Some Aspects of the Tariff Question

Taussig, Frank William
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Cambridge, MA: Harvard University Press
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1st edition.

Part I, Chapter III

The Principle of Comparative Advantage


The doctrine of comparative advantage,—or, in the phrase more commonly used by the older school, of comparative cost,—has underlain almost the entire discussion of international trade at the hands of the British school. It has received singularly little attention from the economists of the Continent, and sometimes has been discussed by them as one of those subtleties that have little bearing on the facts of industry. I believe that it has not only theoretical consistency, but direct application to the facts; and that in particular it is indispensable for explaining the international trade of the United States and the working of our tariff policy. Neither the familiar arguments heard in our controversy nor the course of our industrial history can be understood unless the principle of comparative advantage is clearly understood and kept steadily in view.


Briefly stated, the doctrine is that a country tends under conditions of freedom to devote its labor and capital to those industries in which they work to greatest effect. It will be found unprofitable to turn to industries in which, though labor and capital may be employed with effect, they are applied with less effect than in the more advantageous industries. The principle is simple enough, nor is it applicable solely to international trade. The conversant reader does not need to be told that it bears on the division of labor between individuals as well as on that between nations. The lawyer finds it advantageous to turn over to his clerk that work which he could do as well as the clerk, or even better, confining himself to the tasks in the profession for which he has by training or inborn gift still greater capacity. The able business leader delegates to foremen and superintendents routine work of administration that he could doubtless do better than they; he reserves himself for the larger problems of business management for which he has special aptitude. The skilled mechanic often has a helper to whom he delegates the simpler parts of his trade, giving his own attention to those more difficult parts in which he has marked superiority.


In international trade, however, the principle, if not most important, needs most attention; because it is obscured by the extraordinary persistence of prejudice and of shallow reasoning in this part of economics. Simple as it is in its statement and in its more obvious applications, it extends to some complex and difficult problems, and more particularly to those concerning the varying ranges of prices and wages in different countries. There is perhaps no topic in economics on which there is more of popular confusion than on this; nor can it be said that there is always careful and consistent thinking on it among economists who contemn the popular superficialities. Though fallacies of much the same sort are prevalent in all countries, the United States is above all that for which the principle is most important and for which there is most need of explaining the connection between prices, wages, and the currents of international trade.


Whatever the differences of opinion among economists on the theory of wages,—and those differences are less in reality than in appearance,—there is agreement that a high general rate of wages rests upon general high product, on high effectiveness of industry. It is not necessary here to enter on the question whether, in speaking of the effectiveness of industry, we should consider precisely in what way it can be said to be based on the several factors in production, or caused by them. Some economists regard capital and natural resources (land) as distinct factors, contributing each its specific share to the total product of industry. Others regard them simply as means or conditions for enabling labor to work with effect and so to turn out a large product. The latter seems to me the better way of stating the case,—that labor is the fundamental agent in production; but for the present purpose it is not material which form of statement is preferred. It is agreed among the careful thinkers on economics that high general wages and a high degree of material prosperity can result only from the productive application of labor; good tools or good natural resources, or both, being indispensable to high productivity. And when "labor" is spoken of, it must be remembered that not only manual labor is meant, but the equally important labor of organizing and directing the rank and file. In the United States more particularly, the general effectiveness of labor depends in great degree on the work of the industrial leaders.


Now when there prevails a general high range of wages, due to generally productive application of labor, this high rate comes to be considered a difficulty,—an obstacle. The business point of view is commonly taken in these matters not only by the business men themselves, but by the rest of the community. To have to pay high wages is a discouraging thing in business; does it not obviously make expenses high, and competition difficult? People do not reflect that wages are not high as a matter of course. If they are in general high, there must be some general cause. Once established, they are taken in a country like the United States as part of the inevitable order of things. The ordinary man does not stop to consider why they should exist at all. He regards them as something he must face, and too often as something that constitutes a drawback in industry.


