A Critique of the National Bureau of Economic Research’s Comparative Historical Political Economy
An essay has been brought to my attention, written by Douglas A. Irwin, former economist for the Board of Governors of the Federal Reserve System, for the National Bureau of Economic Research, titled “Tariffs and Growth in Late Nineteenth Century America,” where the author seeks to refute the protectionist argument that America’s rise to economic supremacy in the late 19th century was a result of its high tariff laws. This he attempts by interrogating economic data in such a way as to decouple cause from effect.
Irwin begins with acknowledging the well-known fact that America’s rapid economic growth and emergence as a world industrial power occurred under high tariffs. While it is true that correlation is not causation, it is phenomenal to claim, as Irwin does, that free trade could have caused this magnificent growth to have gone even further.
His main argument is simply that American economic growth in the late 19th century was the result of “labor force expansion and capital accumulation, while productivity growth was undistinguished when put in a comparative perspective.” Irwin further argues “[i]t is difficult to attribute much of a positive role for the tariff because import tariffs may have raised the price of imported capital goods, thereby discouraging capital accumulation, and productivity growth in nontraded sectors, rather than in manufacturing, was the driving force behind the United States’s overtaking of the United Kingdom in per capita GDP during this period.”
The problem with this argument is that it requires a suspension of holistic economic thinking to be plausible. The protectionist school in America, centered around Henry Charles Carey, made their explicit goal for the nation the accumulation of useful capital (like steam engines, iron furnaces, rolling mills, machine tools, soils improved by fertilizers) and population, the tariff being one of the primary means of doing so, with free trade tending to hinder this process1. By guaranteeing the home market to domestic producers via tariffs, urban populations would increase, retarding dispersive westward migration for virgin lands, culminating in a strong home market centered around urban industrial areas2. Their liberal free-trade opponents scoffed at the idea that accumulating capital was even desirable in the United States, for their application of the Ricardian doctrine of comparative advantage held that the nation should simply double down on agrarianism and plantation agriculture, erroneously maintaining that industrialization would mean lower wages for workers3. So for a free trader to take up the defense of accumulation of capital, without even acknowledging the changeover, is bewildering.
Irwin shows data suggesting that America’s high economic growth in the late 19th century compared to British growth in the same time period was not primarily due to higher economic efficiency but to a faster pace of capital accumulation in the US that “exceeded that in the United Kingdom by a factor of more than 3 during this period.” This in effect makes the protectionists’ case for them. No one seriously argues that the United States surpassed Britain by inventing futuristic technology thanks to tariffs; we were simply enabled by protection to gather capital and population to the point where we could compete by our superior capital mass and labor force size, putting already existing but latent industrial inventions to use. Such accumulation of capital is only possible when infant industries are protected from superior foreign competition, so that they can grow up, expand, and reach their full potential as employers and producers.
Irwin even concedes the empirical validity of another protectionist claim: “Whereas U.S. labor productivity in agriculture was comparable to that in the United Kingdom, U.S. labor productivity in manufacturing was roughly twice that in the United Kingdom throughout the late nineteenth century. One reason why the United States caught up to (and eventually surpassed) the United Kingdom in per capita GDP is that American workers shifted from agriculture to manufacturing.” This is necessarily true. The aim of the tariff was in fact to shift a larger share of the workforce from agriculture to manufacturing, which was understood to be a source of greater productivity. He also supplies a chart (Table 4) showing significantly higher American productivity levels in manufacturing pursuits compared to Great Britain on the eve of the passage of the Federal Reserve Act. It is unclear how this evidence is meant to disprove any claims of protectionists. If while under protection our industrial employment grew, and every economic sector rose in efficiency compared to our main rival, who practiced free trade, is that not prima facie evidence of success? It would be if free trade theories admitted the validity of historical precedent in policy recommendations.
Irwin attempts to explain away the data he presents by saying “[t]he tariff cannot take much credit for this shift because the level of import protection was roughly constant from the Civil War through this period, so its effect is already built into the 1870 figure.” To say this is to give up the argument, because the protectionists promised from the start that tariffs would have a gradual salutary effect on the whole national economy.
Irwin also points out that “[e]xtensive growth was due to the mobilization of resources – using greater amounts of labor and capital – to increase production,” while growth in per capita income was “more the result of capital deepening from high rates of saving and investment in which current consumption was sacrificed for future production, than achieving greater productive efficiency,” Irwin argues. While it is true that this is not a direct effect of protection, it is perplexing that this would be raised as an argument against the American System, one of whose three pillars was a National Bank to invest in productive industry. This later took the form of greenbacks and the National Banking system implemented under President Lincoln. No one denies the necessity of adequate credit flows for the health of business and as a source investment profits, least of all the protectionists of the American School.
One potential reason for the rise in investment was that “the tariff could have shifted the distribution of income in the United States toward high-savings households, thereby adding to the supply of savings and contributing to capital accumulation.” So Irwin has identified an indirect way the tariff may have helped the overall economy, even though he dismisses it. But it should be obvious that if more Americans have jobs and are buying locally, there will be more money left over for re-investment within our own borders.
Irwin cites literature suggesting that America’s fast post-Civil War growth was spurred by the government spending its fiscal surpluses, which it may be recalled were generated in large measure by tariff revenues. While he argues that such tremendous taxes could have been collected by other means, it would have involved extracting huge sums of wealth directly from American consumers rather than the foreign producers. Keep in mind that by the 1880s tariff revenues were so high that free traders demanded the tariff be lowered because the government was struggling to spend it all. But the effect of this government spending on growth was not particularly large by the numbers he cites, with 5 to 10 percent of capital stock and 2 to 4 percent of GNP at stake.
