Epistemological Problems of Economics

The infant industries argument advanced in favor of protective tariffs represents a hopeless attempt to justify such measures on a purely economic basis, without regard to political considerations. It is a grievous error to fail to recognize the political motivation behind the demand for tariffs on behalf of infant industries. The same arguments as are advanced in favor of protecting a domestic product against foreign competition could also be adduced in favor of protecting one part of a general customs area against the competition of other parts. The fact that, nevertheless, protection is asked only against foreign, but not also against domestic, competition clearly points to the real nature of the motives behind the demand.

Of course, it may happen in some cases that the industry already in existence is not operating in the most favorable of the locations that are presently accessible. However, the question is whether moving to the more favorable location offers advantages great enough to compensate for the cost of abandoning the already existing plants. If the advantages are great enough, then moving is profitable and is carried out without the intervention of a tariff policy. If it is not profitable in itself and becomes so only by virtue of the tariff, then the latter has led to the expenditure of capital goods for the construction of plants that would otherwise not have been constructed. These capital goods are now no longer available where they would have been had the state not intervened.

Every tariff under whose protection new plants come into existence that otherwise would not have been built so long as the older plants established elsewhere were still utilizable leads to the squandering of capital. Of course, the fanatics on both sides of the ocean who want to “make the economy rational” do not care to see this.

Under the protection of tariffs—and other interventionist measures that bring about the same result—industries come into existence in places where they would not have been established in a world of free trade. If all tariff walls were now to fall at one blow, these plants would prove to be malinvestments. It would then become evident that it would have been more practical to have erected them in more favorable places. Nevertheless, they are there now, and the question whether they should be abandoned in order to set up new ones in more advantageous places is again to be decided by examining whether or not this would be the most profitable application for the employment of capital available for new investments. Consequently, the transfer of production from the places to which it has been brought by the interference of the tariff policy to the locations it would have chosen in a free economy, and which are now still regarded as the most favored by nature, will take place only gradually. The effects of the protectionist policy still continue even after its abandonment and disappear only in the course of time.

If one country alone removes its tariffs while all other countries continue to adhere to protectionism and retain their immigration barriers, its economy would have to adjust itself by concentrating on those branches of production for which conditions in that country are relatively most advantageous. Such an adjustment requires the investment of capital, and the profitability of this capital is again dependent on whether the difference in the costs of production between the enterprises to be abandoned and the ones to be newly established is great enough to justify the necessary expenditure of capital at that time. In this case too the effects of the protectionist policy continue for a certain period after its abandonment.

Everything that has been said concerning protection in foreign trade is, of course, equally true of the protection of one group of domestic enterprises against another. If, for example, tax rates favor savings banks over commercial banks, consumer cooperatives over businessmen, agricultural producers of alcohol over industrial producers, small business over big business, all those consequences appear that are brought about by the protection of the less efficient domestic industry against its more efficient foreign competitor.