When speaking of wages as high, we may have in mind either money wages or commodity wages ("real" wages, in the older phrase). It is familiar to all that money wages are higher in the United States than in Europe; and it is almost as familiar that the greater money wages are by no means completely offset by higher prices, and that there remains a large advantage in real or commodity wages. Let us center attention for the moment on this latter and more substantial advantage,—the higher commodity wages.


It is obvious that higher commodity wages cannot be handed over to workmen by employers unless the workmen (as guided by the employers and aided by tools and machines) turn out a large product,—unless there is greater effectiveness of industry. I say effectiveness, not efficiency, because the latter word has come to be used so often to denote one particular factor that bears on the quantity of product,—the immediate efficiency of the manual workers; by no means the sole or even the commanding factor. In current discussions on the tariff and wages, it has often been alleged that in one industry or another the efficiency or skill of the workmen is no greater in the United States than in England or Germany; that the tools and machines are no better, the raw materials no cheaper. How then, it is asked, can the Americans get higher wages unless protected against the competition of the Europeans? But, it may be asked in turn: suppose all the Americans were not a whit more skilful and productive than the Europeans,—perhaps quite as skilful, but not more so; suppose the plane of effectiveness to be precisely the same throughout the realm of industry in the countries compared; how could wages be higher in the United States? The source of all the income of a community obviously is in the output of its industry. If its industry is no more effective, if its labor produces no more, than in another community, how can its material prosperity be greater and how can wages be higher? A high general rate of real wages could not possibly be maintained unless there were in its industries at large a high general productiveness.


But when once these two concomitant phenomena have come to exist,—a high effectiveness of industry and a high general rate of wages,—it follows that any industry in which labor is not effective, in which the plane of effectiveness is below that in most industries, finds itself from the business point of view at a disadvantage. It must meet the general scale of wages in order to attract workmen; yet the workmen do not produce enough to enable that general scale to be met and a profit still secured. Such an industry, in the terms of the principle now under discussion, is ipso facto working at a comparative disadvantage. In other industries, product is high; that is, labor cost per unit is low. In this industry, product is low; labor cost is high. The industry does not measure up to the country's standard, and finds in that standard an obstacle to its prosecution.


Consider the same problem,—the relation between wages, costs, prices,—from the point of view of money wages. Here again we are beset by everyday fallacies and superficialities. High money wages, it is commonly alleged, cannot be paid unless there be high prices for the goods made. A dear man is supposed to mean a dear coat, and a cheap man a cheap coat. Yet it is beyond dispute that in the United States, while money wages are higher than in European countries, the prices of things bought are on the whole not higher. Though some things cost more, and higher money wages therefore do not mean commodity wages higher in the same degree, real wages remain higher by a substantial amount. The dear man may perhaps mean a dear coat,—of this we shall learn more when we come to consider the domestic conditions of production for clothing; but the dear man certainly does not mean dear food, and probably does not mean a dear house. The explanation is simple: though wages in money are high, the effectiveness of the dear man's labor on the whole is also high, and therefore goods on the whole are not dear. Where a man who is paid high wages turns out a larger number of pieces, each piece can be sold at a low price, and the employer still can afford to pay the high wages. With reference to individuals, the business world is constantly accepting this principle. A good man, we are told, is cheap, even at high wages. To use the same phrase, a good industry is cheap even though high wages are paid in it. Where labor is effective, high wages and low prices go together.


None the less, an established high rate of wages always presents itself to the individual employer as a difficulty that has to be overcome. And to the employee it presents itself as a thing in danger,—something that must always be jealously guarded. Yet it is a real difficulty for the employer only where the effectiveness of labor is not great; and for the employees also it needs no protection, so far as the competition of foreign products is concerned, where this same essential condition is found. If, indeed, such effectiveness does not exist, then the American employer cannot pay the prevailing high rate of wages, and hold his own in free competition with producers in countries of lower wages. In other words, he cannot hold his own unless there is the comparative advantage in his particular industry. The prevalence of a general high rate of wages is due to the fact that in the dominating parts of the country's industrial activity the comparative advantage exists. These dominating industries set the pace; in them we find the basis of the high scale of remuneration; it is they which establish a standard which others must meet, and which to the others presents itself as an obstacle.


