The Protection of Infant Industries: Hamilton, Rae, List, Mill, Marshall and Taussig

The protection of infant industries was a commonplace in mercantilist times, and fre­quently advocated as a policy goal by authors and policymakers. In the typical words of a writer in the Scots Magazine of 1740:

All manufactures in their infancy require not only care, but considerable expense, to nurse them up to a state of strength and vigor.

Another writer in 1729 cautioned, however, that “if after their improvement [of manu­factures] they can’t push their own way, by being wrought so cheap as to sell at par with others of the same kind, it is in vain to force it” (ibid.).

Adam Smith was not impressed with the infant industry argument and contended instead:

By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country. But though the industry of the society may be thus carried with advantage into a particular channel sooner than it could have been otherwise, it will by no means follow that the sum total, either of its industry, or of its revenue, can ever be augmented by any such regulation. (WN IV.ii.13)

His attitude toward infant industries was later contested by several influential writers as not applicable to countries that were beginning to develop their economies in competi­tion with the superior technology and long manufacturing experience embodied in the products of the country where the Industrial Revolution began, Britain. Policies aimed at economic development and inspired by nationalistic considerations were proposed in contrast to the cosmopolitan economic language in which the Wealth of Nations was couched.

The founder of the school of national economists was Alexander Hamilton, Secretary of the Treasury to George Washington, who on 5 December 1791, submitted to Congress a “Report on manufactures” in which he noted the difficulties that beset investment in new enterprises in a country such as the newly independent United States:

These have relation to - the strong influence of habit and the spirit of imitation - the fear of want of success in untried enterprises - the intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted - the bounties premiums and other artificial encouragements, with which foreign nations second the exertions of their own Citizens in the branches, in which they are to be rivalled. (Hamilton 1791 [1964]: 140)

Investment in “untried enterprises” should be facilitated by government policies such as subsidies and premiums to innovation, which are preferable to protective duties and should be maintained for a limited length of time. The “temporary expense” that they entail is “more than compensated, by an increase of industry and Wealth, by an aug­mentation of resources and independence; & by the circumstance of eventual cheapness” (ibid.: 171).

Hamilton’s arguments for infant industry protection and support were taken up by John Rae, a Scotsman who migrated to Canada and then to the US where he published Statement of Some New Principles on the Subject of Political Economy, Exposing the Fallacies of the System of Free Trade, and of Some Other Doctrines Maintained in the “Wealth of Nations” (Rae 1834). As the title promised, it was an extended critique of Smith’s Wealth of Nations, and contained in addition a pioneering formulation of capital theory that subsequently impressed Mill and was further developed by Irving Fisher. Like Hamilton, Rae pinned his hopes for economic development on the encouragement of innovation in manufacturing and the transfer of foreign technologies.

After migrating to the US, the German economist Friedrich List became another admirer of Hamilton’s “Report” and wrote Outlines of American Political Economy (List 1827). He then returned to Germany where in 1841 he published a book subsequently translated into English as National System of Political Economy (List 1856). List became the most influential advocate of infant industry protection in Germany, Europe and throughout the developing world. For him the main aim of protection was the genera­tion and harnessing of a nation’s “productive forces”, an expression subsequently taken up by Karl Marx. The infant industry argument for protection was at first contested by the British classical school of political economy, probably under the influence of Smith’s doubts about its validity. However, in his Principles of Political Economy of 1848, John Stuart Mill embraced John Rae’s arguments as theoretically legitimate and worthy of cautious implementation. Mill’s advocacy of infant industry protection (which he called “naturalizing a foreign industry”) was instrumental in making this policy respect­able in principle to economists and policymakers. Mill supported it in circumstances highlighted in book V of his Principles devoted to the role of the government, where he argued for policies designed to convert a potential comparative advantage into an actual comparative advantage:

The superiority of one country over another in a branch of production often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the produc­tion than those which were earlier in the field: and besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production than its trial under a new set of conditions...

The infant industry argument was subsequently given cautious approval by Alfred Marshall (1923 [1965]: 217-19) in the United Kingdom and Frank Taussig (1927) in the US, whose first book written when he was only 23 is titled Protection to Young Industries as Applied in the United States (Taussig 1883 [2000]). Both economists leaned toward free trade but respected the logic of infant industry protection. Taussig (1927: 179) noted that protection had promoted the growth of some American industries but not others. However, to a greater extent than the advocates of national systems considered above, he carefully related a country’s success in creating new industries to the existence of poten­tial comparative advantage, and attributed the latter to a complex interplay of natural and human factors.

Infant industry protection, according to its advocates, does not inherently conflict with eventual free trade. They all maintained that protection should be limited in time and specific to particular industries. However, they refused to believe that compara­tive advantage is predetermined by a country’s geography or its natural and human resources, along the lines of the Heckscher-Ohlin trade model examined below. They aimed to develop a country’s potential comparative advantage rather than exploit an exogenously given one. The distinction between present-day economists who accept the infant industry argument for protection and those who reject it parallels that between philosophers such as Plato, who believed that “one individual is naturally fitted for one task, and another for another” (Plato 1963: 370b), and those like Adam Smith who held such interpersonal differences to “arise not so much from nature, as from habit, custom, and education” (WN I.ii.4). Despite this view, as noted above Smith himself rejected the infant industry argument. The writings of the above-discussed “creators of comparative advantage” anticipated the field of economic development that evolved in the twentieth century.