Jim Powell, "Milton Friedman's Favorite Book on Trade,"The Wall Street Journal, June 10, 2016.
Protection or Free Trade is two books in one. The first part is a thorough dismantling of protectionist arguments and a defense of free markets, free trade, capitalism, specialization, economic progress, and freedom in general. The second part of the book compares the private ownership of land to slavery, calls for a steep tax on land, and accepts the "socialist" label. This might seem incongruent, but to George, these positions were integrated, based on a crucial and tenuous assumption: landowners and employers have a monopoly and won't compete with each other.
Protection or Free Trade examines why free trade has so few advocates and defenders. Everyone benefits from free trade, but special interests benefit noticeably if they can limit free trade for their specific industry. "Free trade ... offers no special advantage to any particular interest...". [II.3]2 Worse, those who benefit from limiting free trade may extrapolate that benefit to others. "Those who are specially interested in protective tariffs find it easy to believe that protection is of general benefit." [II.3]
Protectionism is sometimes justified for supposedly benefiting average people. According to George, "[t]he slave owners justified slavery as protecting the slaves. British misrule in Ireland is upheld on the ground that it is for the protection of the Irish." [II.20] George saw protectionism for what it is. "Trade is not invasion. It does not involve aggression on one side and resistance on the other, but mutual consent and gratification" [VI.6] and "It is not from foreigners that protection preserves and defends us; it is from ourselves." [VI.5]
George had a clear-eyed view of voluntary trade and showed how it is mutually beneficial and increases overall wealth. "If I trade with a Canadian, a Mexican, or an Englishman it is for the same reason that I trade with an American—that I would rather have the thing he gives me than the thing I give him. If I did not want the thing I am to get more than the thing I am to give, I would not wish to make the trade." [VI.26] Those who worry that foreign companies are hurting us by "dumping" their underpriced products on American consumers have it exactly backwards. Wrote George: "There is no one who in exchanging his own productions for the productions of another would think that the more he gave and the less he got the better off he would be. Yet to many men nothing seems clearer than that the more of its own productions a nation sends away, and the less of the productions of other nations it receives in return, the more profitable its trade." [XIII.1]
Protectionism does not reflect, and is antithetical to, the wishes of regular people. Producers want to sell to all buyers and consumers want to purchase the best goods available, regardless of origin. "Industry and commerce, when left to themselves, pay no more attention to political lines than do birds or fishes." [V.4] George provided one of the best quotes on the illogic of protectionism: "What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war." [VI.7]
George delved into the relationship between trade and specialization, showing how trade increases specialization, which increases overall wealth. We don't trade because we are wealthy; we are wealthy because we trade.
Men cannot apply themselves to the production of but one of the many things human wants demand unless they can exchange their products for the products of others. And thus it is only as the growth of trade permits the division of labor that, beyond the merest rudiments, skill can be developed, knowledge acquired and invention made; and that productive power can so gain upon the requirements for maintaining life that leisure becomes possible and capital can be accumulated. [VI.20]
The rude methods of savages are due less to ignorance than to isolation. A gun and ammunition will enable a man to kill more game than a bow and arrows, but a man who had to make his own weapons from the materials furnished by nature, could hardly make himself a gun in a lifetime, even if he understood gun making. [XVI.18]
George made an important distinction between a revenue tariff and a protective tariff. The objective of a revenue tariff is to provide tax revenues to the government, while the objective of a protective tariff is to dissuade citizens from buying foreign goods. The two types of tariffs directly conflict. With a revenue tariff, the U.S. government would want Americans to buy more Toyotas3 because the revenue from the tax is equal to the number of units purchased times the tariff per unit. With a revenue tariff, the government may pocket more tax revenues from each Toyota purchased than from each GM. With a protective tariff, the U.S. government wants Americans to purchase fewer Toyotas, leaving the sales to a domestic producer such as GM. A successful protective tariff will generate less revenue—perhaps even zero—than a successful revenue tariff. Many protectionists confuse the two objectives.
