is that a protective duty protects the home producer* from foreign competition, so as to encourage him, by larger profits than he could otherwise get, to engage in or increase production. All the beneficial effects claimed for protection depend upon its effect in thus encouraging the employing producer.
Chapter 13 — Protection and Producers
But when, assuming this, the opponents of protection represent the whole class of protected producers as growing rich at the expense of their fellow-citizens, they are contradicted by obvious facts. Business men well know that in long-protected industries the margin of profit is as small and the chances of failure as great as in any others — if, in fact, those protected industries are not harder to win success in by reason of the more trying fluctuations to which they are subject.
The reason why protection in most cases thus fails to encourage is not difficult to see.
The cost of any protective duty to the people at large is (1) the tax collected upon imported goods, plus the profits upon the tax, plus the expense and profits of smuggling in all its forms; plus the expense of sometimes trying smugglers of the coarser sort, and occasionally sending a poor and friendless one to the penitentiary; plus bribes and moieties received by government officers; and (2) the additional prices that must be paid for the products of the protected home industry.
It is from this second part alone that the protected industry can get its encouragement. But only a part of this part of what the people at large pay is real encouragement. In the first place, it is true of protective duties, as it is true of direct subsidies, that they cannot be had for nothing. Just as the Pacific Mail Steamship Company and the various land and bond grant railways had to expend large sums to secure representation at Washington, and had to divide handsomely with the Washington lobby, so the cost of securing Congressional "recognition" for an infant industry, or fighting off threatened reductions in its "encouragement," and looking after every new tariff bill, is a considerable item. But still more important is the absolute loss in carrying on industries so unprofitable in themselves that they can be maintained only by subsidies. And to this loss must be added the waste that seems inseparable from governmental fosterage, for just in proportion as industries are sheltered from competition are they slow to avail themselves of improvements in machinery and methods.** Out of the encouragement which the tariff beneficiaries receive in higher prices, much must thus be consumed, so that the net encouragement is only a small fraction of what consumers pay. Taking encouraged producers and taxed consumers together there is an enormous loss. Hence in all cases in which duties are imposed for the benefit of any particular industry the discouragement to industry in general must be greater than the encouragement of the particular industry.
Every tax that raises prices for the encouragement of one industry must operate to discourage all other industries into which the products of that industry enter. Thus a duty that raises the price of timber necessarily discourages the industries which make use of timber, from those connected with the building of houses and ships to those engaged in the making of matches and wooden toothpicks; a duty that raises the price of iron discourages the innumerable industries into which iron enters; a duty that raises the price of salt discourages the dairyman and the fisherman; a duty that raises the price of sugar discourages the fruit preserver, the maker of syrups and cordials, and so on. Thus it is evident that every additional industry protected lessens the encouragement of those already protected.
If there are producers who permanently profit by protective duties, it is only because they are in some other way protected from domestic competition, and hence the profit which comes to them by reason of the duties does not come to them as producers but as monopolists. That is to say, the only cases in which protection can more than temporarily benefit any class of producers are cases in which it cannot stimulate industry. For that neither duties nor subsidies can give any permanent advantage in any business open to home competition results from the tendency of profits to a common level. The first effect of a protective duty is to increase profits in the protected industry. But unless that industry be in some way protected from the influx of competitors which such increased profits must attract, this influx must soon bring these profits to the general level. A monopoly, more or less complete, which may thus enable certain producers to retain for themselves the increased profits which it is the "first effect of a protective duty to give, may arise from the possession of advantages of different kinds.
It may arise, in the first place, from the possession of some peculiar natural advantage. For instance, the only chrome mines yet discovered in the United States, belonging to a single family, that family have been much encouraged by the higher prices which the protective duty on chrome has enabled them to charge home consumers. In the same way, until the discovery of new and rich copper deposits in Arizona and Montana the owners of the Lake Superior copper mines were enabled to make enormous dividends by the protective duty on copper, which, so long as home competition was impossible, shut out the only competition that could reduce their profits, and enabled them to get three or four cents more per pound for the copper they sold in the United States than for the copper they shipped to Europe.
A similar monopoly may be obtained by the possession of exclusive privileges given by the patent laws.
Or again, a similar monopoly may be secured by the concentration of a business requiring large capital and special knowledge, or by the combination of producers in a "ring" or "pool" so as to limit home production and crush home competition.
But the higher profits thus obtained in no way encourage the extension of such industries. On the contrary, they result from the very conditions, natural or artificial, which prevent the extension of these industries. They are, in fact, not the profits of capital engaged in industry, but the profits of ownership of natural opportunities, of patent rights, or of organization or combination, and they increase the value of ownership in these opportunities, rights, and monopolistic combinations, not the returns of capital engaged in production. Though they may go to individuals or companies who are producers, they do not go to them as producers; though they may increase the income of persons who are capitalists, they do not go to them by virtue of their employment of capital, but by virtue of their ownership of special privileges.