Some further explanation of these general statements is necessary before they can be made to fit all the facts. What has just been said of dominating industries holds only as regards those industries and those commodities which play a part in international trade.


For sundry reasons, many articles do not come within the range of international dealings. It is out of the question that they should be exported or imported. Such are bulky articles, not readily transportable for any distance, like bricks; these are necessarily produced near the spot where they are used. Such again are articles greatly affected by national habit, like furniture or household utensils; and,—to mention a highly important class,—such are houses and house-room, which must be provided once for all by domestic labor. Things of this sort may or may not be higher in price than they are in foreign countries. They are made by labor which is paid the current high rates of money wages. If that labor is more effective than in foreign countries, the commodities will yet be lower in price than abroad. But if that labor is not effective as compared with similar labor in foreign countries, the commodities will be higher in price. Domestic commodities, therefore,—meaning by that phrase the commodities which are necessarily produced within the country, may be higher in price than they are in foreign countries, or the same in price, or even lower in price, according to the effectiveness of the labor engaged in producing them. If by some change in the underlying conditions,—say, an extraordinary cheapening of transportation,—their importation were to become feasible, the employer would find it impossible to compete with foreigners unless there was the same effectiveness of industry in producing them as there was in the dominant industries.*20


As regards commodities potentially within the range of international trade,—and with these alone the tariff controversy is concerned,—the principle of comparative advantage applies more fully and unequivocally to the United States than to any country whose conditions are known to me. The difference in money wages between the United States and European countries is marked; the difference in commodity wages, though not so great, none the less is also marked. Notwithstanding these high wages, constituting an apparent obstacle or handicap for the domestic producer, the United States steadily exports all sorts of commodities; not only agricultural products, but manufactures of various kinds. Evidently they could not be exported unless they were sold abroad as cheaply as foreign goods of the same sort are there sold. That these products of highly paid labor are exported and are sold cheap, is proof that American industry has in them a comparative advantage. There are other goods which, though not exported, are also not imported; goods where the balance of advantage is even, so to speak. They are not such as are ruled out of the sphere of international trade once for all, because of great bulk or necessity of production in situ; they might conceivably be imported; yet in fact they are not imported. These are the products of industries in which American labor is effective, yet not effective to the highest pitch; effective in proportion to the higher range of money wages in the country, but barely in that proportion. And finally there are the goods whose importation continues, even though there is no obvious obstacle to their domestic production from soil or climate. These are things which, it would seem, could be produced to as good advantage at home as abroad. They could be produced to as good advantage; but they lack the comparative advantage. They do not measure up to the standard set by the dominant industries. The obstacle to their successful prosecution within the country is not physical but economic. It is they which find in high wages an insuperable difficulty. In this class belong the industries which are protected, and which would not hold their own without protection. They are in a position analogous to that of the strictly domestic industries in which labor is not effective, but which, being carried on of necessity within the country, have high prices made necessary by high money wages. The obvious difference between the two cases is that the force which causes the strictly domestic industries to be carried on is an unalterable one, such as the difficulty or impossibility of transportation; while that which causes the protected industry to become domesticated is the artificial one of a legislative barrier.


What, now, are the causes of industrial effectiveness and comparative advantage? To put the question in other words, what are the industries in which a comparative advantage is likely to appear? and, more particularly, in what directions is the labor of the people of the United States likely to be applied with special effectiveness?


The more common answer has been, in agriculture. A new country, with abundance of fertile land, finds its labor most effective in the extractive industries. Hence the United States long were steady exporters of wheat, meat products, cotton. Hence Canada is now a heavy exporter of wheat. Wheat is specially adapted to extensive culture, and is easily transportable; it is the commodity for which nature gives to a new country in the temperate zone a clear comparative advantage. The international trade of the United States was long determined chiefly by the country's special advantages for the production of wheat and similar agricultural staples.


