Henry George
and the Tariff Question
by Karen
DeCoster [Posted on Wednesday,
April 19, 2006] [Subscribe at email services and
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American economist Henry George is best known for his 1879
treatise Progress and Poverty, for which Albert Einstein
designated George a "beautiful combination of intellectual keenness,
artistic forum, and fervent love of justice" (George 1879, cover).
Progress and Poverty became a huge success, and in 1886
George followed up with a far more obscure — but perhaps more
significant — work on the nature of free trade as pertaining to the
eradication of poverty: Protection or Free
Trade: An Examination of the Tariff Question, With Especial Regard
to the Interests of Labor (online at the Mises
Institute).
The problem identified by Henry George, in Protection or Free
Trade, is that of poverty, and more specifically, wages and
unemployment. What follows from that is George's systematic and
all-embracing dissertation of the effects that protectionist and
free-trade policies have on the wealth of a nation and its
individuals. Naturally, he arrives at a conclusion that is decidedly
in favor or free trade — as opposed to protective prescriptions — as
a surefire solution to the ills of poverty.
George develops his focal point early on by posing the essential
question: Are protective tariffs helpful to those who make their
living via labor? He considers this the "tariff question," calling
it the "great political question of the immediate future" (George
1886, p. 3). He does, in fact, dare to say that he approves of the
ends promoted by the protective tariff advocates when the ends
sought are the promotion of higher wages and prosperous
employment.[1] Nevertheless, he maintains that his position
is to objectively determine whether or not protective tariffs are in
fact favorable to those ends.
George holds up free trade as the natural condition. That is,
men, when unaffected by artificial restraints, instinctively engage
in free exchange whereas protection is a fabrication of mankind, and
therefore is not native to our state of being. Thus does he offer
his definition of protection: "the levying of duties upon imported
commodities for the purpose of protecting from competition the home
producers of such commodities" (George 1886, p. 28). Protectionists,
he adds:
Contend that (at least up to a certain point in the national
development) protection is everywhere beneficial to a nation, and
free trade everywhere injurious; that the prosperous nations have
built up their prosperity by protection, and that all nations that
would be prosperous must adopt that policy. (p. 28)
So does Henry George proceed to demolish the notion of the
protective unit — where each nation, as a whole, presumes it ought
to protect itself from other, competitor nations. Before getting to
that analysis, however, onward to explore Henry George the man, and
the times in which he composed his free market philosophy and
critiques of protectionism.
Life and Times of Henry George
Henry George (1839-1897) was a journalist and American political
economist who was born in Philadelphia, but settled in California in
his teens. After failed attempts at gold mining, he ended up in the
newspaper industry, where he developed his exceptional talents for
writing and analyzing political economy. He had no formal training
in economics, in spite of his many superb books on the topic. It was
during a trip to New York that George noticed a strange paradox: the
poor in New York City seemed to be far less enabled than the poor
back home in lesser-developed California.
Henry George's perplexity over this paradox led to his first
book, Progress and Poverty, in 1879. This book became a huge
seller, earning him enormous praise and international fame. In
effect, while he was alive, he became known as one of the world's
most famous men — only behind Thomas Edison and Mark Twain (De
Mille). George's granddaughter Agnes George de
Mille states:
George was endowed for his job. He was curious and he was
alertly attentive to all that went on around him. He had that
rarest of all attributes in the scholar and historian that gift
without which all education is useless. He had mother wit. He read
what he needed to read, and he understood what he read. And he was
fortunate; he lived and worked in a rapidly developing society.
George had the unique opportunity of studying the formation of a
civilization — the change of an encampment into a thriving
metropolis. He saw a city of tents and mud change into a fine town
of paved streets and decent housing, with tramways and buses. And
as he saw the beginning of wealth, he noted the first appearance
of pauperism. He saw degradation forming as he saw the advent of
leisure and affluence, and he felt compelled to discover why they
arose concurrently.
The result of his inquiry, Progress and Poverty, is
written simply, but so beautifully that it has been compared to
the very greatest works of the English language. But George was
totally unknown, and so no one would print his book. He and his
friends, also printers, set the type themselves and ran off an
author's edition which eventually found its way into the hands of
a New York publisher, D. Appleton & Co. An English edition
soon followed which aroused enormous interest. Alfred Russel
Wallace, the English scientist and writer, pronounced it "the most
remarkable and important book of the present century." (De
Mille)
George's quest for the solutions to poverty led him to scrutinize
the tariff question, the protectionist paradigm, and some
investigations thereof. He fearlessly lays out his purpose for the
writing of his fourth and perhaps most important book, Protection
or Free Trade.
