Mises Contra Kealey
Take, for instance, the infant industries argument advanced in favor of protection. Its supporters assert that temporary protection is needed in order to develop processing industries in places in which natural conditions for their operation are more favorable or, at least, no less favorable than in the areas in which the already established competitors are located. These older industries have acquired an advantage by their early start. They are now fostered by a merely historical, accidental, and manifestly “irrational” factor. This advantage prevents the establishment of competing plants in areas the conditions of which give promise of becoming able to produce more cheaply than, or at least as cheaply as, the old ones. It may be admitted that protection for infant industries is temporarily expensive. But the sacrifices made will be more than repaid by the gains to be reaped later.
The truth is that the establishment of an infant industry is advantageous from the economic point of view only if the superiority of the new location is so momentous that it outweighs the disadvantages resulting from the abandonment of nonconvertible and nontransferable capital goods invested in the already established plants. If this is the case, the new plants will be able to compete successfully with the old ones without any aid given by the government. If it is not the case, the protection granted to them is wasteful, even if it is only temporary and enables the new industry to hold its own at a later period. The tariff amounts virtually to a subsidy which the consumers are forced to pay as a compensation for the employment of scarce factors of production for the replacement of still utilizable capital goods to be scrapped and the withholding of these scarce factors from other employments in which they could render services valued higher by the consumers. The consumers are deprived of the opportunity to satisfy certain wants because the capital goods required are directed toward the production of goods which were already available to them in the absence of tariffs.
There prevails a universal tendency for all industries to move to those locations in which the potentialities for production are most propitious. In the unhampered market economy this tendency is slowed down as much as due consideration to the inconvertibility of scarce capital goods requires. This historical element does not give a permanent superiority to the old industries. It only prevents [p. 510] the waste originating from investments which bring about unused capacity of still utilizable production facilities on the one hand and a restriction of capital goods available for the satisfaction of unsatisfied wants on the other hand. In the absence of tariffs the migration of industries is postponed until the capital goods invested in the old plants are worn out or become obsolete by technological improvements which are so momentous as to necessitate their replacement by new equipment. The industrial history of the United States provides numerous examples of the shifting, within the boundaries of the country, of centers of industrial production which was not fostered by any protective measures on the part of the authorities. The infant industries argument is no less spurious than all the other arguments advanced in favor of protection.
At first glance, you could accuse Mises of being non-responsive to Kealey-type arguments. But on closer consideration, Mises’ answer is on point. It amounts to this: “So costs are high now, but will eventually be low thanks to learning by doing? Great! If you really believe that, I suggest that you start your business, then run it at a loss until the learning curve saves you. If the financials are really so clear-cut, investors will happily give you all the money you need during the start-up period, knowing they’ll be fully repaid once you know what you’re doing.”
While this may seem fanciful, this is standard practice in startups: You willingly lose money for a while – often years – until you hit stride.
The obvious objection is naturally: But investors rarely want to invest in projects like this. Indeed, most would-be investors will hastily shoo you out the door.
Why won’t they listen? Because in the real world, most business ideas that lose money for the first couple of years are going to lose money forever. Learning by doing will not save them. “Lose money, then make it all back and more” is the exception; “Lose money, then lose even more” is the rule. In the absence of strong, specific evidence, you should assume the worst. Kealey’s case amounts to urging Third World governments to take the empty promises of their native businesspeople as Gospel.
And one really shouldn’t do that.