It should be noted, however, that not only the natural resources told, but the manner in which they were used. From the first, inventiveness and ingenuity were shown. The United States early became the great country of agricultural machinery. Especially during the second half of the nineteenth century, the skill of the makers of agricultural implements and the intelligence of the farmers who used the implements were factors not less important than the great stretches of new land. Still another factor of importance was the cheapening of transportation. From the very beginning, the Americans have been energetic and successful in overcoming the vast distances of their country. Our railroads have cheapened long hauls as nowhere else. The most striking improvements of this sort were made in the last third of the nineteenth century; then new lands were opened, and agricultural products exported, on a scale not before thought possible. When the effectiveness of labor is spoken of, the effectiveness of all the labor needed to bring an article to market is meant; not merely that of the labor immediately and obviously applied (like that of the farmer), but that of the inventor and maker of threshing-machines and gangplows, and that of the manager and worker on the railways and ships. In other industries even more markedly than in agriculture, the labor of the directing heads, of the planners and designers, tells in high degree for the final effectiveness of the labor which is applied through all the successive stages.


That the situation began to change with the opening of the twentieth century does not need to be explained at length. The period of limitless free land was then passed, and with it the possibility of increasing agricultural production under the specially advantageous conditions of new countries. For one great agricultural article—cotton—the comparative advantage of the country indeed maintained itself, and its exports continued to play a great part in international trade. The exports of other agricultural products,—wheat, corn, barley, meat products,—have by no means ceased, nor will they cease for some time. But they tend to decline, absolutely and even more relatively. Other articles grow in importance, such as copper, petroleum, iron and steel products, various manufactures. For some of these,—copper, for example,—the richness of our natural resources is doubtless of controlling importance. But the manner in which those natural resources are turned to account is in all cases important; and in many cases the comparative advantage of which the exports are proof rests not on the favor of nature at all, but solely on the better application of labor under conditions inherently no more promising than those of other countries. What are the causes of advantage under these less simple conditions?


The same question may be asked regarding a closely-allied phenomenon, referred to a moment ago. A considerable range of manufactured articles, though not exported, are yet not imported. The domestic manufacturer holds the domestic market with ease, while paying higher wages than his foreign competitor. The range of such industries is wider than is commonly supposed. It is obscured by the fact that our tariff system imposes needless and inoperative duties on a quantity of things which would not be imported even in the absence of duties. On the other hand there is a considerable range of articles on which the duties do have substantial effect,—articles which would be imported but for the tariff. Some of these continue to be imported notwithstanding high duties; they pour in over the tariff wall. Why the difference between the two sets of cases: those in which the domestic manufacturer holds his own irrespective of duties, and those in which he needs the duties or even is beaten notwithstanding the tariff support?


The answer commonly given is that American producers can hold their own more easily when much machinery is used. Then, it is said, the wages bill forms a smaller proportion of the expenses of production, and the higher wages of the United States are a less serious obstacle. But it requires no great economic insight to see that this only pushes the question back a step. Why is not the machinery itself more expensive? The machinery was made by labor. It is a commonplace that a commodity made with much use of machinery is the combined product of two sets of laborers,—those who make the instruments and those who operate them. If all those whose labor is combined for producing the final result are paid higher wages than in foreign countries, why cannot the foreigners undersell where much machinery is used as well as where little is used?


The real reason why Americans are more likely to hold their own where machinery is much used, and where hand labor plays a comparatively small part in the expenses of production, is that Americans make and use machinery better. They turn to labor-saving devices more quickly, and they use devices that save more labor. Where Americans can apply machinery, they do so; and not only do so, but do so better, on the whole, than their foreign competitors. The question remains one of comparative effectiveness. Their machinery is not necessarily cheaper; absolutely often it is dearer; but it is cheap relatively to its effectiveness. It is better machinery, and the labor that operates it turns out in the end a product that costs not more, but less, than the same product costs in countries using no such devices, or using devices not so good.