I have sought to discover why protection retains such popular
strength in spite of all exposures of its fallacies; to trace the
connection between the tariff question and those still more
important questions, now rapidly becoming the "burning question"
of our times; and to show to what radical measures the principle
of free trade logically leads. (George 1886, p. ix)
George was particularly motivated by economic thought before Adam
Smith, mainly the
French liberals, whom he saw as having laid the groundwork for
the principles of free trade, which he sought to further elaborate.
Indeed, his dedication of the book is "to the memory of those
illustrious Frenchmen of a century ago: Quesnay, Turgot, Mirabeau,
Condorcet, Dupont, and their fellows who in the night of despotism
foresaw the glories of the coming day." (George 1886,
dedication)
Henry George was exploring the tariff question at a time when it
was an ideologically volatile topic with no economic rationale
behind it whatsoever. The 1880s, in fact, were a period wherein
Republican legislators had been clamoring for protective tariffs,
with the Democrats bucking for "revenue-only" tariffs. What ensued
from the fuss was the Tariff
Act of 1883 (The Mongrel Tariff), followed by three more Tariff
Acts before the turn of the century. The two major political parties
of the time — the Republicans and Democrats — were heavily divided
on this issue. During the presidential campaign of 1884, the
Republicans, in fact, held forth the tariff question as the main
issue for which they battled (Taussig 1910, p. 156). Actually, the
entire 19th century was marked with the manifestation of
protectionist doctrine and feverish tariff struggles, including the
inauguration of political strife that served to forge the War
Between the States. Thus was Henry George influenced to examine both
sides of the tariff issue.
The Protective Tariff: Cui Bono?
The original purpose of tariffs was the raising of revenue. The
protection of domestic industries was only a secondary effect. Henry
George defined the type of protection sought as protection from
"that part of trade which consists in bringing in from other
countries commodities that might be produced at home" (George 1886,
p. 45). According to George, the protectionists contend:
That to secure the highest prosperity of each nation it should
produce for itself everything it is capable of producing, and that
to this end its home industries should be protected against the
competition of foreign industries. They also contend (in the
United States at least) that to enable workmen to obtain as high
wages as possible they should be protected by tariff duties
against the competition of goods produced in countries where wages
are lower. (George 1886, p. 28)
… The aim of protection, in short, is to prevent the bringing
into a country of things in themselves useful and valuable, in
order to compel the making of such things. (George 1886, p.
36)
The opposition to any such tariff typically consisted of
politicos who saw the revenue tariff as the only possible
replacement for the protective tariff. However, for the sake of
brevity, the focus here will be on the argument for and against the
protective tariff.
The protective tariff is popular due to the misconceptions that
surround its potential for accruing benefits to the populace.
According to Bettina Bien Greaves, "The most common arguments given
are that it is in the "national interest" to maintain wages and
living standards, protect industries and skills considered vital for
defense, preserve domestic markets for domestic producers, and
encourage infant industries" (Greaves 1986, p. 24). However, the
trade-off is that while a protective tariff may help some producers,
it will harm others. A tariff slants the playing field in favor of
those who are a party to the tariff's benefits, while other
industries become hampered by higher costs or perhaps higher
barriers to entry, thus prohibiting products, businesses, or entire
industries from developing.
Aside from the usual arguments surrounding the "national
interest," within the pro-tariff ranks there are more pernicious
forces at work. Oftentimes tariffs are purely political favors or
tools of injustice designed to empower special interests or
particular classes or people at the expense of other, less-favored
classes. One of the fallouts from a tariff is its capability to act
as an agent for hidden redistribution.
Tariffs and other devices are often used to redistribute income
within the economy precisely because no such consensus exists in
the body politic, and that redistribution by the tariff is less
obvious than other means the government can employ. Thus, the
tariff is often used to redistribute incomes when the government
wants to hide the income transfer. This kind of device is used
when the redistribution has little to do with accepted standards
of distributional equity in the economy, but amounts, more or
less, to a "payoff" to particular groups for some reason. (Krauss
1978, p. 9)
Special interests, therefore, have an interest in lobbying
bureaucrats for tariff favors when in fact only they will be
benefited by them. This is a political means — requiring the use of
coercion — for obtaining monetary benefit via regulatory channels.
Or as Murray Rothbard terms it:
Protectionism is simply a plea that consumers, as well as
general prosperity, be hurt so as to confer permanent special
privilege upon groups of less efficient producers, at the expense
of more competent firms and of consumers. But it is a peculiarly
destructive kind of bailout, because it permanently shackles trade
under the cloak of patriotism. (Rothbard 1986, p.