If a tariff is placed on Toyotas, Toyota may decide to absorb the new tax or to raise prices to compensate. The first case leaves the market unchanged, with a direct transfer of money from Toyota to the federal government. The second case allows GM to raise its prices to match. "An import duty can only fall on foreign producers when its payment does not add to price; while the only possible way in which an import duty can encourage home producers is by adding to price." [IX.15] The main beneficiaries of higher-priced domestic cars? GM's shareholders. The main losers? American consumers.
The way to encourage local producers is by creating situations in which they can increase their prices, which benefits some business owners and hurts consumers. Not all businesses benefit because the "finished products of some industries are the materials or tools of other industries." [IX.22] For instance, protecting domestic steel producers leads to higher steel prices, which hurts domestic auto manufacturers and shipbuilders. There is no way to encourage everyone; helping one industry hurts others, always for a net loss. Jobs are a primary reason that some favor protectionist policies, but tariffs on imports hamper economic activity and tend to reduce the quality of jobs in the economy.
George found that protectionist measures artificially protect some businesses and their shareholders, but not necessarily workers, all of whom are "unprotected" and earn wages set by the market. He concluded by saying, "We have seen that protective duties cannot increase the aggregate wealth of the country that enforces them, and have no tendency to give a greater proportion of that wealth to the working class." [XXI.3]
George pointed out a logical inconsistency in his opponents' advocacy of economic growth through the opening of canals and the building of railroads, combined with tariffs on imports. "The effect of such things is to lessen the cost of transporting commodities; the effect of tariffs is to increase it." [IV.18]
George also debunked the myth that low-wage countries have an inherent advantage over high-wage countries. "That low wages mean inefficient labor may be seen wherever we look. Half a dozen Bengalese carpenters are needed to do a job that one American carpenter can do in less time." [XIV.10]
Henry George claimed that most of the fundamental problems in the economy could be traced to the private ownership of land and that if this "problem" were fixed, the economic system would work substantially better.
His argument ran as follows.
Agreeing with one of Karl Marx's tenets, George believed that "labor is the producer of all wealth...". [II.23] This is an interesting claim in a book about how free trade—which is not labor—makes us wealthier. He gives some credit to capital, which he defines as the savings from past labor.
Land simply exists as a passive raw material. "Land in itself has no value. Value arises only from human labor." [XXV.14] Furthermore, George claims that none of us is given the right to exclude others from the land.
Labor needs land to be productive. Laborers may be "free," but they do not possess what is necessary—land—for the use of their labor. Land is essential, but landowners provide nothing of value. According to George, they are dead weight.
George believed that workers compete for land and jobs, and firms compete for customers, but landowners and employers don't compete for tenants and employees. Landowners will simply increase rental rates, and employers will keep wages artificially low to pocket most the returns. The result is a working class left with subsistence wages. "The general rate of wages in every country is manifestly determined by the rate in the occupations which require least special skill, and to which the man who has nothing but his labor can most easily resort." [XIX.40] George concluded that "... men are forced by competition to the extreme of human wretchedness...." [XXVIII.21] and "... as population increases must press the lowest class into virtual slavery, and even starvation." [XXVIII.23]
George wanted to abolish the private ownership of land. "Property in land is as indefensible as property in man." [XXIX.30] Yet he realized that such an outcome would be difficult given the way that society is structured—there are too many vested interests against such a radical change. "The only way to abolish private ownership in land is by the way of taxation." [XXIX.20]
George endorsed the abolition of all taxes save the single tax on land. He wanted to eliminate all taxes upon the "production, accumulation or possession of wealth...". [XXVI.34] The one tax he proposed was, by his definition, not a tax at all. "That part of the tax on real estate which is assessed on the value of land irrespective of improvements is, in its nature, not a tax, but a rent—a taking for the common use of the community of a part of the income that properly belongs to the community by reason of the equal right of all to the use of land." [XXVI.21] The tax rate would be set so high that there would be little reason to own land unless you wanted to productively use it.