In general, it may be laid down that this sort of comparative advantage is most likely to appear in the United States in two classes of industries,—those that turn out large quantities of staple homogeneous commodities and those that themselves make tools and machinery. Only where many identical things are turned out, does it pay to construct an elaborate and expensive plant. A machine-using people directs its energies to best advantage where thousands of goods of the same pattern are to be produced. Hence the repeated experience that, notwithstanding high duties, there is a tendency to import specialties and goods salable in small quantities only. Goods used by the masses in large quantities, as distinguished from luxuries bought by the comparatively few who are rich, are likely to be produced at home, without danger of being pushed by competing imports. If specialties, such as goods made to order, must be supplied by domestic producers, they are likely to be what the customer thinks inordinately dear; because they are made preponderantly, or at least in greater degree, by hand labor which is paid high wages and which by the very conditions of the case cannot use labor-saving machinery. Again, implements themselves, big and little, are likely to be well made in a country where people are constantly turning to machinery; from kitchen utensils and household hardware to machine tools, electric apparatus, and huge printing presses. These are things in which the success of American industry is familiar; which are exported, not imported; in which it is proverbial that the Yankee has a peculiar knack,—another way of saying that he has a comparative advantage.


The relation between high wages and the use of machinery calls for a word more of explanation. It is usually said that high wages are a cause of the adoption of machinery, and that we find here the explanation of the greater use of machinery in the United States. I believe that the relation is the reverse; high wages are the effect, not the cause. To the individual manufacturer it may seem a cause; he schemes to save in the wages bill by adopting a labor-saving device. But the reason why he is induced to scheme is that labor-saving devices are in common use and that the effectiveness of industry at large is therefore great,—hence high wages. No doubt the general situation has its reflex influence on the individual. Every one is put to his trumps; every one feels the need of playing the industrial game at its best. The abundant resources which so long contributed greatly, and indeed still contribute, to making labor productive and wages high, thereby stimulated the introduction of labor-saving methods in industries not so directly affected by the favor of nature. But the fundamental cause of the prevalent use of machinery was in the intelligence and inventiveness of the people; these being promoted again by the breath of freedom and competition in all their affairs. What are the ultimate causes of industrial progress and industrial effectiveness is not easily stated; complex historical, political, perhaps ethnographic forces must be reckoned with. But these causes work out their results in modern times largely by prompting men to improve their implements and to use unhesitatingly new and better implements. Thence flows a high rate of return for their labor; it is not the high rate of return that leads them to use the better tools.


In creating and maintaining the comparative advantage which comes from the better application of the machine processes, the business man—the industrial leader—has become in recent times a more and more important factor. The efficiency of the individual workman has been much dwelt on in discussion of the rivalries of different countries: aptitude, skill, intelligence, alertness, perhaps inherited traits. No doubt qualities of this sort have counted in the international trade of the United States, and still count. The American mechanic is a handy fellow,—it is from his ranks that the inventors and business leaders have been largely recruited,—and he can run a machine so as to make it work at its best. But there is a steady tendency to make machinery automatic, and largely independent of the skill of the operative who runs it. The mechanics who construct the machines and keep them in repair must indeed be highly skilled. Once, however, the elaborate machine is constructed and kept in perfect running order, the operative simply needs to be assiduous. Under such circumstances the essential basis of a comparative advantage in the machine-using industries is found in management,—in invention, rapid adoption of the best devices, organization.


The business leader has been throughout a person of greater consequence in the United States than elsewhere. He has loomed up large in social consequence because he has been of the first economic consequence. He has constructed the railway, and opened up the country; he has contributed immensely to the utilization of the great agricultural resources; he has led and guided the inventor and mechanic. I am far from being disposed to sing his praises; there are sins enough to be laid to his account. But he has played an enormously effective part in giving American industry its special characteristics. His part is no less decisive now than it was in former times,—nay, more so. The labor conditions brought about by the enormous immigration of recent decades have put at his disposal a vast supply of docile, assiduous, untrained workmen. He has adapted his methods of production to the new situation. His own energy, and the ingenuity and attention of his engineers and inventors and mechanics, have been directed to devising machinery that will almost run itself. Here the newly-arrived immigrant can be used. So far as the American can do this sort of machinery making to peculiar advantage, so far can he pay wages to the immigrants on the higher American scale and yet hold his own against the European competitor who pays lower wages to the immigrant's stay-at-home fellow. But it is on this condition only that he can afford to pay the green hand wages on the American scale, or on some approach to it: he must make the total labor more effective. The main cause of greater effectiveness in the dominating industries is to be found, under the economic conditions of recent times, not so much in the industrial quality of the rank and file as in that of the technical and business leaders.