2)
Henry George noted the mischievous aspects of protective tariffs,
which is why he questioned the levying of import duties as opposed
to encouraging domestic producers by way of bounty payments or
subsidies (George 1886, p. 82). If indeed the purpose of protective
tariffs were to encourage the domestic production of commodities,
why then, would the US government not use a system of
bounties or subsidies which would encourage all industries,
instead of tariffs, which encourage only selected industries?
George has an immediate answer:
Bounties enable us to see and to fix the encouragement to each
industry, while the protective system leaves the public in the
dark and makes the encouragement to each industry almost a matter
of chance. (George 1886, p. 82)
The pro-tariff position, however, tends toward the view that with
import duties, as opposed to the subsidy or bounty alternatives, the
cost of the tax falls upon the foreign producers of the goods being
imported. Conversely, that does not hold true in most cases, or as
George noted, such a notion "contains a scintilla of truth" (George
1886, p. 85). George recognized "special cases" wherein this is
indeed the case, but even then, it affords home producers no
encouragement toward production.
In short, in order for an import duty to fall on the backs of
foreign producers, it must not add to the price of the goods. On the
contrary, "the only possible way in which an import duty can
encourage home producers is by adding to the price" (George 1886, p.
87). This attracts more producers to the industry in the hopes of
the superior profits that are to be obtained. Thus import duties
do add to the price of goods, and must do so in order to
"encourage" domestic producers to engage in the competitive
production of goods that are otherwise more efficiently gained
through trade with foreign producers. The procurement of premium
profits is one intention of protective tariffs in the first
place.
Hence we arrive at the condemnation of protective tariffs as a
means to an end, with the end being a politically motivated
redistribution of income, the securing of favors for industry
participants through opportunities for improved revenues, or the
boosting of union wages at the behest of collective bargaining
groups. George noted the sheer chicanery that erupts from within
politics itself: "For the fixing of protective duties is simply the
distribution of pecuniary favors among a crowd of greedy applicants"
(George 1886, p. 85).
Economist A.C. Pigou noted a body of fourteen academics, voicing
their conclusions on the tariff issue in the London
Times:
There are also to be apprehended those evils other than
material which Protection brings in its train — the loss of purity
in politics, the unfair advantage given to those who wield the
powers of jobbery and corruption, unjust distribution of wealth,
and the growth of "sinister interests." (p. 28)
Importance and Legacy
Although this work remains somewhat arcane compared to
Progress and Poverty, Henry George's Protection or Free
Trade is one of the most significant books ever written on its
topic. Perhaps what stands out most in considering this work is the
fact that Henry George was not always in favor of free trade (Martin
2001). George had been firmly in the protectionist camp, and it was
only after relentless education and self-examination of economic
issues that he abandoned protectionism. What's so important is
why George came to see the benefits of free trade.
First, his studies brought him to the conclusion that
protectionist policies did not raise wages, and thus did not
alleviate poverty. George believed that the reason protection became
so deeply rooted in the American and British economic systems is
because of the faulty classical economists' notion of the wages-fund
theory. In Chapter One of George's Progress and Poverty, he
states:
The answer of the current economy is, that wages are fixed by
the ratio between the number of laborers and the amount of capital
devoted to the employment of labor, and constantly tend to the
lowest amount on which laborers will consent to live and
reproduce, because the increase in the number of laborers tends
naturally to follow and overtake any increase of capital. (p.
17)
… It being assumed that capital is the source of wages, it
necessarily follows that the gross amount of wages must be limited
by the amount of capital devoted to the employment of labor, and
hence that the amount individual laborers can receive must be
determined by the ratio between their number and the amount of
capital existing for their recompense. (p. 22)
Thus it follows that, "since the total of all wages is fixed, the
competition of foreign products or foreign labor would only further
subdivide this fund and reduce wages" (Martin 2001). George's entire
first chapter in Progress and Poverty is a denunciation of
this wages-fund doctrine[2] as he
began to build his case against protectionism and for free trade —
the argument that culminated in the publishing of his book in 1886.
Thus Protection or Free Trade was an essential vignette in
George's heroic undertaking of the cause of defending free trade
from the suffocation and oppression of arbitrary government
diktat.
