following: “Experience teaches that men are often so much governed by what they are accustomed to see and practice, that the simplest and most obvious improvements in the most ordinary occupations are adopted with hesitation, relucatance, and by slow graduation. “ (170). According to Hamilton, when jobs become obsolete or no longer profitable, “changes would ensure, but these changes would be likely to be more tardy than might consist with the interest either of individuals or of the society. It many cases they would not happen” (171). Thus, government intervention is needed to facilitate the movement of labor from one sector (agriculture) to another (manufacturing). The second reason for government intervention, the infant industry argument, presumes that “the greatest obstacle of all to the successful prosecution of a new branch of industry, in a country in which it was before unknown, consists in the bounties, premiums, and other aids which are granted in a variety of cases by the nations in which the establishments to be imitated are previously introduced” (171). New firms “have to contend not only with the natural disadvantages of a new undertaking, but with the gratuities and remunerations which other governments bestow” (171). Because of this, Hamilton argues that the “infant” industries should enjoy the protection because they are competing against foreign firms which also enjoy subsidies. Finally, Hamilton argues for proctenionist policies on the basis that the idea of an “invisible hand” directing people to the employment that is most beneficial is not wholly correct. Rather, “it [the invisible hand] will struggle against a force of unequal terms, or will of itself surmount all the adventitious barriers to a successful competition, which may have been erected either by the advantages naturally acquired or by those which may have sprung from positive regulations and an artificial policy” (171). Essentially, a beneficial distribution of labor via the invisible hand only occurs when there aren’t any other “hands” operating.
After establishing that an economy based on manufacturing is desirable, and then explaining why that will not organically occur, Hamilton naturally arrives at the conclusion that governments must enact protectionist policies. He names eight policies that the US should implement:
- Protecting duties, or duties on those foreign articles which are rivals of the domestic ones intended to be encourages
- Prohibitions of rival articles, or duties equivalent to prohibitions
- Prohibitions of the exportation of materials of manufactures
- Pecuniary bounties
- Premiums
- Exemption of the materials of manufactures from duty
- Drawbacks of duties which are imposed on the materials of manufactures
- Encouragement of new inventions and discoveries at home, particularly those which relate to machinery
In order for these policies to be implemented, Hamilton stresses the importance that it be the national legislature that is in charge of tariffs, and not state ones: "Many aids might be given to industry, many internal improvements of primary magnitude might be promoted, by an authority operation throughout the Union, which cannot be effected as well, if at all, by an authority confined within the limits of a single State" (182).
Daniel Raymond
Background
Unlike many of the other economists advocating protectionism, Daniel Raymond was a socialist, which heavily influenced his rationale and reasoning behind enacting nationalist policies. In his work ‘’The elements of Political Economy,’’ Raymond first begins by distinguishing between the private and public interest, in a response to Adam Smith’s believe that “society is nothing more than the sum total of the individuals who compose it. The well-being and prosperity of the state was the aggregate of that of the individuals in the state. Therefore, national and individual interests were identical” (184). After Raymond emphasizes the national interest above any and all individual interests, he advocates nationalist policies such as refraining from trade in many instances, eliminating any surplus of goods, and enacting tariffs.
Contributions
To illustrate the distinction between public and private interests and to show that the public interest should always be paramount, Raymond uses the analogy of the military. He writes, "It is a fundamental principle that the army is ONE, and the general the head; no soldier is permitted to have a right, or an interest, opposed to the general good of the army" (189). He continues and applies it to political economy: "It should be a fundamental principle that the nation is ONE, and the legislature the head; no citizen should be permitted to have a right, or an interest, opposed to the general good of the nation." One specific right that he mentions later is property rights, which will be discussed in a subsequent section. He firmly believes that “Upon all subjects relating to political economy, and especially upon the subject of protecting duties, it is ever to be remembered, that the public intersts are paramount to individual interests – that a private mischief, or inconvenience, must be endured for the public good.” He does not specify what type of calculus would determine if an action or interest is in the national interest, aside from the goal of full employment. Full employment is the one overarching objective that his policies aim towards.
As previously noted, one right that Raymond thought should be subservient to the national interest was the notion of individual property rights. While there are some rights that are unalienable (life, liberty, strength, talents, personal beauty, etc) these are rights because God gave them to man. However, God did not give property to man, thus it is not an item that is inherently in the possesion of an individual. "Individual right to property is never absolute, but always relative and conditional. No man has, or can have, a perfect exclusive right to property of any description. The public right to every piece of property is superior to the private right of the individual owners" (189). He likens the role of the national government to God; while only God is responsible for giving humans life and their individual talents, the national government should be the governing body that grants or takes away property. Raymond makes an early case for emminent domain: "An individual may have a title to property, but it cannot be superior to the title of the whole. Hence the right of the public to take a man's property for the purpose of making public roads, or erecting fortifications, or any other purpose" (190). The logic behind the government being able to confiscate property because it serves the public interest is the same logic applied to tariffs.