Similar reasoning is applicable to another cause of effectiveness in industry which has been much discussed of late,—"scientific management." Some persons believe that here is a panacea of universal application; any and every industry can be made more effective by systematic observation and experiment on each of its steps and management based thereon. With reference to the protective system it was maintained, for example, after the reduction of duties in the tariff act of 1913, that scientific management, if generally adopted, would enable all American industries to meet the new and sharp competition of foreigners. The truth is that here also the question is one of comparative advantage. Scientific management is likely to tell more in some industries than in others. Apparently it tells most in industries of the standardized type,—precisely those in which industrial leadership already has proved of cardinal importance and in which Americans have already shown the greatest aptitude for leadership. It implies large-scale operation; since the heavy expense of preliminary investigation and the enlarged supervisory staff are worth while only if the expense is spread over a large output. It is adapted not to industries which produce specialties or small lots of numerous and varied articles, but to those in which the steady repetition of the same operations makes it profitable to work out an elaborate system. The indications are that it will not radically change the character of American manufacturing industry or modify the division between domestic and foreign sources of supply. Rather is it likely to accentuate existing relations; to strengthen American industry where it is already strong. Not all industries equally will feel its influence, but those in which this special form of industrial leadership tells with special effectiveness.


Returning now to the invention and operation of machinery, we have to consider a further possibility,—one which has played a considerable part in recent tariff discussions. The more machinery becomes automatic, the more readily can it be transplanted. Is there not a likelihood that apparatus which is almost self-acting will be carried off to countries of low wages, and there used for producing articles at lower price than is possible in the country of high wages where the apparatus has originated? In hearings before our congressional committees a fear is often expressed that American inventors and toolmakers will find themselves in such a plight. An American firm, it is said, will devise a new machine, and an export of the machine itself or of its products will set in. Then some German will buy a specimen and reproduce the machine in his own country (the Germans have been usually complained of as the arch plagiarists; very recently, the Japanese also are held up in terrorem). Soon not only will the exports cease, but the machine itself will be operated in Germany by low-paid labor, and the articles made by its aid will be sent back to the United States. Shoe machinery and knitting machinery have been cited in illustration. The identical apparatus which has been brought in the United States to extraordinary perfection is sent to Europe (perhaps even made in Europe by the American manufacturer), and is there worked by cheaper labor. The automatic looms, again, which have so strikingly influenced the textile industry of the United States, and so much increased its effectiveness,*21 are making their way to Europe,—here again being pushed into use by the American loom makers themselves. Is it not to be expected that they will be operated by cheaper English and German and French labor, and that their products will be shipped back to the United States, to the destruction of the very American industry which they had first made strong and independent?


This possibility is subject to exaggeration. It is not so easy as might be supposed to transplant an improved system of production and all that hangs thereby. However automatic a machine may be, intelligence and knack in operating it are always called for; though less, perhaps, among the ordinary hands than among the machine tenders and foremen. It is a common experience that the same machinery will produce in the country of its invention and manufacture better results than when transplanted. Those very automatic looms, just referred to, are making their way very slowly into Europe. They do not fit into the traditional industrial practices, and do not accomplish what they accomplish in the United States. The difficulties which impede the transfer of machinery and methods, however perfected and however available for every applicant, are most strikingly illustrated in the rivalry of the Orient. We hear frequently of the menace of the cheap labor of China, India, Japan. Will not these countries deluge us with the products of cheap factory labor, when once they have equipped themselves with the latest machinery? The truth is that they will in all probability never thus equip themselves. To do so, would require more than the mere shipment of the machinery and the directions for working it. A completely different industrial environment would need to be transplanted. The yellow peril has been as much exaggerated in its economic possibilities as in its military.