In addition, this valuable work was also an important
testimonial, in many ways, to the tenets of the Austrian School. Austrian
Leland Yeager notes, "Actually, he was a profound and original
economist. He independently arrived at several of the most
characteristic insights of the "Austrian School" (2001). Adds Oscar
B. Johannsen:
While the individualism of Henry George may not be quite as
apparent as the Austrians', his life's work was directed toward
creating conditions which would enable the individual to lead the
kind of life he wished, qualified only by his not interfering with
the right of another individual to live as he wished. And George
was only too aware that it was people who created the institutions
which he believed were not only the cause of poverty amidst
plenty, but were also largely responsible for inhibiting the
freedom of the individual. (2001)
Henry George's free trade
principles also spawned the geolibertarianism
movement, a "political
philosophy that holds along with other forms of libertarian
individualism that each individual has an exclusive right to the
fruits of his or her labor, as
opposed to this product being owned collectively by society or the
community" (Wikipedia). Geolibertarianism (also known as
geoanarchism) is, in a sense, a branch of anarcho-capitalism, taking
its tenets from Locke, Jefferson, and Smith.
However, unlike more individualist forms of libertarianism,
geolibertarianism holds that all land is owned collectively by
society and may not become private property. Therefore, if
individuals use the land they must pay rent to the community for
doing so. They hold that private property is the product of labor,
and since land itself was not created by human labor, it cannot
rightfully be considered the property of any
individual.Geolibertarians generally advocate distributing the
land rent to the community via a land value
tax, as proposed by Henry George
and others before him. (Wikipedia)
Henry George, with his potpourri of original and crafty
hypotheses, seeded numerous "movements" or strains of thought that
are leading edge to this day. Accordingly, his legacy endures as he
is embraced by libertarians, quasi-libertarians, and
non-libertarians, as these groups — and others — strive to
reintegrate his thought closer to their own. As economic historian
Joseph Schumpeter noted, "He was a self-taught economist, but he was
an economist" (Schumpeter 1954, p. 864).
Karen De Coster, CPA, is a freelance writer, graduate student in
Economics and Finance, and an accounting and finance professional.
Send her mail. See her
Mises.org archive.
Also, see her website and blog at http://www.karendecoster.com/. Comment on
the blog.
Notes
[1] On page 3 of Protection or Free Trade,
George states, "I accept as good and praiseworthy the ends avowed by
the advocates of protective tariffs." Later, throughout the book, he
denounces tariffs and all of their political and mischievous ends.
However, reading the antecedent material in the introduction leads
me to believe that the ends he praised were that of prosperity
through rising wages and steady employment.
[2] George's counter proposition to classical
wages-fund doctrine is "That wages, instead of being drawn from
capital, are in reality drawn from the product of the labor for
which they are paid." (Progress and Poverty, p. 23) On p. 25,
he goes on to note that on the basis of "the practical application
of these two theories, there arises all the difference between rigid
governmental protection and free trade." Thus emerges the basis for
his pro-free trade argument.
References
De Mille,
Agnes George. "Who Was Henry George?" The Progress
Report.
"Geolibertarianism."
Wikipedia.
George, Henry. 1879. Progress and Poverty. New York:
Robert Schalkenbach Foundation.
George, Henry. 1886. Protection or Free Trade: An Examination
of the Tariff Question, With Especial Regard to the Interests of
Labor. New York: Robert Schalkenbach Foundation.
Greaves, Bettina Bien. 1986. Free Trade: The Necessary
Foundation for World Peace. Irvington-on-the-Hudson, New York:
The Foundation for Economic Education.
Johannsen, Oscar B. 2001. "Henry George and the Austrian
Economists — History of Thought." The American Journal of
Economics and Sociology. (December)
Krauss, Melvyn B. 1978. The New Protectionism: The Welfare
State and International Trade. New York: New York University
Press.
Martin, Thomas L. 2001. "Protection or free trade: An analysis of
the ideas of Henry George on international commerce and wages -
International Trade." The American Journal of Economics and
Sociology. (December)
Pigou, A.C. 1904. The Riddle of the Tariff. Clifton, New
Jersey: Augustus M. Kelley Publishers.
Rothbard, Murray. 1986. Protectionism and the Destruction of
Property. Auburn, AL: Mises Institute.
Schumpeter, Joseph A. 1954. History of Economic Analysis.
Edited from manuscript by Elizabeth Boody Schumpeter. New York:
Oxford University Press.
Taussig, F. W. 1910. The Tariff History of the United States,
Part I. New York: G.P. Putnam's & Sons.
Yeager, Leland. 2001. "Henry George and Austrian Economics —
History of Thought." The American Journal of Economics and
Sociology. (December) You can
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