Friday, November 11, 2016

Alexander Hamilton on Infant Industries

The idea that government should offer temporary support for starting up a new industry, until it becomes established and can stand on its own, has become known as the "infant industry" argument. The "infant" terminology, as well as a prominent example of the underlying argument, dates back to Alexander Hamilton's 1791 "Report on Manufactures" (available at various places around the web, like here and here).

However, Hamilton's discussion of how to support what he called "infant manufactures" (a term he uses only one time) isn't quite as simple as just using tariffs to protect a domestic industry from foreign competition. He is focused how to encourage new manufacturing industries, and he argues that "bounties--that is, subsidies--funded from other government revenues are the best way to do so. Hamilton only argues for import tariffs as one way of collecting revenue for the government to provide such "bounties." A few points worth noting about this line of argument would include:

1) Hamilton prefers bounties over tariffs, in part, because subsidies avoid raising the price of the good--as tariffs would tend to do. He recognizes that import tariffs cause an "expense to the community," in the form of higher prices,and in this sense they are just like a tax that is used to support a government subsidy.  Conversely, Hamilton argues that explicit subsidies will tend to attract additional competition.

2) Hamilton also favors bounties because he notes that limits on imports only give a domestic producer an advantage in the home market, without providing any incentive for exporting. This suggests that the goal of supporting an infant industry, and a way such a policy can be judged, is whether it leads to export sales.

3) Hamilton emphasizes that any such "infant manufactures" policy should be temporary.

4) Hamilton also points out that the US manufacturers of his time already have a considerable advantage over foreign competition because they have much lower costs of transportation.

5) Hamilton's "infant manufactures" argument is not an argument for tariffs to protect jobs in existing established industries. It applies to subsidizing new industries.

6) From a political economy point of view, it's interesting to contemplate whether how a policy of using revenue from tariffs to fund subsidies for domestic industry would play in the contemporary world. It would make explicit, in the form of government collecting revenue and cutting checks, that that tariffs imposing costs to benefit a domestic industry. I don't know if this would make such a policy more popular or less so.

7) It's interesting to reconsider Hamilton's argument for bounties in the context of the modern economy. Modern governments have a lot of tools that give indirect support to new industry: for example, support of education at K-12 and university level, support of R&D, well-developed institutions of intellectual property, legal institutions that support enforceable contracts and financial markets, and so on. Modern governments also have sources and quantities of revenue undreamed  of in Hamilton's time: thus, a standard modern argument against tariffs is that if you want to subsidize a certain industry (and I'm leaping over a Grand Canyon of arguments with that "if"), then setting up a situation in which domestic producers can charge consumers more (because of limited competition) is an odd and potentially counterproductive way to do it.