On the subject of international trade, Raymond begins by bringing up the general rule that people buy items if they are sold for cheaper than what it would cost them to make it themselves. However, according to him, "buying goods where they may be the cheapest may be the best policy for some individuals, while buying them where they come dearest may be the best policy for the nation" (193). To elaborate this idea, he uses the example of a tailor and shoes. Most tailors would choose to buy shoes if it is cheaper than making shoes, however, Raymond argues that this is only a beneficial situation as long as the tailor has "constant employment." If the tailor has a couple hours where he is not employed, working as a tailor, then the tailor is better off spending that time making his shoes, no matter how cheap they are. This idea is applicable as a nation -- unless there is full employment, nations should not import goods, because it is better for those not working to make the imported good, no matter how high the cost.
Another policy that would help the nation towards full employment that Raymond highlights is to eliminate any surplus of goods remaining at the end of the year. One cause of unemployment is "the fluctuations in the demand for the product of industry. That consumption does not equal the production, which, as has already been shown, necessarily produces distress" (193). To fix this problem he writes, "If the whole product of English industry was clean consumed annually by the English nation, there would be little or no distress -- there would be no fluctuations in the demand for labor" (194).
Despite pushing for a nation not to engage in trade unless there is full employment, Raymond recognizes that people will likely not refrain from this behavior and therefore also outlines what type of tariff policy a nation should pursue. Namely, Raymond believes that tariffs are a method to prevent "dumping" by another country. He uses the example of England, in which "there is much more probability of a surplus than a deficiency in the supply. This surplus must be disposed of at some price, and if it only sells for half the original cost. They send this surplus to the American market and sell it at auction. This temporary supply causes a fluctuation in the American market" (195). To counter this destabilizing action, he argues for a tariff that would cause the price of imported goods to remain high, no matter what the foreign country was willing to sell the good for. The second component of his tariff argument addresses the rule that most people believe about lowering tariffs, which is that after a period of time that allows infant industries to develop, tariffs should be gradually lowered. Raymond takes the opposite view on the issue, and actually argues the reverse: "The tariff should be frequently changed, and gradually raised" (196). The foundation of his argument rests on the idea that firms makes a small profit (he cites 10% as a "liberal allowance for any country"), and any reduction in the tariff would destory the domestic production.
Henry Carey
- "Such, Mr. Editor, have been the results of thorough protection on one side of the ocean and an absence of protection on the other. Choose between them!" -- Henry Carey, comparing the events in France and the American South in a letter to the London Times, 1876
Background
As scholar Andrew Dawson writes, "[Carey] tried to create a national school of economics at a time when no unified economy existed and when slave owners, homesteaders, merchant and manufacturers all advanced their own notion of 'national interest.'"
Contributions
Carey had many views that were contradictory to the established ones of the time, most notably the Ricardian theory of rent and Malthusian thoughts on population. His opposition to these theories was due to his belief that there was an essential harmony of interests, this being attributed to God the Creator. He also based his protectionist policies on the power of association, and the ideal of independence from foreign nations and self-sufficiency.
Carey was a strong proponent of the idea that there was an essential harmoney of interests, which can be defined as:
- "He had a vision of an ideal America in which small manufacturing towns would spread across the land. To him "association" allowed farmers to exchange products with neighbouring mechanics and to develop America beyond the stage of primary producer. Towns would grow into cities, generate a social and cultural life, and cities would trade with other cities. By such a process all underdeveloped nations would achieve economic maturity. Through the free association of co-operating individuals, town and country and capital and labour achieved harmony" (Reassessing, 466)
According to Overbeek, "Carey strongly rejected the more pessimistic elements in the classical school such as the idea of pressure on population on landed resources and the concept of rising rents" (200). Decreasing economic rents and population increasing at an unsustainable rate would be an insult to the wisdom of God, who in his mind would not have put his creations in such a negative situation. More specifically, Carey disagreed with Ricardo because he thought that "as population grew and society progressed, men acquired the ability to cultivate the richer but more resistant land. With better tools and more people, the better but less accessible land could then be farmed" (201). Using Carey's logic, returns would begin to increase when other land began to be cultiavted, and economics rents would go back to the level they started at, arriving once again at a harmonious equilibrium. On the issue of Malthusian predictions that population would grow exponentially at a rate faster than food, due to laws of diminishing returns. Carey disagreed with this prediction, reasoning that "man's food supplies are of animal and vegetable origin... These lower forms of life can also grow geometrically just like the human race." Carey also predicted that as societies advance, man's "intellectual and spiritual powers increase while his reproductive powers decline to the point where births and deaths just about balance" (201). To conclude, "Carey criticized political economy for its assumption of class antagonism, particularly the crucial role played by landowners in extracting rent, and the pessimistic belief that the mass of the population could expect no permanent improvement in their material condition" (Reassesing, 473). Malthus and Ricardo had theories that did not lead to an essential harmony and therefore were the subject of much of Carey's criticism.
One of Carey's main tenents for adovcating protectionism was the theory of power of association, which is "the ability of man to join together with his fellow-men. It is based on division of labor and it develops the intelligence and individuality. Association is based on difference, it cannot take place to any great extent among people perfomring the same tasks" (200). Therefore, Carey argued against international trade on the basis that specialization and free trade "was the antithesis of association because it created "centralization," a system in which a core industrial capitalism traded manufactures for raw materials with a faraway and less developed periphery" (Reassessing, 466). Carey uses the idea of a dominant core and dependent periphery to support the necessity of tariffs: "Britain's overdevelopment of manufactures and lack of sufficient home market led to dependence on free trade, which, in turn, held all other countries, including those with manufacturing aspirations, in a permanent state of providers of raw materials. Expressed in this way, the demand for the tariff appeared as a natural response to protect all Americans from British exploitation" (Dawson, 479). In other words, the only method of preventing exploitation from industrialized countries such as Britain was to raise a tariff on imports coming from the UK.
