Our sheep and the tariff

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Chapter I. The Tariff

Free-Trade or protection? This is the present Alpha and Omega of political controversy. True, the word ' ' free- trade ' ' is more or less avoided by many of its disciples. They prefer to be called ' ' Tariff Reformers, ' ' or announce themselves in favor of a " tariff for revenue only." But the rival principles of free-trade and protection lie at the bottom of every argument. 11 Revenue Reformers " regard the Tariff as only a temporary expedient — a nursery for ' ' infant industries ; ' ' while none of those who advocate ( ' a tariff for revenue only, ' ' at heart regard a tax on imports as an economical method of defraying the expenses of the government.

It is not my purpose to discuss the general subject of import duties. Sydney Smith said of Bishop Berkeley, that he had u . . . . destroyed the world in one volume octavo ; ' ' but it would have required, even from a Berkeley, a far greater expenditure of pen and ink to thoroughly discuss the tariff. I shall therefore confine myself to one portion of the field, namely: The Tariff on Wool.

It is necessary, however, to first dispose of a preliminary question. If the theory of free-trade is correct, all impost duties are necessarily bad; and it will be useless to investigate the actual conditions of any industry, except to furnish an example of the truth of our conclusions. On the other hand, if there are circumstances in which a tariff will be beneficial to a nation, it will be necessary to detenu ine, by an examination of facts, whether our present situation warrants us in protecting the wool-grower. A purely theoretic study of economic questions is of doubtful ultility, but, nevertheless, the practical must be preceded and combined with the theoretical, before we can expect useful results. In the present case this combination is unusually easy; for though the theoretical part of many tariff discussions has been confused by much useless disputation, the two lines of argument, one taken by the free trader and the other by the protectionist, are in reality very simple.

Basiat, in his entertaining little work on "Sophism of Protection," has placed the theoretic basis of free-trade in its clearest and best light. The idea which lies at the foundation of his argument, as at the foundation of free-trade thought generally, is that a reduction in the price of any commodity is always beneficial to a people. No one will care to dispute that a general reduction in prices would be advantageous, provided wages remained the same; but it is the idea that a fall in the price of any single commodity is necessarily a good to the whole country which is peculiar to the free-trader. He thus makes cheapness the criterion of efficient production. To defend this position each commodity is taken up in turn. Man is regarded as first demanding article A. As a consumer of A it is desirable that he should buy A as cheaply as possible. Then some other commodity is taken, and the same line of reasoning is adopted with a similar result; while from the whole, it is concluded that a tariff on any article, which tends, temporarily at least, to raise its selling price, is always and necessarily bad. To be of any value in this connection the proposition

"cheapness is always desirable," must be universal. It must not simply hold under certain conditions; for then the doctrine of free-trade, which rests on it, will cease to be applicable to all countries at all times. The proposition itself rests, as we have shown, on a method of reasoning which separates each commodity, and the desire for it, from all other desires and commodities; treating each in turn as if it alone existed, and applying the law deduced from such an examination to a world where men seek simultaneously a great variety of organic and inorganic substances.

L,et us on our part turn to the world as actually constituted. We find the laborers, apart from those doing purely intellectual work, engaged either in agriculture or manufacturing. I use these terms in their broadest sense. By ' ' agriculture ' ' I mean any industry in which land is a necessary element of production; and under the term ' ' manufacture ' ' include all other occupations. *

An increase in the demand for manufactured articles has no permanent effect in raising the price. Four men can attend to twice as many looms as two. If twenty men can turn out forty yards of cloth in a day, forty men, with twice as much machinery, can make eighty yards, or even more, if the increase in numbers makes possible more efficient organization of labor. But whether any slight increase in the return per man will take place or not, the point I wish to emphasize is this, that an increase in the demand for manufactured com-

* The reader may find a full discussion of land and its rent, which forms the basis of this discussion, in the following works: Ricardo, Principles of Pol. Econ. and Taxation, Chap. II ; James Mill, Elements of Pol. Econ., p. 17; McCulloch, Principles of Pol. Econ., Part III., Sect. V. ; J. S. Mill, Principles of Pol. Econ., Book II., Chap. XVI.; Fawcett, Manual of Pol. Econ., Book II., Chap. III.; Jevons, Theory of Pol. Econ., Chap. VI. ; Walker, Pol. Econ., Part IV., Chap. II. ; Patten, Premises of Pol. Econ., Chaps. I. and II. ; George, Progress and Poverty, Book II., Chap. II.

