This section of the book is from the "Introduction To Public Finance" book, by Carl Copping Plehn.
Under this class belongs also that expenditure which is made for the development of industry by bounties and the protection of home industries against foreign competition. The latter expenditure differs from the former only in that the sums spent do not pass through the hands of the officers of the treasury.
1 There are still nine widows of soldiers of the Revolutionary War on the list of pensioners. It is estimated that there is a possibility that some of these may survive until 1916. There are 45 survivors and 4445 widows of soldiers of the War of 1812. From Indian wars there are 3104 survivors and 3284 widows. From the Mexican War are 13,461 survivors and 7686 widows ; all the rest are attributable to the Civil War. Widows of soldiers who took part in that contest may still be on the pension list in the year 2002. —World Almanac, 1895.
The recipients of this assistance collect it directly from the contributors in the shape of higher prices for their wares than would otherwise prevail. With the economic side of this expenditure, and the possibility or impossibility of adding permanently to the wealth of a nation by this process, we have nothing to do. But as many important nations, all, in fact, except England, Norway, Holland, Belgium, Switzerland, and Denmark, practise this form of expenditure, we cannot avoid at least a statement of its character. The revenues derived by the government from taxes on the commodities actually imported will be considered in Part II. But so far as any actual " protection " is afforded the home producer it is an item of expenditure. In effect it is practically the same as if a subsidy or bounty were paid out of taxes collected from the consumers of the goods in question, to the producers. This expenditure is made not so much in the hope of increasing the total wealth of the nation directly as in the hope of obtaining a greater diversity of products, so that in the end the effect will be to increase the wealth, indirectly, by allowing for a greater division of labour, and consequently for more steady and efficient production. This policy has nowhere been begun as a permanent one, but one of its results is the growth of powerful vested interests which make for permanence. Thus bounties are paid directly from the treasury, or protection is afforded to industries which it is hoped will eventually be self-supporting but which are not so at the time. At different times circumstances have caused this policy to be supported by different arguments.
Practically all the most important arguments have been used at different times in the United States, where protection has prevailed with scarcely a break from 1816 to 1895 and still prevails in large measure. The oldest of those arguments is known as the " infant industries argument." It is urged that new, weak industries cannot hope to live if subjectto the competition of older foreign industries. At the same time it is maintained that in case of war it would be practically necessary for a country to be able to supply all its own needs. This grows directly into the argument of List, which is in the main to the effect that a nation's prosperity, in general, depends not so much upon the mass of wealth produced as upon the greatest possible diversity of its industries, so as to develop all possible phases of its national production. Just as the human body is healthier when all the muscles are uniformly developed, than when a few are abnormally strong, so, it is argued, a nation is more truly prosperous when all its productive forces are moderately active than when its entire force is expended in a few lines. Later comes the patriotic or "home market" argument, which urges that the home producer has a claim on the custom of the home consumer. Finally this argument develops into the famous "pauper labour" argument, and it is maintained that the home producer has been enabled to pay his workmen higher wages than the same classes of workmen receive in foreign countries, on account of protection, and that to remove that protection would be to reduce the home workmen to the standard of life of the foreigners. This latter argument is largely an appeal to class interests for votes and is not quite tenable. The infant industries argument, it is generally admitted, is incontestable. The strongest argument in favour of the continuance of this subsidising of industries has been developed from that of List. This may be restated somewhat as follows : if the productive energy of a nation has but a few outlets, as in exploiting natural advantages, there is a great danger that the nation's economic life may become stagnant. If, however, production be diversified, even by an artificial process, it is much easier to keep the current of productive energy in motion, allowing it to be turned in whatever direction new advantages may open up.
While it may be admitted that there is great force in these arguments, it must be remembered that protection is very heavy expenditure, not less heavy because it is hard to estimate its amount. There is a practical limit set to the possible amount of expenditure in this direction by the wealth of the people. If this process places too heavy a burden on the nation's annual wealth increment, the burden will not be borne,and the end defeated. That is, if the "protected' infant industries finally outgrow the need of subsidies, and fix prices by competition, the drain upon the resources of the country ceases. If they do not, the subsidising process may continue so long as the general mass of the wealth is not thereby too seriously curtailed. A nation may be able to pay for diversification of industries, just as it may be able to pay for schools, for parks, for museums, for libraries, etc. But the limit of such expenditure is set by what the nation can afford. This limit is too frequently overlooked ; it is too often forgotten that all protection is public expenditure. No " protection " is afforded unless the price is raised. The difference between the price that would have prevailed and the price that does prevail is the amount the nation spends for this purpose. This is not offset by any gain in wealth, and can only be justified by the desirability of having a diversity of industries.