Section Three: Economists advocating Liberalism from 1900-1940
Common Themes
- Misconceptions about benefits of free trade
- Tariffs as method to privilege certain groups
- Basis of High Wages in the United States
- Protecting the Home Market
Frank William Taussig: Protection and Free Trade. The Case for Free Trade.
Background
- "As much on the grounds of political morality as economic efficiency, Taussig was never in sympathy with the tariff legislation of this country. He was far from being a protectionist in the ordinary sense of the term. However, he frankly recognized whatever seemed to him to be tenable in the protectionist argument -- particularly, but not exclusively, the infant industry argument -- and never tried to minimize it as the economists who sympathize with free trade are in the habit of doing." --Joseph Schumpeter, The Quartery Journal of Economics, 1941
Frank William Taussig,J. A. Schumpeter, A. H. Cole and E. S. Mason The Quarterly Journal of Economics Vol. 55, No. 3 (May, 1941), p.342). Indeed, upon examination of his writing, it becomes evident that Taussig did not simply disregard the protectionist argument as whole, but rather took the tenets of protectionist policy and evaluated them. Furthermore, it is essential to include his writings when discussing tariff policy because "He was one of the first to realize that economic theory, like the theoretical part of any other subject, is not a storehouse of recipes or a philosophy, but a tool with which to analyze the economic patterns of life. (FWT, p. 358). Taussig's combination of careful, detailed approach to analyzing free protectionist and free trade arguments with his application of theory to policy makes him an excellent intellectual to include in the debate about tariffs.
Thesis of argument:
- People misunderstand implications of free trade because they see the first and most obvious effects of a given policy while neglecting to inquire about the long-term effects
- Refutes protectionists' claim that tariffs and other protections ensure employment in the home country
- Most people’s ideas about free trade are only concerned with prices and sales
- Interest groups play a special role
- Identified that some products have different social and private costs (externalities)
Taussing argues his first point about people's misconceptions about free trade by using the classic domestic v. foreign specialization example. He highlights "the ancient association of foreigner with enemy" and mentions how "people do not worry when New England buys coal from Pennsylvania; but when coal is bought from Nova Scotia, dire consequences are supposed to ensure." To further support his argument, he points to British Columbia; fifty years from the time he wrote his book, British Columbia was actually claimed by the United States. Consuming the territory's lumber, coal, and fishery resources were clearly advantageous. Yet, once the border was established, "the situation is supposed to change; and that which would have brought us gain in the way of more abundant and cheaper supplies is fraught with peril precisely because these supplies came from a foreigner" (292). Taussing succinctly captures the way that while many people view trading within their country as non-problematic and beneficial, free trade with a foreigner amounts to a losing a zero-sum game in which there are only winners and losers.
Unequal benefits: One subject area that Frank Taussig wrote extensively on was the myth of the tariff as a way to equalize production costs or "competitive conditions." He opposes this on the basis that a tariff actually does the opposite; tariffs actually ensure that a specific manufacturer or industry receive special benefits at the expense of all others not included under the tariff. Specifically, he addresses the 1922 Ford-McCumber Tariff. It is in this tariff that the principle of equalizing the playing field is "given concrete expression" (The Tariff, 1929-1930, 177). The Ford-McCumber tariff was enacted with the intention of raising duties when it was more costly to produce an item domestically, and lower duties once production costs decreased. (The Tariff, p.177) However, as Taussig notes, "The story is different when it comes to the outcome... The doctrine about equalizing costs is ignored: something is wanted that will benefit their industries and their district. The incessant repetition that of the doctrine that spells prosperity leads each and all to wish for a share in that prosperity." (p.177). Taussig links this desire to receive a slice of the economic pie of tariffs to political logrolling -- Member A of Congress supports legislation that supports an industry in Member B's Congressional district in return for Member B voting in favor of a policy that benefits manufacturers located in Member A's district. This exchange of favors demonstrates how tariffs do not actually benefit all but rather a small, sub-section of manufacturers. If a tariff did in fact benefit everyone, there would be no impetus for log-rolling, but log-rolling is an undeniable occurrence.
Home market "We hear it proclaimed ad nauseam that protected industries give farmers a home market; as if there were created a new and additional market, and not a mere substitute for the foreign market." (The Present Doctrine of Free Trade, p.33)
High wages for domestic workers "For years it has been dinged into the ears of the American people that high wages are the result of protection, or at least dependent on protection; that the maintenance of a high standard of living depends on the barrier against competing laborers of lower price, and that the workingman has a special and peculiar interest in the system of high duties" (Present Doctrine, p. 35). "By and large the it would be agreed all hands that the fundamental causes of high wages is large productiveness of labor and that so long as productiveness exists a large reward to workmen will follow. The higher range of wages in the United States is due to the country's rich resources and to the energy and intelligence with which these have been utilized." (35). However, Taussig is quick to point out that aside from high levels productivity, there are a number of other factors which also contribute to high wages, and it is often difficult to single out what precisely is responsible for high wages in a particular sector.