IO OUR SHEEP AND THE TARIFF.

inodities will not be followed by a permanent rise in prices.

In agriculture it is different. Each acre of land has its limit of productive capacity. Skill and labor can add to the total product, but there is a point beyond which no more can be produced. You may grow a stalk of wheat on every square inch of ground, but you cannot grow two stalks in the same place. Again, if you double the amount of labor on an acre, while you may and probably will increase your product, you may not double it. Two men working in a field may raise more than if one man worked alone, but the proportion that each receives may be less than the amount he could raise working by himself.

What is true of each field taken separately is true of the country, as a whole. When there is only a small amount of a commodity raised, then an increase in the demand for it, attracting capital towards the industry, may open new sections of the country, and ultimately increase, not only the amount produced, but the proportional return per man, i. e. , the return measured by the total labor expended, and the total result. On the other hand, if much land is already devoted to the production of some one product, an increase in the demand will cause lands less favorable for its cultivation to be utilized. Production becoming more difficult, the ''proportional return ' ' will be less than before. The increased labor will not meet with a like increase in reward. When the cultivation of any commodity in the country has been carried to this extent, then it is said that the point of diminishing returns for that commodity has been reached. If after this more of the commodity is produced in response to a greater demand, the average effort required to produce a unit quantity of the commodity is greater than before. Such an increase would naturally lead us to expect an increase in its price. But

OUR SHEEP AND THE TARIFF. II

the actual effect on the price is even greater than we might at first anticipate. Thus suppose it takes 2,000,- 000 laborers working for two months to raise 200,000,000 lbs! of tobacco. The demand increases. If the point of diminishing returns for tobacco has been passed, the increase in the product has to be secured by growing tobacco on land less suited to its cultivation. The difference between the average cost of production on the old and new tobacco lands will depend in each case on the physical conditions of the country. We may suppose that it will now take 2,500,000 men, working for two months to raise 240,000,000 lbs. of tobacco; the 40,000,000 lbs. representing the increase in the amount of the demand. If tobacco were grown by a co-operative association, each worker would receive 96 pounds of tobacco, instead of the 100 lbs. which he received before the increase in the demand necessitated a resort to poorer tobacco soils. But tobacco, or any other commodity, is not grown on a co-operative plan. Bach man cultivates his own land, or the land he has rented, and no two acres are exactly alike. Every pound of tobacco is thus grown under different conditions, and has a different cost of production. At any one time, however, for similar grades, there is but one price; and this price which rules each single article of the product must be high enough to repay the labor expended on that portion raised under the most unfavorable conditions. Men will not long continue to produce any commodity at a loss. If prices do not warrant growing a certain product on some of the land now utilized for its cultivation, those lands will cease to be used. Agricultural prices then are not governed by the total effort required to raise the entire product ; but by the cost of production of that portion of each commodity grown on the poorest land. The poorest land used for the cultivation of each commodity is often spoken of as the present margin for its cultivation. Iii our illustration the increase in price per pound of tobacco may be much more than four per cent. , which represents the average decrease in the return for each man's labor, if tobacco was raised on the cooperative plan. The rise in price is represented by the difference between the poorest tobacco lands utilized for tobacco, before the increase in the demand and that used after such increase. The difference depends upon the change in the amount of the demand and the physical conditions of the country. It may be five, ten, or, if all the lands in any degree suitable for tobacco have already been utilized for the production of that commodity, even twenty or thirty in exceptional cases.

Not only does the increase in the demand for an agricultural product, if the point of diminishing returns for its cultivation has been passed, raise the cost of the product to the consumer; but it has a bad effect on the distribution of wealth. That portion of the wealth of the community which goes to the owner of land for the use of the natural properties of the soil, is called rent. I use the term in a restricted sense, and do not include the return from the price paid for houses and barns, but simply the price which is paid for the fertility of the soil, or on account of the land's desirable position. Let us see how the excessive demand for some one product affects this kind of rent. The price for any commodity being regulated by the cost of that portion which is grown under the most unfavorable conditions, or in other words on the margin for its cultivation, the difference between the price and cost of production of the commodity on lands well suited for its cultivation is often very great.