Here's the relevant passage from Hamilton:
Pecuniary bounties. This has been found one of the most efficacious means of encouraging manufactures, and is, in some views, the best. Though it has not yet been practised upon by the Government of the United States (unless the allowance on the expiration of dried and pickled fish and salted meat could be considered as a bounty), and though it is less favored by public opinion than some other modes, its advantages are these:
 1. It is a species of encouragement more positive and direct than any other, and, for that very reason, has a more immediate tendency to stimulate and uphold new enterprises, increasing the chances of profit, and diminishing the risks of loss, in the first attempts.
 2. It avoids the inconvenience of a temporary augmentation of price, which is incident to some other modes; or it produces it to, a less degree, either by making no addition to the charges on the rival foreign article, as in the case of protecting duties, or by making a smaller addition. The first happens when the fund for the bounty is derived from a different object (which may or may not increase the price of some other article, according  to the nature of that object), the second, when the fund is derived from the same, or a similar object, of foreign manufacture. One per cent. duty on the foreign article, converted into a bounty on the domestic, will have an equal effect with a duty of two per cent., exclusive of such bounty; and the price of the foreign commodity is liable to be raised, in the one case, in the proportion of one per cent.; in the other in that of two per cent. Indeed the bounty, when drawn from another source, is calculated to promote a reduction of price; because, without laying any new charge on the foreign article, it serves to introduce a competition with it, and to increase the total quantity of the article in the market.
3. Bounties have not, like high protecting duties, a tendency to produce scarcity. An in-crease of price is not always the immediate, though, where the progress of a domestic manufacture does not counteract a rise, it is, commonly, the ultimate effect of an additional duty. In the interval between the laying of the duty and the proportional increase of price, it may discourage importation, by interfering with the profits to be expected from the sale of the article.
4. Bounties are, sometimes, not only the best, but the only proper expedient for uniting the encouragement of a new object of agriculture with that of a new object of manufacture. It is the interest of the farmer to have the production of the raw material promoted by counteracting the interference of the foreign material of the same kind. It is the interest of the manufacturer to have the material abundant and cheap. If, prior to the domestic production of the material, in sufficient quantity to supply the manufacturer on good terms, a duty be paid upon the importation of it from abroad, with a view to promote the raising of it at home, the interest both of the farmer and manufacturer will be disserved. By either destroying the requisite supply, or raising the price of the article beyond whit can be afforded to be given for it by the conductor of an infant manufacture, it is abandoned or fails, and there being no domestic manufactories to create a demand for the raw material, which is raised by the farmer, it is in vain that the competition of the like foreign article may have been destroyed.
It cannot escape notice, that a duty upon the importation of an article can no otherwise aid the domestic production of it, than by giving the latter greater advantages in the home market. It can have no influence upon the advantageous sale of the article produced in foreign markets -- no tendency, therefore, to promote its exportation.
The true way to conciliate these two interests is to lay a duty on foreign manufactures of the material, the growth of which is desired to be encouraged, and to apply the produce of that duty, by way of bounty, either upon the production of the material itself, or upon its manufacture at home, or upon both. In this disposition of the thing, the manufacturer commences his enterprise under every advantage which is attainable, as to quantity or price of the raw material; and the farmer, if the bounty be immediately to him, is enabled by it to enter into a successful competition with the foreign material. If the bounty be to the manufacturer, on so much of the domestic material as he consumes, the operation is nearly the same; he has a motive of interest to prefer the domestic commodity, if of equal quality, even at a higher price than the foreign, so long as the difference of price is any thing short of the bounty which is allowed upon the article.
Except the simple and ordinary kinds of household manufacture, or those for which there are very commanding local advantages, pecuniary bounties are, in most cases, indispensable to the introduction of a new branch. A stimulus and a support, not less powerful and direct, is, generally speaking, essential to the overcoming of the obstacles which arise from the competitions of superior skill and maturity elsewhere. Bounties are especially essential in regard to articles upon which those foreigners, who have been accustomed to supply a country, are in the practice of granting them.

The continuance of bounties on manufactures long established, must almost always be of questionable policy: because a presumption would arise, in every such case, that there were natural and inherent impediments to success. But, in new undertakings, they are as justifiable as they are oftentimes necessary.
There is a degree of prejudice against bounties, from an appearance of giving away the public money without all immediate consideration, and from a supposition that they serve to enrich particular classes, at the expense of the community. But neither of these sources of dislike will bear a serious examination. There is no purpose to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry; no consideration more valuable, than a permanent addition to the general stock of productive labor.
 As to the second source of objections it equally lies against other modes of encouragement, which are admitted to be eligible. As often as a duty upon a foreign article makes an addition to its price, it causes an extra expense to the community, for the benefit of the domestic manufacturer. A bounty does no more. But it is the interest of the society, in each case, to submit to the temporary expense-which is more than compensated by all increase of industry and wealth; by an augmentation of resources and independence; and by the circumstance of eventual cheapness, which has been noticed in another place. It would deserve attention, however, in the employment of this species of encouragement in the United States, as a reason for moderating the degree of it in the instances in which it might be deemed eligible, that the great distance of this country- from Europe imposes very heavy charges on all the fabrics which are brought from thence, amounting to from fifteen to thirty per cent. of their value, according to their bulk