They must, however, make provision for disability or superannuation. In a yet lower class I should place those who derive their incomes from rents, interest on mortgages and bonds, dividends on stocks, the funded income class. They are in no peculiarly favorable situation to make new investments; they are subject to rigid standards of consumption; and they are under no compulsion to set aside a portion of their incomes for future needs. In the lowest class of all I place the great mass of workingmen, since they have the least favorable opportunity for investment and are subject to the most tyrannical standards of consumption.

When an industry reaches the acme of development, the position of the independent entrepreneur becomes assimilated to that of the recipient of funded income. Accordingly we are justified in drawing a distinction between the entrepreneur engaged in an industry which quickly attains its full development and those engaged in an industry of practically unlimited development. Thus we arrive at the conclusion that the richest and most enduring sources of new capital are the interest and profits of the manufacturing entrepreneur class.

A practical tariff system cannot bestow all its benefits upon a higher thrift class and impose all its burdens upon a lower one. Nevertheless it can hardly be denied that the chief benefits of modern protectionism have been bestowed upon those engaged in capitalistic enterprise. In the United States protection, down to the present day, has meant little but the diversion of income from all other classes in society to the capitalist manufacturer. The farmer and wageearner have carried a net burden; the manufacturer alone has secured a net gain. Here a rapidly developing agriculture has been taxed for the benefit of rapidly developing manufactures. Although, under these conditions a high thrift class has been taxed, agriculture would quickly have attained a state of full development, and thus would have ceased to give large incentive to thrift. The impetus given to manufactures, which under modern conditions possess almost unlimited power of absorbing capital, must, of itself, have accelerated accumulation. It is worth noting that in the long run protection in a democratic state must favor the higher thrift classes at the expense of the lower. In every state protection is essentially a minority interest. The export industries can gain nothing from the policy; industries that supply a purely local demand also gain nothing. These two groups of industries outweigh the industries which would suffer under competition. The number of persons whose incomes are diminished by protection will greatly exceed the number of persons whose incomes are enlarged by it.

If it is true that the general tendency of modern protection has been to divert income from a lower to a higher thrift class we are justified in saying that protective duties have played a part in equiping modern society with the vast stock of capital goods which it now possesses. For proof of this we must have recourse to an analysis of the effects of protection upon capital formation in concrete instances. Let us suppose that in a country which formerly imported its silk a heavy duty is levied with the object of creating a silk-manufacturing industry at home. Men, intending to invest otherwise, are induced to go into the silk business. At the beginning the capital goods with which the new industry is equipped represent no net addition to the productive wealth of the country.. But a new industry is naturally speculative in character; and the more conservative entrepreneurs are slow to enter it. In the nature of the case the industry will be undersupplied with capital. This means that capital will be more than ordinarily productive in the industry; it means further that entrepreneurs will be steadily endeavoring to secure more capital to expand their operations. Under these circumstances it is inevitable that a large proportion of the profits created by the industry will be reinvested in it. Here then we have a net addition to the productive wealth of the country.

We arrive at practically the same result if we select a commodity entering chiefly into the consumption of the wage-earners. A large proportion of the wage-earning class saves practically nothing, whether wages are high or low. Standards of consumption tend to absorb any surplus income that may appear. A duty borne by the wage-earning class places little check upon accumulation. Thus the main effect of the duty is to divert income from a lower thrift class to a higher one, and hence to give an impetus to the formation of capital.

In answer to this line of argument it is alleged that a tariff constructed in such a way as to equalize costs of production at home and abroad would not permit the surplus profits out of which capital is built. This is true. But one may safely challenge all the economists. in the world to point to one instance of a "scientific" tariff. In the nature of things there can be no such tariff. What manufacturers' association would conduct political campaigns, roll logs, and otherwise exert itself for the mere privilege of being placed on an equality with the foreigner? What would be the object in establishing a new industry if it were to offer only profits that might be secured from industries already existing?

It is true that if the protected industry operates under great natural disadvantages, as in the classical case of producing wine in

Scotland, the burden to the consumer will be so much greater than the net gain of the producer that the net effect upon accumulation will be unfavorable. But it is not the practice of entrepreneurs to demand, nor of statesmen to grant, protection for industries that labor under extraordinary disadvantages. Rather the selection of industries for protection tends to be such that a greater part of the tribute exacted from the consumer is bestowed upon the producer in the form of profit instead of being wasted in the insane struggle with refractory natural conditions.

What is the test by which it can be determined whether the protective system shall be abandoned? By the academic protectionists, duties should be abolished when the protected industries are in a position to meet foreign competition. According to the theory here put forth, they should not be removed until the protected industries cease to develop rapidly. Then the duty should be removed whether the industry can meet foreign competition or not.

