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Chapter 13: The Infant-Industry Argument
The “infant-industry” argument has been considered as the only justifiable ground for a protective tariff by many “neoclassical” economists. The substance of the argument was clearly stated by one of its most noted exponents, Professor F.W. Taussig:
The argument is that while the price of the protected article is temporarily raised by the duty, eventually it is lowered. Competition sets in ... and brings a lower price in the end. ... [T]his reduction in domestic price comes only with the lapse of time. At the outset the domestic producer has difficulties, and cannot meet foreign competition. In the end he learns how to produce to best advantage, and then can bring the article to market as cheaply as the foreigner, even more cheaply.1
Thus, older competitors are alleged to have historically acquired skill and capital that enable them to outcompete any new “infant” rivals. Wise protection of the government for the new firms will, in the long run, promote, rather than hinder, competition.
The troublesome question arises; if long-run prospects in the new industry are so promising, why does private enterprise, ever on the lookout for profitable investment opportunities, persistently fail to enter the new field? Such unwillingness to invest signifies that such investment would be uneconomic, i.e., would waste capital and labor that might otherwise be invested in satisfying more urgent wants of consumers.
An infant industry will be established if the superiority of the new location outweighs the economic disadvantages of abandoning already-existing, nontransferable capital goods in the older plants. If that is the case, then the new industry will compete successfully with the old without benefit of special governmental protection. If the superiorities do not balance the disadvantages, then government protection constitutes a subsidy causing a wastage of scarce factors of production. Labor and capital (including land) is wastefully expended in building new plants, when an existing plant could have been used more economically. Consumers are forced to pay a subsidy for a wastage of goods needed to serve their wants. This does not imply that if, at one time, an infant industry is unprofitable on the free market, and hence uneconomic, that such will always be the case. In many instances, the new location becomes superior after a portion of the existing capital goods in the old plants has been allowed to wear away.
Protectionist economic historians are under pains to assert that no important infant industry can be established without substantial tariff protection against entrenched foreign competition. The high degree of tariff protection in the greater part of the history of the United States, has made this preeminent industrial country a favorite “proof” of the infant-industry argument.
Ironically, it is the United States that provides the most striking illustrations of the fallaciousness of the infant-industry doctrine. Within its vast borders, the United States offers an example of one of the world’s largest free-trade areas. The frequent regional shifts in American industries provide numerous examples of birth and growth of infant industries, and decline of old, established industries. One of the most striking examples is that of the cotton textile industry.
One of America’s important industries, cotton textiles were manufactured almost exclusively in New England from 1812 to 1880. During that period, there were practically no textile plants in the cotton-growing areas of the South. In 1880, the cotton textile industry began to grow rapidly in the South, rising at a far greater rate than the industry in the “entrenched” New England area, despite absence of special protection. By 1925, half of the country’s cotton textile production occurred in the South. In the early 1920s, moreover, cotton textile production in New England began a sharp absolute decline as well, so that, at present, the South produces approximately three-fourths of the country’s cotton textiles, and the New England area less than one-fourth.2
Another striking example of a regional shift is the clothing industry, which was highly concentrated in New York City and Chicago (close to the retail markets) until the 1921 depression. At that time, under the pressure of union-maintained wage rates and work rules in the face of falling prices, the clothing industry moved with great rapidity to disperse in rural areas. Other important shifts have been the relative dispersal of steelmaking from the Pittsburgh area, the growth of coal mining in West Virginia, airplane manufacturing in California, etc.
Logically, the “infant-industry” argument must apply to interlocal and regional as well as national trade, and failure to apply it to those areas is one of the reasons for the persistence of this point of view. Logically extended, the argument would imply that it is difficult or impossible for any firm to exist and grow against the competition of existing firms in the industry, wherever located. Illustrations of this growth, and of decay of old firms, however, are innumerable, particularly in the United States. That, in many instances, a firm with almost no capital can successfully outcompete a firm with existing “entrenched” capital need only be demonstrated by the case of the lowly peddler, who is legally banned or restricted at the instance of his rivals throughout the world.
It is ironic that the American cotton textile industry provides a major example of the growth of an unprotected infant industry, for the infant-industry argument first came into prominence precisely in connection with this industry. Although the infant-industry argument has been traced back to mid-seventeenth-century England,3 it was first widely used after the War of 1812 in America. During the war, when foreign trade had practically ceased, American capital turned to investment in domestic manufactures, particularly cotton textiles in New England and the Mid-Atlantic states. After 1815, these new firms had to compete with established English and East Indian competition. The protectionists first appeared in force upon the American scene, urging that the new industry must be protected in its infant stages. Mathew Carey, Philadelphia printer, brought the argument into prominence, and he exerted great influence on young Friedrich List, who was later to become the infant-industry argument’s best-known advocate.4
[Originally prepared for the William Volker Fund; date unknown. Reprinted in Strictly Confidential: The Private Volker Fund Memos of Murray N. Rothbard, David Gordon, ed. (Auburn, Ala.: Mises Institute,2010), pp. 249–53.]
- 1. F.W. Taussig, Principles of Economics, 2nd ed. rev. (New York: Macmillan 1916), p. 527. Taussig went on to assert that “the theoretical validity of this argument has been admitted by almost all economists,” and that the difficulties lay in the practical application of the policy.
- 2. Cf. Jules Backman and Martin Gainsbrugh, Economics of the Cotton Textile Industry (New York: National Industrial Conference Board, 1946). Some of the reasons for the shift in capital from North to South were (1) lower wage rates for comparable labor in the South—about half in 1900; (2) development of power in the South; (3) more rapid unionization in the North, and hence, shorter hours, and great work restrictions, raising the unit labor cost; (4) earlier wage and hour legislation in the North; (5) higher taxes in the North. These factors took on greater importance after World War I, when immigration restrictions sharply reduced the supply of mill labor in the North, while the labor supply of the poor Ozark Southerners continued to be plentiful, and when unions and social legislation became more powerful.
- 3. Cf. Jacob Viner, Studies in the Theory of International Trade (New York: Harper and Brothers, 1937), pp. 71–72.
- 4. Cf. Mathew Carey, Essays in Political Economy (Philadelphia: H.C. Carey & I. Lea, 1822); Joseph Dorfman, Economic Mind in American Civilization, vols. 1 and 2 (New York: Viking Press, 1946).