To Save Our Hides
APRIL 01, 1968 by WILLIAM L. LAW
Mr. Law is President of the Cudahy Tanning Company in Wisconsin.
Protectionist sentiment in the nation seems more prevalent today than it has been in many years. This trend is unfortunate.
I have some knowledge of the subject, inasmuch as baseball glove leather was the principal product of our firm until 1957 when Japanese-manufactured ball gloves entered and ultimately captured 70 per cent of the United States market. Today we tan no baseball glove leather. Sentiment in the ball glove industry at that time was very strong for protective action. I investigated the matter in some depth but found that I could not in good faith urge protectionist action on my representative. Such action would have been wrong economically, politically, and morally. It simply makes no sense.
My sentiments are colored by the fact that I look on myself not as a tanner whose product is leather, but as a capitalist whose product is profit. That climate most beneficial to capitalists, and for that matter workers and society in general, is one in which there exists a minimum of governmental interference.
Unfortunately, the most active foes of capitalism seem to be capitalists themselves, because they seek socialism for themselves but free enterprise for others.
The protectionist argument is almost as widespread today as it was two hundred years ago when Adam Smith so brilliantly demonstrated its fallacies. Fortunately, we have the work of Smith and his many successors plus the numerous empirical lessons of the benefits of free trade (of which the United States is a notable example) to demonstrate the advantages of unrestrained exchange; unfortunately, it seems that each generation must relearn the lesson.
The Highest Impertinence
No improvement can be made on Smith’s understanding that "it is the highest impertinence and presumption, therefore, in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense, either by sumptuary laws, or by prohibiting the importation of foreign luxuries. They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will….
"To give the monopoly of the home market to the produce of domestic industry… must in almost all cases be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of a shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbors, and to purchase with a part of its produce, or what is the same thing, with a price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom….
"That it was the spirit of monopoly which originally both invented and propagated this [protectionist] doctrine cannot be doubted; and they who first taught it were by no means such fools as they who believed it. In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest that it seems ridiculous to take any pains to prove it; nor could it ever have been called in question had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind."
The "sophistry" of which Smith speaks is in essence that being advanced today by those protectionists desiring to limit or eliminate the importation of foreign goods, and is basically as follows: The United States is a high wage country, its industry is unable to compete with that in other countries, imports are increasing, and unless remedial measures are adopted, our industries will be destroyed, our defense posture will be weakened, and a large scale unemployment will ensue.
That argument is advanced innocently by the naive and sophistically by those who know better. It is no different from that ventured by the mercantilists whose errors Smith so ably exposed.
For Better Living
Attend, then, the rationale for free trade — the position, incidentally, supported by most economists: We trade in order to obtain goods that are either unobtainable domestically, such as asbestos, or that can be obtained cheaper abroad, such as baseball gloves. Trade, between individuals, between states, between nations, is economic and it does not reduce living standards of the participants; rather, it enhances them. In short, trade raises wages. Those who think otherwise fail to understand that wages in the United States are the world’s highest for a reason; Americans work with the most and the best tools. American industry has the world’s highest average capital investment (tools) per worker ($23,000) and therefore has the highest average productivity per worker. We have high wages; however, because of the multiplier (tools) we have low labor costs.
Certainly, labor intensive industries—handmade lace, for instance — are unable to compete. Give an Italian girl a needle and $20 per week and she will produce lace for one-fourth the cost of the American girl who receives $80 per week. Their productivity must be equal. However, give an American miner a giant mechanical shovel and $150 per week and by mining 20 tons of coal per day, he will produce much cheaper coal than the British miner with less efficient tools who receives $60 per week and only produces four tons. The labor cost per American ton at that ratio would be $7.50 and that per British ton would be $15. So we import handmade lace and we export coal; we import baseball gloves and we export computers; we import coffee and we export jet planes.
We Pay with Exports
Exports must equal imports. If this were not so, we would hope for all the imports we could get.
Imagine receiving goods for nothing. But we must pay — and we pay with exports.
Those who would limit imports are taking a superficial view, and it is essential for the sake of our economic well-being that we consider this matter in depth. Consider not only the worker who competes with imports but also the worker who is helped by exports. The baseball gloves are seen, but the computers exported to pay for them are not seen because they have crossed the border; yet, they are nonetheless real.
Consider the consumers whose real wages are raised by cheap imports. Consider the merchants with whom the consumer who buys cheap imports spends the dollars saved. Consider the industries themselves which by competing in world markets are honed to a higher degree of competitive efficiency than they might otherwise be. Indeed, no one likes competition; but it is competition that has given the United States the world’s highest standard of living.
Let those who say that free trade causes unemployment examine our history. They will discover that our periods of highest unemployment occurred when tariffs were highest. Unemployment is not caused by imports, nor is it caused by automation or by growth of the labor force. Supporters of those doctrines would be hard put to find statistical support.
Unemployment is caused when money wages are arbitrarily forced or held above the level indicated by the market. Remember, the level of real wages in an area is in proportion to the capital investment per worker in that area. But if money wages are arbitrarily oversupported, unemployment ensues. To illustrate: In the 1929 deflation the money supply fell by one-third; prices of goods fell, but the administration used all weapons at its disposal to hold money wages up, and for ten years 15 to 25 per cent of the work force was unemployed. The situation was not corrected until 1940 when the government took the opposite position (though for other reasons) and held wages down while it printed money to finance the war. Unemployment disappeared at once.
Most economists agree with the above position. One of them, Sir William Beveridge, said in his book, Full Employment in a Free Society: "This potential effect of high wages policy in causing unemployment is not denied by any competent authority… as a matter of theory, the continuance in any country of a substantial volume of unemployment which cannot be accounted for by specific maladjustment of place, quality, and time is, in itself, proof that the price being asked for labor as wages is too high for the conditions of the market; demand for and supply of labor are not finding the appropriate price for meeting."
Let it be understood that if money wages fell, prices would fall and real wages would continue to rise.
Trade, then, does not cause unemployment; rather, it raises living standards. If industries find that they cannot exist in a free market, it may be that they should not. This should be a market determinant.
If Freedom Is the Goal, Rely on the Market
As for the final argument that national defense requires that the consumers subsidize these noncompetitive industries, let it be said that this position has a better foundation than the others, though in most cases an insufficient one.
For instance, the head of a large steel company asks, "Can we, for example, be assured of the strong industrial base in steel we need for modern defense if one quarter or more of the steel we require is imported from countries lying uncomfortably close to the Soviet Union and China?"
I imagine that we can, but properly this is a matter for the strategic planners within whose purview it falls. The decision should be made in a calm and rational manner and without distortions urged by parties whose interests are not necessarily those pretended.
The free market has the answer to imports, to unemployment, to gold outflow, and to most economic problems if we will but let it function. If the level of money wages (the distinction between real wages and money wages is important) is so high that unemployment threatens and that the balance of trade is negative, then a high tariff policy will simply reduce exports and employment as it always has in the past. The solution of such a problem calls for hard money and the free market.
There is no other effective method. Reliance on the market is the only method consistent with the highest possible standard of living and a climate of political freedom.
Our business, incidentally, is excellent.