Arthur Pigou: The Riddle of the Tariff, Chapters 2 & 5
Background
Thesis of argument:
- People misunderstand benefits of free trade
- Interest groups play important role in protectionist policymaking
- Imposing tariffs on even just a few goods can lead to widespread consequences
To support his first point that people misunderstand the benefits of free trade, Pigou poses a theoretical scenario in which a previously protective tariff on tea is abolished, leading to greater foreign competition. Tea producers are faced with an influx of competition, see their profits decline, and either have to downsize their business or close shop all together. A man loses his job and the entire family enters a state of poverty. Clearly, to the average observer, this seems like an undesirable situation. However, " 'the things which are seen' are often of less importance than 'the things which are not seen.' " The things “which are not seen” in this case is that the situation is primarily a dislocation of industry – “It is not because of Free Trade, but because the industrial army is continually advancing, that the road is strewn with abandoned baggage and lagging men. Dislocation through foreign competition is only a single species of a far larger genus.” Essentially, Pigou is arguing that people solely focus on the "strewn baggage" which is temporary unemployment, and do not see the larger picture, which is that the road is ultimately a higher standard of living.
Most likely helping and reinforcing common misconceptions of free trade benefits are interest groups, comprised of manufacturers in protected industries. Unlike the average man, interest groups probably understand fully the benefits and costs of protectionist policies, and they are in the small minority of those who benefit, which is similar to Ludwig von Mises's argument that tariffs and protectionist policies create privileged groups. Pigou writes, “There is a considerable chance that manufacturers, when confronted with competition, will expand energies, which might best be devoted to discovering more economical methods of work, in the sordid trade of “persuading” and “influencing” legislators. This process is compounded by the fact that there is a type of "log-rolling" that occurs; different industries "making treaties of mutual support in the scramble for tariff doles." While Pigou does not completely disregard the possibility that legislators may reject this "blast of corrupt solicitation" he does not view it as likely. Thus, in addition to the problem that many people honestly (albeit misguidedly) view free trade as harmful, there are the interest groups that play upon these fears and lobby politicians to enact policies favorable to a small portion of the economy.
Pigou's third point was that once governments begin to enact tariffs in certain areas, it can lead to a dangerous precedent. As Pigou writes about British agricultural subsidies, "A beginning might be made with duties upon wheat and mutton only, but there can be no guarantee that these would not be driven to take unto themselves further duties upon fish, butter, cheese, vegetables, and eggs" (332). Other countries would see the (inceasing) protection on British goods and "the chance it [protectionism] may provoke reprisals is increased. It is not a question whether or not Germany and other countries would be morally justified in resorting to measures of that kind, but whether, they would be likely to do so" (336). He continues and answers the question of whether countries would be likely to enact corresponding/retaliatory tariffs by arguing, "There is a very great probability that we should become involved in continued tariff discussions and occasional tariff wars" (337).
Ludwig von Mises, Money, Method and the Market Process
Thesis of argument:
- Opposed tariffs and other government regulations of the free market because he did not subscribe to idea that there is inherent and unresolvable tension and conflict between people of different classes
- In order to become better off economically, people must find ways to produce goods and services more efficiently, thus improving everyone's well being
- Political and economic nationalism were a result of a small group of elites convincing the general public that nationalism was the best policy
- By imposing tariffs, the government actually creates privileged subgroups or "castes" that experience the benefit of the protection
Mises begins his description about the rise of protectionism by highlighting the fact that while in the 1860s, the world seemed to be heading towards a state of free trade, England was in fact the only country that “unconditionally espoused the principle of free trade.” (348). While many countries were gradually reducing tariffs and other barriers to trade, there were still two main groups of countries that followed protectionist policies: European countries with a history of mercantilism, and former colonies. After this brief summary of the international economy, von Mises comments on several aspects of free trade. He writes, “If protection is granted to once branch of production or to a few branches only, those privileged are benefited at the expense of the nation” and then continues to write how to eliminate this problem of privileging a few above the rest would mean granting everyone the same protection, thus there would be no advantage to anyone.
Another point of his opposition to free trade lies in the relationship of the Current Account and Capital Account in a country’s Balance of Payments (CAB = (-)(PRFA + PBFA). He calls it “vain” for a country to try to improve its balance of payments because “capital transactions, gifts and tributes, the total value of the commodities sold and the services rendered to foreigners exactly equals the value of the goods and services received.”
At the time von Mises was writing, there were supporters of protectionism that claimed that Ricardo’s model of Comparative Advantage was no longer valid because several conditions integral to Ricardo’s changed. One conditions was that Ricardo assumed there was no mobility of capital and labor, when clearly the 19th century saw large amounts of migration. However, migration movements did not nullify Ricardo’s theory because according to von Mises, “There are areas more densely populated and areas less densely populated” (350).
Lionel Robbins, The Economic Basis of Class Conflict
- "Nationalism is something which must be surpassed. There was probably never a moment in history of the world when such a task seemed so difficult to accomplish. But it can be accomplished if our hearts and minds tell us that it is necessary; and it must be accomplished if all that we regard as most valuable is not to perish in the wreck of our common civilization." -- Lionel Robbins, 1937
Background
In his work Economic Planning and International Order in 1937, Lionel Robbins argues that "The way forward to a better world order lies not in nationalism, authoritarianism, and the regulation of trade but in international liberalism." "Robbins deliberately and explicity adopted, like J.S. Mill, that the overriding concern was world and not national welfare.