If the poorest land ultilized for wheat yielded ten bushels to the acre, one who happened to own land which could produce fifteen bushels per acre could demand five bushels of each crop from the person who desired to lease it from him. Any increase in the price of wheat would not benefit the tenant; it would simply compel him to pay the owner so much more rent. That part of the rent which is due to the land's capacity for growing wheat, would be equal to the price of wheat per bushel multiplied by the difference between the average number of bushels produced on that land, and the average number of bushels raised on land at the present time on the margin of cultivation for wheat. Thus, with every increase in the demand for wheat, after the point of diminishing returns has been passed, two factors tend to increase the money-rent of wheat lands. The margin for the cultivation of wheat falls ; therefore the difference between the amount of wheat which can be raised on any old wheat lands and the lands on the margin for the cultivation of wheat is increased. But at the same time the price of wheat per bushel has risen; for price is regulated by the cost of production on the margin of cultivation for wheat, and that margin having fallen, the cost of production has become greater. The farmer who rents his land from the owner is not benefited, nor is he injured, by a rise in rents. Practically he is always laboring on the margin of cultivation. If he happens to use better soil than his neighbor, he pays a higher rent for the privilege.

Thus we perceive that the increase in the price of any agricultural commodity owing to an increase in the demand, while it may injure the consumers, does not benefit the farmer as a farmer, but rather tends to create a landed gentry who live not on their own labor or savings, but on those of others; and whose incomes are not due to the efforts of themselves, or their ancestors, but to the fact that they own a piece of ground, which has become a natural monopoly because it is peculiarly adapted to the growing of a certain commodity.

Our short investigation has shown us this much concerning production : There is a marked contrast between manufactured and agricultural commodities. With the former an increase in the demand has no effect on the price or the distribution of wealth; while with the latter, such an increase may, under certain circumstances, not only have a great and permanent effect on the price, but, by increasing rent, may tend to cause an unequal distribution of wealth. The key to the problems which surround the subject of foreign trade, as also the refutation of the proposition that the cheapness of any commodity is always beneficial, lies in a recognition of the fundamental distinction between the effects of increased demand on the prices of agricultural and manufactured commodities.

Remembering this distinction, let us take the following illustration of the possible effect of a tariff on all clothing.

Suppose we have two countries "A" and "B." In " A" the money rate of wages is one dollar per day; in U B" for the same work, eighty cents. The high rate of money wages in the first country we may suppose to be the result of social of political causes. We can look upon "A" as a young country where many new projects are being constantly started, and consequently, where the demand for labor is greater than the supply. In "A" we may imagine that wheat and agricultural products are one dollar per bushel. In the second country, in spite of the lower rate of wages, on account of the poorer quality or limited quantity and therefore higher price of the land, the price of wheat is one dollar and ten cents per bushel. *

* The land actually planted in wheat or other agricultural products in the country where the wages are comparatively low, need not necessarily be poorer in order to make the price higher than in the country where the money rate of wages is high. The wages in the United States, for example, are higher than in England, although the

If trade is unrestricted, the industries of country c 'A' ' will be mainly agricultural. Breadstuffs will be exported, and in exchange manufactured products will be imported. Manufacturing in this country will be at a serious disadvantage, for the same work is performed for twenty-five cents less in country "B." A protective policy is adopted, a duty of thirty per cent, being laid on all cloths. It soon becomes cheaper to manufacture than to import. Clothes will now be made at home. Many laborers will leave agriculture and drift toward manufacturing pursuits. The production of food will fall off by the amount of agricultural commodities formerly exported; for those who formerly labored to produce the agricultural commodities desired by the foreign nation, in order to pay for the imported manufactured articles, will themselves be employed in manufacturing those articles. If now money wages remain the same, and the purchasing power of a dollar is increased, then certainly the tariff is beneficial. By the purchasing power of a dollar I mean its power to buy the things we want in the relative proportion in which we desire them. The price of silk, for instance, has no effect on the purchasing power of a dollar to the day laborer. In order to see whether a certain course is beneficial, we must not only know its effect upon prices^ but also the ways in which persons of average means spend their money. The way in which the American living on less than one thousand dollars per year spends his income is as follows:*

average yield of wheat per acre in the counties of England is from 24 to 28 bushels; while in our States it is only from 12 to 16 bushels. The price of wheat is higher in London, however, than in New York, because England cannot raise all the wheat she demands, and therefore must import from us and from other coup tries.

* Wright, Comparative Wages and Prices. The Sixteenth Annual Report of the Massachusetts Bureau of Statistics and Labor.

l6 OUR SHEEP AND THE TARIFF.

Subsistence 5 J -7 6 per cent.