153. The Economics of Protection

The economic fallacy of free trade lies, not in its logic, but in its assumptions. The latter are part and parcel of the static and individualistic system of thought of the later eighteenth century which made Nature the hero in the piece and assigned to the state the rôle of villain. At the basis of the argument for free trade are the two quite dissimilar but complementary propositions that men are guided by a supreme natural pre-wisdom to choose the best lines of production, and that the process of production consists in juggling together a certain number of productive units from each of three great hoppers, called Land, Labor, and Capital. To make clear the dependence of the theory upon these underlying assumptions, let us strip it of its verbiage and reduce it to its simplest terms.

It may best be stated as a problem: Given a definite amount of land, of capital, and of labor; in what particular permutations shall the three be put up in such a way as to secure the largest amount of consumptive goods? Obviously, since labor and capital are the human factors, they must be economized; their supplies must be made to "go as far as possible." This can be done by making Nature shoulder the largest possible amount of the actual work of production. This last can be achieved by having each article produced in the place best fitted for its production, and letting the peoples of the various places exchange their surpluses. In other words, the best possible adjustment of the mobile factors of labor and capital must be made to the immobile factor, land. To illustrate, an attempt

should not be made to produce both watches and oranges in Connecticut or Florida. With the available but limited amounts of labor and capital a larger quantity, both of watches and of oranges, can be produced, if Connecticut devotes itself to the production of watches and Florida to the cultivation of oranges, than if each tries to produce for itself both of these commodities. If, then, the government does not interpose artificial restrictions, a scheme of profits and losses will secure the localization of industries at places best fitted for them. Consequently a larger amount of consumable goods will be produced under free trade than under a restrictive system. The theory might properly be called the law of the economic utilization of labor and capital.

In view of this statement the weakness in the assumptions of the argument will quickly be noted. The first is the preconception of the rationality of human judgment in the localization of industry. It imputes omniscience to that judgment; for the decision has to be made before the industry is located; and the evidence to guide that judgment, in profits and losses, is not available until much later. At best, rational judgment can locate industries at points where Nature's contribution can be most fully utilized only after a protracted and costly period of experimentation. It is doubtful, too, whether the owners of natural resources, who have had little experience with the larger world of affairs, can determine just what industries are adapted to a given locality. If they are left alone, custom is likely to ripen into the inertia that breeds stagnation. Further, because of the intricacy of the industrial cycle and the imperfection and lack of availability of business barometers, it is impossible for the average business man to look into the future and see all the exigencies which converge to make a business a success or a failure. No one expert is sufficient for this task. Technical experts who know all the potential productive capacities of a particular place need to be assisted by business experts who are able to forecast demand and general business conditions. A group of them should, by the use of scientific methods, determine the industrial needs that are most pressing and the localities best adapted to the production of articles to satisfy these needs. Encouragement should be given, if conditions are favorable, to the prosecution of various businesses. Towards this end the protective tariff should prove a most useful device.

The second glaring error in the assumptions is a conception of potential resources in fixed terms. The elements out of which useful goods are made are most valuable. Our natural resources are what they are, because our industrial system is what it is. Change the system, and the catalogue of our resources would be materially

altered. In a sense China's wealth is far greater than Japan's, yet it lacks a certain almost indefinable dynamic quality. Labor, particularly, defies expression in rigid calculable terms. Man is possessed of many potential gifts. The majority of these always remain latent; some two or three are developed. Take a boy from a rural environment, where possibilities are narrowly circumscribed, to a large city and watch unsuspected talents develop. Physically speaking, the amount of land, capital, and labor may remain the same. Each as it is, as a static thing, may be best utilized under free trade. But the important question is, Does society under free trade develop the most important latent capacities? Does free trade permit society to utilize its full capacity for development? The worst that is said about protection is that for a time it imposes higher prices upon consumers' goods. Admit the charge. Its cost is far more than offset by its transformation of society into a more complex and integrated whole, which offers a larger range of opportunity to the individual, and surrounds him with an atmosphere surcharged with a spirit that brings out his latent powers. Again, the fallacy of free trade is that it overlooks the possibility of developing new capacities for productive work.

The third glaring error is, in a sense, of a kind with the second. It is the assumption of a fixed quantity of each of the productive factors. Our own experience has demonstrated quite clearly the possibility of greatly increasing two of these factors, labor and capital, and in a way increasing the third, land, by the creation of an industrial system that allows a fuller utilization of natural resources. In the argument above, labor was the important factor; here capital takes the first place. The importance of a definite increase in the volume of capital is not clearly enough appreciated. Land, of course, physically speaking, is fixed in quantity. If a nation has reached the point of diminishing returns, an increase in numbers is attended by a fall in the standard of living. Material progress, then, is associated with an increase in the quantity of capital. Protection, as Professor Johnson has shown in another reading, increases for protected businesses the margins between costs and selling prices. A large part of the additional profits realized is turned back into the business in the form of reinvested capital. The growth of an industry is closely dependent upon its control by a permanent management who have vast pecuniary stakes in its success. This is possible only under a system which permits expansion through reinvestment of profits. This protection makes possible. The alternative, involving the investment of outside capital in the business, can be taken only at the cost of a sacrifice of part of the