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

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

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

neighbors did, and outstripped them all, at least during the first half century of her free-trade policy. Again, the protectionist points to the recent rapid advance in prosperity and industrial power of Germany as an example of the beneficence of the protectionist policy. To this the free-trader can retort that Germany's prosperity began with the formation of the present Empire after 1870. The taking away of the tariff walls between the German states and the establishing of a free-trade area within the whole Empire created a much larger freetrade area than had formerly existed. Secondly, the efficiency of the German system of technical education has contributed more than any other single factor to her prosperity. In the third place, Germany has had the advantage of a lower standard of living. England became prosperous long before Germany did, and as a result of her prosperity wages rose, and likewise salaries and all living expenses. The English workingman gets higher wages than the German workingman. All the salaried men in 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 weekend 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 overwhelmingly in favor of free trade except in the matter of war supplies. Sometimes, however, it seems as though the freetraders were willing and able to answer all the arguments in favor of protection except the real ones. They confine themselves, 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 protective tariff if the government really wants to go about it seriously.

Some possibilities of a protective tariff.1 (1) 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 standpoint of the community rather than from that of the individual business man.

When the consumer pays the tariff. Whether the home consumer 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.

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 consequently 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 consequently a rise in price.

When the increase in home production offsets the decrease in importation. The question then becomes, Under what conditions 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 domestic 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 proportion 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 falling off in the amount purchased. In other words, the consumer 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 supply, the supply is inelastic. When the demand is elastic and

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 diminishing 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 product; 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 imported. 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.