Clothing 12.32 "

Fuel 5-io

Sundries 15-57 "

Taking these figures for country U A" and assuming that the duty raises the cost of clothing 30 per cent., then the tariff has increased the cost of living 30 per cent, of 12.32 per cent, or 4.896 per cent. But the same laborers spend 51.76 per cent, of their income for food. The tariff, however, has decreased the demand for the agricultural products, formerly exported. If the country has previously passed the point of diminishing returns for these products, the poorest lands utilized for their cultivation after the adoption of the protective policy, will be much better than the poorest land formerly used for their production. As before stated, the poorest land in "A" used for the production of agricultural commodities regulates their selling price. Therefore the extent of the reduction in the cost of food in country "A," owing to the duty on manufactured articles, will depend upon the difference between the poorest lands used for the production of the agricultural commodities exported while the free-trade policy continued, and the poorest land used for the production of the same commodities after the adoption of the policy of protection. The physical conditions of the country may be such that there is no difference. Then, as far as our argument has gone, there would be no compensation for the increase in the cost of manufactured articles. But can we say a priori that the physical conditions of any country are necessarily such that the result will not be a great fall in the price of agricultural products ? If meat, bread, etc. , fall ten per cent. , the cost of living would be reduced 5. 17 per cent. Then in spite of the increase of 30 per cent, in clothing, a dollar will buy more than before the adoption of the protective policy. By supposing an alteration in the conditions, we can increase or diminish the benefits of protection.

I do not claim that the foregoing illustration proves that protection to manufactured articles is a good thing for all countries at all times, or that protection is the proper policy for the United States. But I do contend that it shows we cannot say with the free-trader, ' ' Protection is always and necessarily bad. ' ' « The advisability of impost duties depends upon circumstances. The foregoing idea might be formulated somewhat as follows:

Prop. 1, A. Under certain circumstances a system of protection to a large class of manufactured commodities^ by decreasing the number of agricultural laborers, raising the margin of cultivation, and reducing the cost of agricultural produce, will increase the purchasing power of a dollar.

This argument, which supports, under certain circumstances, a general system of protection to manufactures, can also be used to show the evil, under similar conditions, of a general system of protection to agricultural products. To force a portion of the population into manufactories, will not raise the cost of manufactured commodities, and may greatly diminish the cost of food. But if the point of diminishing returns for many agricultural products has already been passed, to drive numbers from manufacturing into agriculture, by placing duties on all farm products, will certainly fa 1 to reduce the price of manufactured articles, and will greatly increase the cost of food and raw material. Thus, Prop. 1, A, when applied to agriculture will read:

Prop. 1, B. Under certain circumstances, a general system ofproteclio?i to agricultural produce, by decreasing the number of laborers in the manufactories, may lower 2 l8 OUR SHEEP AND THE TARIFF.

the margin of cultivation, and thereby increase the cost of food and raw material, while the cost of manufactured commodities will not be reduced.

The ' ' circumstances ' ' which will make a general protection to manufactured articles result in an increase of the productive power of a nation, and the purchasing power of a dollar, are not confined to cases where the nation has passed the point of diminishing returns for nearly all the products of agriculture. In fact, if a nation must wait until the points of diminishing returns have been passed for nearly all the possible products of the land, before laying duties on manufactured articles, a protective policy will never be adopted. It is rather the wrong use of land, than the excess of agricultural labor, that is prevented by a judicious tariff. The high price that foreign nations are willing to pay for some one product, causes it to be cultivated to the exclusion of others better adapted to a large portion of the soil. We doubt if there is a country in the world where one can say there are too many agricultural laborers; but if we had free-trade in the United States, there probably would be too many farmers producing wheat. Generally the reduction of the number of workers in agriculture is beneficial, only because the reduction takes place along those lines where foreign demand will cause excessive production.

Prop, i, B, deals with a general tariff on agricultural products. Such a tariff would be unwise, as the old corn laws of England abundantly testify. But, unfier some conditions, the same argument might be used to defend protection to a single agricultural commodity. Take a country which exports one agricultural product, such as corn, to pay a large part of her international debt. Suppose that the point of diminishing returns for corn has been passed, but in spite of this fact, the country can sell corn much cheaper than its foreign

OUR SHEKP AND THE TARIFF. 19

rival. The foreign country, however, can produce potatoes at so low a cost, on account of its social conditions, or because of the peculiar adaptability of the land to potatoes, that it is impossible to raise them profitably in the corn-growing country. The point of diminishing returns for potatoes in the home country has not been reached, for there are practically no potatoes grown. The only reason why potatoes are not raised, is because they can be produced more cheaply in the foreign country. A prohibitory duty is now placed on potatoes. If this drives persons out of manufacturing into potato raising, a loss will result. But, as it has stopped the importation of potatoes, the foreign demand for the country's products will tend to decline in proportion to the amount of potatoes formerly imported. As corn is the principal export, some corn lands will be thrown out of cultivation, and many persons formerly engaged in raising corn will find it more profitable to raise less corn and more potatoes. Good potato lands which were formerly considered worthless will be taken into cultivation.