Of the monopolies which thus get the benefit of profits erroneously supposed to go to producers, the most important are those arising from the private ownership of land. That what goes to the landowner in nowise benefits the producer we may readily see.
The two primary factors of production, without which nothing whatever can be produced, are land and labor. To these essential factors is added, when production passes beyond primitive forms, a third factor, capital — which consists of the product of land and labor (wealth) used for the purpose of facilitating the production of more wealth. Thus the three factors of production in civilized societies are land, labor, and capital — and since land is in modern civilization made a subject of private ownership, the proceeds of production are divided between the landowner, the labor owner, and the capital owner.
But between these factors of production there exists an essential difference. Land is the purely passive factor; labor and capital are the active factors — the factors by whose application and according to whose application wealth is brought forth. Therefore, it is only that part of the produce which goes to labor and capital that constitutes the reward of producers and stimulates production. The landowner is in no sense a producer-he adds nothing whatever to the sum of productive forces, and that portion of the proceeds of production which he receives for the use of natural opportunities no more rewards and stimulates production than does that portion of their crops which superstitious savages might burn up before an idol in thank-offering for the sunlight that had ripened them.
There can be no labor until there is a man; there can be no capital until man has worked and saved; but land was here before man came. To the production of commodities the laborer furnishes human exertion; the capitalist furnishes the results of human exertion embodied in forms that may be used to aid further exertion; but the landowner furnishes — what? The superficies of the earth? the latent powers of the soil? the ores beneath it ? the rain? the sunshine? gravitation? the chemical affinities? What does the landowner furnish that involves any contribution from him to the exertion required in production? The answer must be, nothing! And hence it is that what goes to the landowner out of the results of production is not the reward of producers and does not stimulate production, but is merely a toll which producers are compelled to pay to one whom our laws permit to treat as his own what Nature furnishes.
Now, keeping these principles in mind, let us turn to the effects of protection. Let us suppose that England were to do as the English agriculturist landlords are very anxious to have her do — go back to the protective policy and impose a high duty on grain. This would much increase the price of grain in England, and its first effect would be, while seriously injuring other industries, to give much larger profits to English farmers. This increase of profits would cause a rush into the business of farming, and the increased competition for the use of agricultural land would raise agricultural rents, so that the result would be, when industry had readjusted itself, that though the people of England would have to pay more for grain, the profits of grain producing would not be larger than profits in any other occupation. The only class that would derive any benefit from the increased price that the people of England would have to pay for their food would be the agricultural landowners, who are not producers at all.
Protection cannot add to the value of the land of a country as a whole, any more than it can stimulate industry as a whole; on the contrary, its tendency is to check the general increase of land values by checking the production of wealth; but by stimulating a particular form of industry it may increase the value of a particular kind of land. And it is instructive to observe this, for it largely explains the motive in urging protection, and where its benefits go.
Horace Greeley used to think that he conclusively disproved the assertion that the duties on iron were enriching a few at the expense of the many, when he declared that the laws of the United States gave to no one any special privilege of making iron, and asked why, if the tariff gave such enormous profits to iron producers as the free traders said it did, these free traders did not go to work and make iron.
The laws do not forbid me from making iron, but they do allow individuals to forbid me from making use of the natural material from which alone iron can be made. They do allow individuals to take possession of these deposits of ore which Nature has provided for the making of iron, and to treat and hold them as though they were their own private property, placed there by themselves and not by God. Consequently these deposits of iron ore are appropriated as soon as there is any prospect that anyone will want to use them, and when I find one that will suit my purpose I find that it is in the possession of some owner who will not let me use it until I pay him down in a purchase price, or agree to pay him in a royalty of so much per ton, nearly, if not quite, all I can make above the ordinary return to capital in producing iron. Thus, while the duty which raises the price of iron may not benefit producers, it does benefit the dogs-in-the-manger whom the law permits to claim as their own the stores which Šons before man appeared were accumulated by Nature for the use of the millions who would one day be called into being — enabling the monopolists of iron land to levy heavy taxes on their fellow-citizens long before they could otherwise have done so.
To repeat: It is only at first that a protective duty can stimulate an industry. When the forces of production have had time to readjust themselves, profits in the protected industry, unless kept up by obstacles which prevent further extension of the industry, must sink to the ordinary level, and the duty losing its power of further stimulation ceases to yield any advantage to producers unprotected against home competition.
*For want of a better term I have here used the word "producers" in that limited sense in which it is applied to those who control capital and employ labor engaged in production.
**This disposition is, of course, largely augmented by the greater cost of machinery under a protective tariff, which not only increases the capital required to begin, but makes the constant discarding of old machinery and purchase of new, required to keep up with the march of invention, a much more serious matter.