He was interested why "the policies of the different national states are such as to create international disharmony." (p.368) "It is doubtful whether real clashes of this sort have played a very large part in bringing about the present international chaos."
Thesis of argument:
- Ideal of self-sufficiency
- Argues against Infant Industry theory that encourages protectionism
- Argues against protectionism on basis that some industries are vital to national security
- Policies of interventionism made the movement of resources from one industry to another difficult
- Domestic employment
Ideal of Self-Sufficiency
One of Robbins' explanations for protectionist barriers to free trade is that there has historically been an emphasis on self-sufficiency as a situation to be valued. Robbins traces this ideal back to the era of Sparta and Plato. He argues that Plato, along with other philosophers of the time, believed that "foreign trade was in itself to be regarded inimical to the atmosphere of the ideal state. The austerity of the alleged self-sufficiency of Sparta was contrasted favorably with the cosmopolitan atmosphere of Athens, whose properity depended on foreign trade" (369). In addition to the Greek philosophers holding this view that autarky is positive and something to strive for, Robbins points to Johann Fichte, Adam Muller and the German "Romantic" school, who believed in the concept of Gescholssene Handelsstaat, which loosely translates to "closed commercial state." He uses the example that "to eat home-grown rhuabard has been held to be more virtous than the consumption of the foreign lemon" (369). However, as Robbins is quick to acknowledge, it is one thing to have an ideal or ethos, but it is another thing to try to evaluate precisely how much of an impact one ideal has had throughout history in the formulation of policy.
In a similar vein, Robbins slightly alters the argument that self-sufficiency is an ideal and is an end itself, but also that it is "a means of military defence" (370). This line of reasoning has been adopted by many more thinkers than self-sufficicency solely as an ideal in its own right.
- "It has always been conceded by free traders that, if the location of any particular form of production within the borders of the national state was regarded as essential to security against attacks, then measures desiged to foster this indusry could not be regarded as contrary to national policy " (370).
There are several examples of this type of thinking acting as the foundation and justification for tariff policy, such as the German agrarian policy before World War I and many countries choosing to produce their own ammunition and military technology.
Tariffs create unemployment
In his article titled, "Economic Notes on Some Arguments for Protection," Robbins outlines several common arguments against free trade, and one of them is that it "is not in the least to argue that the rise of industries elsewhere may not prove injurious to the interests of the inhabitants of a particular area." To counter this argument, Robbins first begins by writing that The main object of economic policy is not to cure unemployment: it is to increase the social dividend. If by curing unemployment that end is accomplished, well and good" (Economic Notes, p. 50).
"The main purpose of a tariff conceived as an instrument for the cure of unemployment is, as Mr. Hawtrey has said, to permit the luxury of a local inflation without incurring the immediate disadvantages thereof."
Infant Industry
Tariffs create privileged groups
Similarly to many other economists, one reason that Robbins opposes tariffs is because they create privileged groups. "By erecting obstacles to trade, one national group may gain at the expense of others. We know that if particular groups of producers happen to occupy a position of strategic advantage in the market, then by suitable restrictions they can secure monopolistic gains." (371). However, Robbins was careful in assigning a great deal of merit to this argument: "However, it is possible greatly to overestimate the applicability of this argument. The circumstances in which an unequivocal gain of this sort is realizable do not often occur in practice." (371). His argument is based on the idea that if a group does in fact experience a type of privilege, new competition is "invited" in other quarters. Furthermore, Robbins believed that a protective tariff in one country would lead to retaliatory tariffs in other countries, thus eliminating any gains.
Section Four: Protectionist Arguments during 1900-1940
Benito Mussolini
- "Not surprisingly, Fascism regarded itself as a rejection, a complete and uncomprising denial of the principles of individualism, liberalism, internationalism, and democracy. The liberal ideas of individual freedom, free enterprise, and enlightened self-regard were seen as concepts that were disintegrating and divisive." (393)
Main thesis:
- Primacy of state: "Political strength creates wealth" (Mussolini) "Fascism conceives of the State as an absolute, in comparison with which all individuals or groups are relative, only to be conceived of in their relation to the state"
- The laborer, the peasant, should be able at a certain moment to tell himself and his dear ones: 'If I am to-day effectively better off, I owe it to the institutions which the Fascist Revolution has created'"; "Today we are burying economic liberalism."
- "That the changes in the economic field... have their importance no one can deny; but that these factors are sufficient to explain the history of humanity excluding all others is an absurd delusion"
- Argues against the theory of wellbeing = happiness; aka disregards that increased levels of consumption raise utility
- Bases it on the idea that there is more to life than physical material wellbeing
- Rejects idea of spontaneous order**"Fascism denies that the majority can direct human society; it denies that numbers alone can govern by means of a periodical consultation" "Empire demands discipline, the co-ordination fo all forces" (409)
John Maynard Keynes
- "The decadent but individualistic capitalism, in the hands of which we found ourselves after the War is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous -- and it doesn't deliver the goods."