None the less, some possibility of this sort does exist, especially in the rivalry between those countries of advanced civilization which are more nearly on the same industrial level. It is by no means out of the question that shoe machinery or automatic looms shall be worked as well in Germany as in the United States. Supposing this to be done, cannot the German employer who gets his operatives at low wages undersell the American employer who must pay high wages? Is not the comparative advantage which the United States possesses in its ingenious machinery necessarily an elusive one, sure to slip away in time? An advantage may indeed be retained indefinitely where skill or intelligence on the part of the individual workmen are necessary. Even here there is a doubt whether it will persist, in view of the spread of education and technical training the world over. At all events, in the widening range of industries where the workman merely tends semi-automatic machinery, the manufacturing industries of the country having high wages would seem to be in a perilous situation.


The only answer which can be given to questioning of this sort is that the leading country must retain its lead. As fast as other countries adopt the known and tried improvements, it must introduce new improvements. Unrelaxed progress is essential to sustained superiority; he who stands still inevitably loses first place. Such was in the main the relation between England and the other western countries during the first three-quarters of the nineteenth century. English machinery was exported and English methods were copied throughout the world, but the lead of the British was none the less maintained. As fast as the other countries adopted the devices which originated in England, that country advanced with new inventions or with goods of new grades. A similar relation seems to exist at the present time between Germany and the other countries which follow her lead in some of the chemical industries.*22 It appears also in the position of the United States in those manufacturing industries which contribute to our exports. As fast as the American devices are copied elsewhere, still other improvements must be introduced.


This will seem to the American manufacturer a harsh sentence, and a heartless or unpatriotic one to the ordinary protectionist. What? To be deprived of the fruits of our own enterprise and ingenuity, without protection from a paternal government against the interlopers? Yet I see no other answer consistent with the general reasoning of economics on international trade and the geographical division of labor. The gain which a country secures from its labor is largest when that labor is applied in the most effective way; and labor is applied with the greatest effectiveness only when it proves this effectiveness by sustained ability to hold the field constantly against all rivals.


This train of reasoning, however, can be carried further. It is conceivable that improvements and inventions will be so completely adopted by all the advanced countries as to bring about an equalization in their industrial conditions; which of necessity would lessen the volume and the importance of trade between them. Where an invention is introduced in a single country, it gives that country at the outset a comparative advantage, leads to exports, and swells the volume of international trade. When the invention comes into international use, however, the industry which it serves may drift toward the countries of low wages; and these then may export the products. May export them, be it observed; for this tendency is greatly checked by those obstacles to imitation and transplanting which have just been referred to. But suppose the tendency not to be checked: suppose that each and every new device comes to be adopted in all countries, and used in all with equal effectiveness. Then the ultimate consequences will be different from those that nowadays follow the introduction of improvements. No one country will then possess advantages in manufactures over others; no one will be able to export to another; trade between them in manufactured goods,—if the assumed conditions hold absolutely,—will cease. All countries will secure in the same degree the benefit of the universalized inventions.


Such would be the inevitable outcome of complete equalization of the effectiveness of labor. The total income of a community is the product of its industry,—in the last analysis, of its labor. If labor is equally productive everywhere, differences in prosperity will cease. Then there will be no room for comparative advantages based on invention, peculiar effectiveness, better machinery, more skilful organization. The only trade between countries will be that based on unalterable climatic or physical advantages; such trade, for instance, as arises between tropical and temperate regions and between temperate regions having markedly different natural resources.