Land is still important, but it has become less so over the years. In George's time, many people earned their living by farming, ranching, or working in big factories. Contrast that with today's information-driven economy. How much land does each Google, Microsoft, or Apple employee need in order to be productive? But George's biggest mistake—and it's a doozy—was his assumption that landowners and employers had a monopoly and wouldn't compete among themselves. Why would there be no competition among the landed class? George didn't address this directly; he assumed that there will always be desperate workers who would push down wages to subsistence levels.
The competition of workmen with workmen for employment, which is the real cause that enables, and even in most cases forces, the employer to squeeze his workmen, arises from the fact that men, debarred of the natural opportunities to employ themselves, are compelled to bid against one another for the wages of an employer. Abolish the monopoly that forbids men to employ themselves, and capital could not possibly oppress labor. [XXVIII.20]
He recognized that, if it were to happen, competition among employers and landlords would fix the problems he identified. "But where the natural rights of all are secured, then competition, acting on every hand—between employers as between employed; between buyers as between sellers—can injure no one." [XXVIII.23]
George knew that he would be called a socialist for his policies, and he accepted that label, but he highlighted his differences with typical socialists. He was firmly against the "State absorb[ing] capital and abolish[ing] competition...." [XXVIII.15], and he claimed that those who advocated that type of socialism failed to understand and appreciate key economic principles. While George recognized that "... evil unquestionably results from social interference with what properly belongs to the individual," [XXVIII.14] there are resources that he thought properly belong under government control, such as telegraphs, railways, and land. He saw this as a long-term natural tendency, as "advancing civilization is to make social conditions relatively more important...". [XXVIII.14]
Henry George's model led to fundamentally the same pessimistic conclusion reached by Thomas Robert Malthus: a permanent society of a few wealthy people with a vast population of subsistence workers on the verge of starvation. The subsequent century of economic inquiry and empirical evidence has, fortunately, not been kind to George's and Malthus's dire conclusions. Employers, it turns out, do compete vigorously for employees. Even though some workers are desperate and some have relatively poor skills, it is impossible for employers to drive wages for all employees down to subsistence levels. Instead, wages approximately equal the value of workers' marginal products and, in developed economies, are usually far above subsistence levels.
An average of about 138,000 people rise out of extreme poverty every day.4 The proportion who live in extreme poverty—below the $1.90-a-day line, adjusted for local purchasing power and inflation—has dropped from 94 percent in 1820 to less than 10 percent today—131 years after Protection or Free Trade was published. George was clearly mistaken on a key assumption, and his pessimistic conclusion, thankfully, has been proven wrong.
This does not mean that the single tax on land is a bad idea. If land were taxed more heavily, the quantity available would not decline; nor would the quantity demanded decline because of land's productive uses. As Milton Friedman said: "In my opinion, the least bad tax is the property tax on the unimproved value of land, the Henry George argument of many, many years ago."5
We should be thankful for George's timeless defense of free trade and his thorough dismantling of protectionist arguments. To Henry George, this was more about morals than economics. He wrote, "The spirit of free trade is that of fraternity and peace." [XXX.5] He summed up his work this way: "That we should do unto others as we would have them do to us—that we should respect the rights of others as scrupulously as we would have our own rights respected...". [XXX.16] If you follow these principles, you end up with free markets and free trade.
Henceforth, all Roman numeral citations are to the 1886 version of Henry George, Protection or Free Trade: An Examination of the Tariff Question with Especial Regard to the Interests of Labor, available at the Library of Economics and Liberty.
I assume, for simplicity, that Toyotas are made entirely in Japan and GM cars are made entirely in America. This is patently false. In the modern car industry, we can consider the location of the company headquarters (Toyota City, Japan, for Toyota and Detroit for GM), the nationality of investors (from around the world), where the parts are made (around the world), where the cars are assembled (in many different countries), and the location of the dealers (in the United States for this example). Some Toyotas are very "American." The Toyota Camry took the top spot for the 10th annual Cars.com American-Made Index with a U.S.-sold domestic content of 75 percent, according to the National Highway Traffic Safety Administration.
Johan Norberg, The Wall Street Journal, "Notable & Quotable: Poverty Is Going Extinct," 4 January 2017.
Mark Blaug. Economica, New Series, 47, no. 188  p. 472.