Main thesis:
- Lack of economic growth and unemployment was a result of insufficient aggregate demand, and thus required increased government spending
- Greater self-sufficiency and economic isolation were desirable for his own country. The fewer economic entanglements the better.
- "I am inclined to believe that a greater measure of national self-sufficiency and economic isolation between countries may tend to serve the cause of peace."
- "Experience accumulates to prove that most modern mass-production processes can be performed in most countries and climates with almost equal efficiency" (421) -- "I am not persuaded that the economic advantages of the international division of labor today are at all comparabnle with what they were."
- Unstable demand (both domestically and internationally)
- "We live in a society organized in such a way that the activity of production depends on the individual businessman hoping for a reasonable profit. The margin which he requires as his necessary incentive to produce may be a very small proportion of the total value of the product. But take this away from him and the whole process stops." Fluctuating prices can "destory the necessary incentive to production" (415).
- Unemployment is caused when "employers have been deprived of profit"
--"The main decision which seems to me today to be absolutely forced on any wise Chancellor of the Exchequer, whatever his beliefs about Protection, is the introduction of a substantial revenue tariff."
- Flat rate (or two) to "cover as wide a field as possible"
- Raw materials would be exempt
- "I am prepared to maintain that the effect of such duties on the cost of living would be insignificant -- no greater than the existing fluctuation between one month and another. "
- Feared the "flight of capital": “The divoce between ownership and the real responsibility of management is serious within a country when, as a result of joint-stock enterprise, ownership is broken up between innumerable individuals who buy their interest today and seel it tomorrow and lack altogether both knowledge and responsibility towards what they monetarily own” (419).
- “We do not wish, therefore, to be at the mercy of world forces working out, or trying to work out, some uniqform equilibrium accroding to the ideal principles, if they can be called such, of laissez-faire capitalism. There are still those who cling to the old ideas, but in no country of the world today can they be reckoned as a serious force” (422).
- “it is the state, rather than the individual, which needs to change its criterion.”
Reed Smoot and Willis Hawley
- Wanted to equalize domestic and foreign costs of production -- but which costs are supposed to be equalized?
- "A protective tariff is intended as an alert guard protecting our industries and labor against unfair competition, improper trade practices and exclusion from an advantageous participation in our markets" (429)
- Played on idea that there is discrimination against American commerce
- Ideal of self-sufficiency
- Believed that tariffs increased foreign trade:
- "There is every reason to believe that history is ready to repeat itself and that the pending bill, when enacted into law, will not only benefit our own people but enlarge our foreign trade" (430)
- Argued that protection would actually lead to lower prices because it would allow for mass production, and mass production means lower prices
- Believed that protection should be applied to all:
- "There has been a tendency during the consideration of the bill for some producers to contend for satisfactory readjustments in rates affecting them and to oppose similar consideration for other producers. It has, however, been the policy of those in charge of the legislation to accord equal consideration to all, believe this to be a just national policy, and that a partial prosperty cannot be maintained" (433).
Section Five: Tariff Policy During 1900-1940
McKinley Tariff of 1890
Background
Tariffs were present for raising revenue during Civil War, yet after it ended, the tariffs were never removed. The United States, then, has drifted into its present position; drifted into it because the customs taxes are those whose incidence is least easily followed, which alone find strong pecuniary interests to aid them" (Taussing, p.327) Main Provisions
- Raised tariffs on imports to almost 50 percent from a previous level of 38 percent
- Tin-plates, as a major import for the US, experienced an even greater increase -- tariff rates rose from 30-70 percent
- Sugar was removed from duty list to duty-free list, and domestic sugar producers were given a subsidy of two cents/pound
- Wool or
Impact
- According to one study by Douglas Irwin, tariff revenue decreased from $225 million to $215 million. (This was attributed to the sugar movement)
- Failed to halt "downward spiral of prices" (Britannica, http://www.britannica.com/EBchecked/topic/616563/United-States/77817/National-politics?anchor=ref612939)
- Tariff was unpopular, and eventually repealed with the 1894 Wilson-Gormon Tariff Act
- Spanish Cuba closed at least 40 smaller tobacco factories
- "Fair traders considered the McKinley Tariff the primary cause of the English depression that struck in 1891" (J398
"The McKinley Bill's highly protectionist tariffs and discriminatory reciprocity policies promised to keep British exports from American markets and potentially close Britain's previously lucrative markets in Latin America and Canada as well. In addition to "also speeded up demand for and development of more efficient transportation and communication" "A desire to protect American 'infant industries' from the perceived onslaught of British manufactures, and as a response to the nineteenth century's vacillating and ongoing boom-and-bust economic cycle." (Paten, 397)
- "no marked change took place in [retail] prices or in wages" (Retail Prices of the Mckinley Act)
- Used price levels: Variations between 99.41 and 100.78
- Change in wholesale prices "showed much greater changes" (Report, p. 103)
- Price index had an extreme of 116.52
Fordney-McCumber Act of 1922
Background "During World War I, American industry was effectively protected from foreign competition and experience a boom. European wartime demands and the disruption of agricultural production in Europe also created a boom for American agriculture. With the conclusion of the war in the fall of 1919, the economy experienced a severe contraction that lasted from January 1920 to July 1921. Real net farm income fell 24%, followed by a decline of 40% from 1920 to 1921. In response to the postwar farm depression, Congress proposed an increase in agricultural tariffs." (Hayford, p. 31)
- Even twenty years ago Theodore Roosevelt wrote to Senator Lodge:
Dear Cabot: Would it not be well to put into the platform about the protective tariff a sentence to the effect that “the minimum duty must always be that which will cover the cost of the difference in labor cost here and abroad, because under no circumstances must the standard of livmgof the American workingmen be brought down”? Itseems to me that this is a very important thing put in.