This consummation will not be reached for an indefinite period; nay, probably it will never be reached. Certainly it is beyond the range of possibility in any future which we can now foresee. But some approach to it is likely to come in the relations between the more advanced countries. There is a tendency toward equalization in their use of machinery, and so in their general industrial conditions. For the United States especially, the twentieth century will be different from the nineteenth. The period of free land has been virtually passed. That great basis of high material prosperity and of high general wages no longer exists as broadly and strongly as it did during the first century of our national life. The continued maintenance of a prosperity greater than that of England and Germany and France must rest on other causes. Now that fresh land can no longer be resorted to by the expanding population, a higher effectiveness of labor must depend almost exclusively on better implements and higher skill,—on labor better led and better applied. It may be reasonably hoped that the United States will long remain the land of promise, in the van of material progress; but the degree of difference may be less than it was. This lessening difference will come about, probably, not because the United States will fall back but because other countries will gain on her. Such has been the nature of the changed relation between England and the countries of the Continent during the last generation; and such,—to go back earlier,—was the change in the relative positions of Holland and England in the course of the seventeenth and eighteenth centuries. England no longer retains the unmistakable leadership which she had over the Continent during the greater part of the nineteenth century. But she has not retrograded; the countries of the Continent have progressed. Such is likely to be the nature of the coming race between the United States and other advanced countries. And the outcome is one which every friend of humanity must welcome. It means diffused prosperity, economic and social progress.


For an indefinite time, however, differences in general industrial effectiveness will remain. They will obviously remain, so far as they rest upon natural causes,—differences in soil, in mineral wealth, in climate. They will remain also in many manufacturing industries in which physical causes are not decisive. Some countries,—the United States among them, we may hope and expect,—will use machinery better, will apply labor-saving appliances more freely. The people of the United States will direct their labor with greatest advantage to those industries in which their abilities tell to the utmost. The development of the different industries will unquestionably continue to be affected by the accidents of invention and of progress, by dominant personalities in this country and in that, by the historical development of aptitudes and tastes, by some causes of variations in industrial leadership that seem inscrutable. But a general trend is likely to persist; in the United States labor-saving devices will be adopted more quickly and more widely. It will be shown in the following pages how this tendency has appeared in the great development that has taken place since the civil war, and how the effects of tariff legislation have been themselves influenced by the general tendency. In the industries where machinery can be used to most effect, this country will continue to have a comparative advantage.

Notes for this chapter

So far as money wages are concerned, the dominating industries are those which export. I have considered this problem fully in a paper in the Quarterly Journal of Economics (vol. xx), from which I quote the following paragraphs (pp. 510-511):—

"Those countries have high money wages whose labor is efficient in producing exported commodities, and whose exported commodities command a good price in the world's markets. The general range of money incomes depends fundamentally on the conditions of international trade, and on those conditions only. The range of domestic prices then follows: it is high so far as the efficiency of labor in domestic commodities is small, low so far as the efficiency of labor in domestic commodities is great.

"The situation is simplest in the case,—difficult to find in the real world, but instructive for illustration of the principle,—of a country having a monopoly of a given article of export or set of exported articles. By monopoly, I mean here not that the producers within the country fail to compete effectively among themselves, but that the producers of no other country compete with them. The price of such exported articles would depend, in the manner with which the reader may be supposed familiar, on the equation of international demand. The more the consumers in other countries care for them, the higher will their prices be pushed. The less the labor with which these articles are produced at home, the higher will be the money wages resulting from these high prices. The higher money wages in the exporting industries will set the standard for money wages in the country at large; and the general high wages may or may not be accompanied, as already explained, by high domestic prices.

"Where a country exports in competition with other countries,—the well-nigh universal case,—the same forces are at work. The prices at which the exports are sold depend on the world demand for the commodity. In that world demand, or, to speak more carefully, interplay of demand, the extent to which the consumers in the several countries care for the articles imported into them determines which countries shall sell their exports on advantageous terms. Those countries whose exports are in most urgent demand will have the greatest possibility of high money incomes. Whether they will have high incomes in fact, depends on the labor cost of their exports. The wheat which is exported both by the United States and by Russia sells at the same price; but that price means large money returns in the country of machinery, efficient labor, and cheap internal transportation, and low money returns in the country which lacks these advantages."

See below, pp. 273 seq.
See a passage quoted in my Tariff History, p. 393, note.

End of Notes

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