To illustrate the result of a tariff on potatoes in a country where the conditions mentioned exist. Suppose a certain farmer made a profit of four do 1 .lar> an acre from his land when he planted corn, and three dollars from the same land when used for potatoes. He will naturally plant corn as often as possible, probably soon exhausting the soil. The government by a tariff increases the price of potatoes, so that the profit on potatoes is four dollars an acre. No more potatoes being imported, the demand for corn falls, and our farmer, we may suppose, only makes three dollars and seventy-five cents growing that cereal. The rise in the price of potatoes, and the fall in that of corn, both operate to increase the acreage devoted to potatoes at the expense of the acreage devoted to corn. Taking the country as a whole, there is less corn grown, but more potatoes. The worst corn lands formerly producing corn are no longer utilized for that purpose. From the standpoint of consumption, therefore, potatoes are higher, but corn is lower. As in our former case, whether the purchasing power of a dollar has been increased — in other words, whether the advance in the price of one of* the articles of our consumption is compensated for by the fall in the price of another — depends, not only on the differences in prices, but on the way in which we spend our income. If corn fell ten per cent, and potatoes rose twenty per cent. , but three times as much was spent on corn as on potatoes, we would be better off than before the tariff.

In the following proposition I have tried to formulate the ideas above discussed:

Prop, i, C. Under certain circumstances a duty on an agricultural commodity, for which the point of diminishing returns has not been reached, by diminishing the area devoted to a product which has been cultivated beyond the point of diminishing returns, and thus reducing the cost of such a product, may increase the purchasing power of a dollar.

The ' ( certain circumstances ' ' mentioned in this proposition, exist when the country under investigation is a large exporter of an agricultural product, such as corn, for which the point of diminishing returns has been more than passed.

There are other circumstances, however, in which a tariff on an agricultural commodity may increase the purchasing power of a dollar. One of the elements of the prosperity of a country is the efficiency of the laborer. Efficiency cannot be measured solely by intelligence, but intelligence is always a factor, and in many cases the most important factor. A worker who spends his time fastening the heel of a boot on the sole can be almost, if not quite, as efficient with a moderate as with a high order of intelligence. But the ignorant farmer is, as a rule, the wasteful, slovenly, and expensive farmer. Such a man produces scarcely enough to supply his own imperative needs, and will save little or no capital. Thus a country will never be as wealthy as its natural resources would lead us to expect, if it has an ignorant farming population. But the intelligent workman and higher type of man requires more wages than his less intelligent competitor. The American can work harder and produce more than the Hungarian, yet the latter, because he demands a low rate of wages, is often the cheaper man for the employer of labor to engage. Suppose we have a country in which dairy products, such as butter, cheese, milk, etc. , are not produced, owing to the low price at which they can be imported from other countries. We can also suppose that there are, as in every country, farmers of many different grades of intelligence. What we want to do, however, is to discover the prevailing type of farmer, or the man who is going to survive in the race of competition.

Let us take two classes of men: one contented with an income of $300, the other, more intelligent and efficient, but requiring at least $400 per annum to supply him with what "he considers the necessaries of life. We will also suppose that the higher type of farmer, by working the equivalent of one hundred clays of twelve hours each, can produce 1200 bushels of corn, while the lower type, working the same length of time, can only produce, on account of his inferior efficiency, 1000 bushels. Though only the equivalent of one hundred days of work is spent in raising corn or other cereals, the farmer is debarred from carrying on any other than agricultural industries. He cannot work in a mill half the year and on the farm the other half. Neither can he greatly increase his production of corn or wheat, for the planting and reaping of any crop must each be accomplished within the space of a fortnight. Under these conditions the lower and less efficient laborer will represent the prevailing type of farmer. By selling the iooo bushels at 30 cents per bushel, he will yet receive $300, or sufficient to enable him to live according to his standard. But the higher type of man, who is forced to sell his product at the same price, only receives $360 for his 1200 bushels, which is $40 less than is sufficient to enable him to supply himself with what are to him the necessaries of life. Under these conditions our higher type of man will tend to drift toward the cities, where he will possibly have to work harder, but where he can obtain sufficient to support him in the way which he looks upon as necessary to a happy existence.