Main Provisions
- Foreign Valuation Clause
- Flexible Provision: Stated baldly, there have been 250 applications, about two-thirds of them for decreases, under the “elastic provision.” The Tariff Commission has actually recommended eight changes- in rates, six of them for increases, two for decreases. President Coolidge has made all the increases effective by proclamation. He has maintained silence about both the recommendations for decreases." (Taming the Tariff Commission"
--"The Congressional compromise between these two was the present “flexible provision,” which delegates to the President instead of retaining in Congress the rate-changing power, specifies no time for tariff-commission reports, and deals with “costs of production” instead of “costs of cpnversion.” The bill offered by Senator Frelinghuysen specified that costs of conversion simmered down finally to labor costs in manufacture. The
--in order to regulate the foreign commerce of the United States and to put into force and effect the policy of the Congress by this act intended,” the Tariff Commission shall make investigations “to assist the President in determining differences in cost of production under this section,” and “no proclamation shall be issued until such investigation shall have been made”; it provides that the President “shall make such findings public, together with a description of the articles to which they apply,” whenever it is “shown that the duties prescribed in this act do not equalize said differences.” (Taming, p.592)
Impact
- "“flexible provision,” of the Fordney-McCumber tariff act. It was introduced intothe bill with a fine fanfare. If the “protection” afforded to industry was costly, here was compensatory protection for the consumer. If the taxpayer’s pocketbook bled too freely, the President could apply a tourniquet. On recommendation of the Tariff Commission he could stimulate or stem the flow by as much as 50 per cent. Rate-making was to be put on scientific basis. The tariff was to be taken out of If the Tariff Commission could have functioned in a vacuum, and if the President could have been elected without obligation to prospective tariff beneficiaries, the consummation might have been achieved. It was not achieved." (Congressional Digest, May)
--Whether a scientific tariff is within the range of possibility is debatable. The facts definitely establish that the present tariff has not been taken “out of politics” and that it is not flexible. It is sclerotic. It is subject to highsate pressure." (Taming)
Smoot-Hawley Tariff of 1930
Background
- Real net farm income:
- 1910-1914: $12,769
- 1914-1918: $14,972
- 1920s: $11,004
"As a consequence, real net farm income was 14% lower in the 1920s than during the 5 years before World War I and 27% lower than its level during World War I." (Hayford, p.31)
Main Provisions
- The increases in tariff are largely directed to the interest of the farmer. Of the increases, it is stated by the Tariff Commission that 93.73 per cent are upon products of agricultural origin measured in value, as distinguished from 6.25 per cent upon commodities of strictly nonagricul tural origin. The average rate upon agricultural raw mate rials shows an increase from 38.10 per cent to 48.92 per cent, in contrast to dutiable articles of strictly other than agricultural origin, which show an average increaseof from 31.02 per cent to 34.31 per cent." (Hoover, 191)
- The extent of rate revision, as indicated by the Tariff Commission, is that in value of the total imports the duties upon approximately 22.5 per cent have been increased and 77.5 per cent were untouched or decreased." (Ibid)
- "Protective Principle": The principle of the protective tariff for the benefit of labor, industry and the farmer is es tablished in the bill by the requirement that the commission shall adjust the rates so as to cover the differences in cost of production at home and abroad?and it is authorized to increase or decrease the duties by 50 per cent to effect this end." (193)
Impact
- "In addition to the usual dissatisfaction with particular schedules and a rather unusual amount of objection from foreign countries,
there is bitter hostility to the proposed administrative provisions, which would make of a protectionist President a little high-tariff czar." (The Nation, 1929)
- Exports in 1929: $5,421 million
- Exports in 1932: $1,611 million
- Letter to President Hoover and the Congress
Signed by 1028 American Economists: Dated May 5, 1930
- The undersigned American economists and teachers of economics strongly urge that any measure which provides for a general upward revisions of tariff rates be denied passage by Congress, or if passed, be vetoed by the President.
- We are convinced that increased restrictive duties would be a mistake. They would operate, in general, to increase the prices which domestic consumers would have to pay. By raising prices they would encourage concerns with higher costs to undertake production, thus compelling the consumer to subsidize waste and inefficiency in industry.
At the same time they would force him to pay higher rates of profit to established firms which enjoyed lower production costs. A higher level of duties, such as is contemplated by the Smoot-Hawley bill, would therefore raise the cost of living and injure the great majority of our citizens.
Few people could hope to gain from such a change. Miners, construction, transportation, and public utility workers, professional people and those employed in banks, hotels, newspaper offices, in the wholesale and retail trades and scores of other occupations would clearly lose, since they produce no products which could be specially favored by tariff barriers.