Irwin even insists that America’s economic growth should not have happened:
there is no solid link between the tariff and capital accumulation. High savings rates appear to have been the principal factor behind the rapid accumulation of capital, the demand for which arose mainly in the non-traded sector, not in manufacturing. To the extent that tariffs raised the price of capital goods, capital investment would have been discouraged.
Regarding non-traded sectors like transportation and infrastructure, this was the third plank of the American System, considered an integral whole with tariffs and a National Bank by Henry Clay and his successors. It was understood by the protectionists how important inland transportation was for a sound home market, and there were many efforts by protectionists to have the government encourage and fund internal improvements, notably the many canals and the transcontinental railroad. It is not honest to separate these dimensions of the home market to detract from the merit of tariffs.
Irwin also acknowledges the argument, substantiated by the data he provides, that “the tariff would move resources into manufacturing and raise that sector’s productivity due to external economies of scale,” only to dismiss the argument as too vague to consider seriously. This is tantamount to surrendering the point; it dismisses the protectionist home-market argument out of hand, without even attempting a refutation. What economists now call “external economies of scale” were precisely the object in mind when political economists Henry Charles Carey and Erasmus Peshine Smith urged higher national tariff rates. By allowing producers and consumers to exchange on the spot, minimizing transport and middleman fees, and providing a greater diversity of employments within the nation, overall economic efficiency would be multiplied4. It is disappointing that no attempt was made by Irwin to refute this empirically observed tendency. America’s top economic theorists of the 19th century were perfectly willing to consider how the outputs of one sector become the inputs of another, but the economic profession has degraded to the point where even thinking about it is considered too difficult to attempt. Irwin also believes that the growth in productivity rates in non-traded sectors like transportation and mining exceeding that of manufacturing between the Civil War and the passage of the Federal Reserve Act proves that tariffs were not effective. This argument again fails to consider the holistic point of view where the growth of the manufacturing sector provides indirect benefits to other sectors.
What has been buried in all this discussion about GDP, GNP, factor productivity, etc., is that the protective tariff really did accomplish what it set out to do: enable the building up of America’s productive powers. The authors of the Morrill Tariff Act of 1861 wanted to ensure that our country was as independent as possible from other industrial nations like the UK, and by the end of the century this was attained. Talking about which sectors grew more rapidly than others, or econometrics like GDP, which was invented in the 20th century, simply obscures the point: protective tariffs assist the growth of industry.
The failure of Irwin’s arguments and evidence to support his claims is particularly troubling in light of the Cato Institute citing this article in support of their own polemic against the tariff. Hopefully this response will prompt greater care in the future to properly substantiate economic claims in works of such importance to policy-making.
To summarize, Irwin attempts to explain away the effects of the tariff by, in effect, asking the reader to suspend holistic economic thinking, zooming in on various trends in the economy and explaining how tariffs may not have directly caused every positive change. Little or no attempt is made at providing a positive alternate explanation for the economic phenomena in question, opting instead for a nihilistic rejection of the possibility of verifying economic causality: “For every speculative argument that tariffs could have promoted higher productivity through this or that channel, there is an equally strong, equally speculative counter argument,” and “the effects of trade policy on growth are probably swamped by other policies and unrelated factors so that one cannot isolate the true impact of trade policy,” says Irwin. This method of analysis reveals the weakness of free trade ideology in explaining economic trends: such theories are typically ahistorical in that they are based on mathematical models and deductive logic; and history is only begrudgingly acknowledged when protectionists force the issue. Thus we ask the reader to consider the arguments of the American School, whose counsel was sought in framing the laws that coincided with our rise to great power status, as they took into account monetary, fiscal, and capital accumulation factors in justifying high tariffs on imported manufactured goods.
Henry Charles Carey, Principles of Social Science, 1858-1859 vol. I p. 351-352, 371-373; vol II p. 279-282.
“A diminution in the demand for labour in mines and furnaces in 1842 tended to increase emigration to the West. For the first year, 1843, those emigrants were consumers only. In the second, 1844, they had grain to sell, and prices fell. In the present year, the demand for labour in mines and furnaces, and in the erection of mills and furnaces, is diminished, and emigration to the West is increased, yet the effect of this on the supply and price of food may not, and probably will not become obvious until 1852.” Henry Charles Carey, The Harmony of Interests, 1856, p. 6.
“Ought it to be considered by us as a subject of regret, that we cannot rival England in her manufactures? Manufactures are forced upon England by her circumstances. She has a limited territory and a population so dense, that they must be employed in that way or perish.” Henry Lee, Report of a committee of the citizens of Boston and vicinity, opposed to a further increase of duties on importations, 1827, p. 26, quoted in Michael Hudson, America’s Protectionist Takeoff (SLET-Verlag: Bakersville, 2010), p. 79-80.
Hudson, America’s Protectionist Takeoff, p. 33.
For an easily digestible explanation of the broad effects of protection, see David Hall Rice, “Chapter XIII. How Protection Gathers Wealth,” in Protective Philosophy, 1890. See also Henry Charles Carey, The Slave Trade, Domestic and Foreign: Why it Exists, and How it May be Extinguished (Philadelphia: A. Hart, late Carey & Hart, 1853) p. 35-43
Mr. Irving has failed to defend free trade economics. Will he refute the claims of the protectionists, or will he become a student of the American School? Might he even find himself acquainted with the esteemed Hamilton Institute?