The vast majority of farmers would also lose. Their cotton, pork, lard and wheat are export crops and are sold in the world market. They have no important competition in the home market. They cannot benefit, therefore, from any tariff which is imposed upon the basic commodities which they produce.
They would lose through the increased duties on manufactured goods, however, and in a double fashion. First, as consumers they would have to pay still higher prices for the products, made of textiles, chemicals, iron and steel, which they buy. Second, as producers their ability to sell their products would be further restricted by the barriers placed in the way of foreigners who wished to sell manufactured goods to us.
Our export trade, in general, would suffer. Countries cannot permanently buy from us unless they are permitted to sell to us, and the more we restrict the importation of goods from them by means of even higher tariffs, the more we reduce the possibility of our exporting to them.
This applies to such exporting industries as copper, automobiles, agricultural machinery, typewriters and the like fully as much as it does to farming. The difficulties of these industries are likely to be increased still further if we pass a higher tariff.
There are already many evidences that such action would inevitably provoke other countries to pay us back in kind by levying retaliatory duties against our goods. There are few more ironical spectacles than that of the American Government as it seeks on the one hand, to promote exports through the activity of the Bureau of Foreign and Domestic Commerce, while, on the other hand, by increasing tariffs it makes exportation even more difficult.
We do not believe that American manufacturers, in general need higher tariffs. The report of the President's Committee on Recent Economic Changes has shown that industrial efficiency has increased, that costs have fallen, that profits have grown with amazing rapidity since the end of the World War. Already our factories supply our people with over 96% of the manufactured goods which they consume, and our own producers look to foreign markets to absorb the increasing output of their machines.
Further barriers to trade will serve them not well, but ill.
Many of our citizens have invested their money in foreign enterprises. The Department of Commerce has estimated that such investments, entirely aide from the war debts, amounted to between $12,555,000,000 and $14,555,000,000 on January 1, 1929. These investors, too, would suffer if restrictive duties were to be increased, since such action would make it still more difficult for their foreign debtors to pay them the interest due them.
America is now facing the problem of unemployment. The proponents of higher tariffs claim that an increase in rates will give work to the idle. This is not true. We cannot increase employment by restrictive trade. American industry, in the present crisis, might well be spared the burden of adjusting itself to higher schedules of duties.
Finally, we would urge our government to consider the bitterness which a policy of higher tariffs would inevitably inject into our international relations. The Untied States was ably represented at the world economic conference which was held under the auspices of the League of Nations in 1927. This conference adopted a resolution announcing that "the time has come to put an end to the increased tariffs and to move in the opposite direction."
The higher duties proposed in our pending legislation violate the spirit of this agreement and plainly invite other nations to compete with us in raising further barriers to trade. A tariff wall does not furnish good soil for the growth of world peace.
Section Six: Conclusion
While it is tempting to categorize economists and intellectuals throughout history as either advocating protectionism or free trade (as is done on this wiki), it is not as simple as black and white. Rather than separate these men into two distinct camps without any crossover into the other, it is helpful to think of them as existing along a spectrum, each believing in varying degrees in either protectionism or free trade. It is clear that while an economist typically leans more to one side than the other, there are still some elements of both protectionism and free trade present in his overall belief. John Stuart Mill is a classic example of an economist who, while predominantly believing in free trade, does acknowledge and support some instances of protectionism. Thus, this debate is not absolute; while it may be convenient to separate them for the sake of organization, all of these men deserve a more comprehensive analysis to understand the full scope of their philosophy.
When examining the historical debate between protectionism and free trade, one theory that comes to mind that could be helpful to put it in perspective is the political scientist Arthur Schlesinger's pendulum theory. In his book The Cycles of American History, Schlesinger argues that American polictics were "a recurrent shifting back and forth between idealistic governmental activists and their more pragmatic opponents who opposed centralized government" (Allen, "The Cycles of History U.S. political pendulum due to Swing Left"). While the two ends that Schlesinger identifies -- idealistic activisits and pragmatic opponents -- are obviously not applicable in this case, the idea of two poles existing, with public opinion constantly shifting back and forth between them seems very relevant for the protectionist vs. free trade debate. It appears that when the general consensus swings too far to either of the poles, forces will bring the "pendulum" back to somewhere in the middle. For example, the McKinley tariff of 1890 was repealed only four years later, as it caused a lot of outrage and opposition. Likewise, the Smoot-Hawley tariff was nullified with the 1934 Reciprocal Trade Agreements Act (RTAA), which increased the power of the U.S. president to singularly negotiate tariff rates. The RTAA is generally considered one of the founding documents of the modern liberal international economic system. Thus, in the span of four years, the US moves from the most protectionist stance in its history to the point of departure towards an open, free-trade based international economy. Furthermore, in light of the 2008 financial crisis, there has been somewhat of a response to move towards a more protectionist stance. The neo-liberal Washington Consensus, which is a set of ten principles that organizations such as the International Monetary Fund generally follow, was created in the 1980s and has been influential in the past two decades. However, in 2010, the Seoul Consensus replaced the Washington Consensus, and the Seoul principles allow for more state intervention. It is possible that the international pendulum is currently in the process of swinging back towards the protectionist pole. Viewing these events with the pendulum theory is perhaps one way to analyze them.
http://www.thenewstribune.com/2008/10/19/512579/the-cycles-of-history-us-political.html
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