Does Mill's case for infant industry protection capture Hamilton's and List's arguments for promoting industrial development?

Abstract

Mill's case for infant-industry protection is widely regarded as capturing the arguments by Hamilton and List. This paper argues that they are actually analytically different. While all three were influenced by Smith's Wealth of Nations, Mill took from it something different than the other two. His endorsement passage for protection refers to a standalone industry. Hamilton and List attached significance to the pin-making type of division of labor at the economy-level but they emphasized the development of that division as the activation of backward and forward production linkages, à la Hirschman, with increasing diversification and differentiation of occupations and industries. Mill only considered employing customs duties in his passage, although in some personal correspondence in the 1860s he mentioned a subsidy. Contrary to mainstream misrepresentations, Hamilton and List did not restrict themselves to proposing customs duties, but suggested both trade and non-trade interventions to activate linkages. Mill's formulation focuses attention on very simple learning by doing to establish the standalone industry. Thanks to their conception of the development process, Hamilton and List appreciated the complexity of technology acquisitions and devoted far more attention to that subject. The implications of these differences for future research and policy considerations are briefly discussed.

Acknowledgment

Some parts of this paper, albeit under a different title, were presented at the 86th Annual Conference of the WEAI in San Diego, California, on June 30, 2011.

Notes

¹ In what follows, Hamilton's Report on the Subject of Manufactures is abbreviated as Report. List's Natural System of Political Economy and National System of Political Economy are abbreviated as Natural System and National System respectively. Mill's Principles of Political Economy with Some of Their Applications to Social Philosophy is referred to as Principles.

² This passage is quoted in full in n. 19 in subsection 2.4 below to facilitate the discussion there and in Section 3 as well.

³ The debate has not ended, just that it has been eclipsed by the Great Recession in the last several years.

⁴ Limited by scope, the subject of ‘government failure’ cannot be treated in this paper.

⁵ Although Toner (1999) chiefly refers to the works of Young (especially Young, 1928) rather than to those by Smith, he senses a connection between Young and Hirschman that is very much akin to the one suggested here between Smith and Hirschman when he writes, ‘Young conceptualized the process of growing markets within a mature industrial economy as generating new specialized industries and increased division of labour amongst existing industries in a process of “industrial differentiation”. This occurred primarily in the intermediate inputs and capital goods sectors. Hirschman similarly conceptualizes the effect of growth in the “size of the market” in underdeveloped countries as leading to the creation of an intermediate inputs and capital goods sector, which over time becomes ever more differentiated’ (Toner, 1999, pp. 85–86, emphasis in original). This book by Toner mainly identifies the major currents in cumulative causation analysis by relating Young's works to several economists in addition to Hirschman. Understandably, the works by Hamilton and List are not under his focus (though, on List, see Toner, 1999, p. 29). Regarding Hirschman, one can imagine that should a country activate the production linkages over time, sustain them, and let new linkages further proliferate, then the dynamism arising from this process of ‘successful development’ constitutes the counterpart to the good things that result from the type-1 division of labor (at the economy-level) that is considered in the Wealth of Nations.

⁶ ‘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 taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own cloaths, but employs a taylor. 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 neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for’ (Smith, [1776] 1979, pp. 456-457).

⁷ To be sure, Hamilton did not live long enough to engage himself with the works of Ricardo, let alone Mill. Nevertheless, in his Report he certainly shows a grasp of this type-2 of division of labor. See Hamilton ([1791] 1966, p. 262). Smith ([1776] 1979, p. 457) infers from his shoemaker–tailor consideration the message that, ‘What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.’ This prompted List to retort, ‘that may be wisdom in national economy which would be folly in private economy, and vice versâ; … that a tailor is no nation and a nation no tailor, that one family is something very different from a community of millions of families, that one house is something very different from a large national territory. Nor does the individual … by striving to further them [his own interests], if left to his own devices, always further the interests of the community’ (List, [1841] 1991, pp. 165–166).

⁸ In this particular context List seems to attribute the differences between agriculture and manufactures to the different spatial concentration of the two types of activities. Thus, ‘[t]he productive powers of agriculture are scattered over a wide area. But the productive powers of industry are brought together and are centralised at one place. This process of concentration eventually creates an expansion of productive powers which grow in geometric rather than in arithmetic proportion’ (List, [1837] 1983, p. 69). However, at one point in his National System List simply notes, ‘Smith affirms that the division of labour is less applicable to agriculture than to manufactures’ (List, [1841] 1991, p. 151).

⁹ Consider this passage, for instance: ‘A small quantity of manufactured produce purchases a great quantity of rude produce. A trading and manufacturing country, therefore, naturally purchases with a small part of its manufactured produce a great part of the rude produce of other countries; while, on the contrary, a country without trade and manufactures is generally obliged to purchase, at the expence of a great part of its rude produce, a very small part of the manufactured produce of other countries. The one exports what can subsist and accommodate but a very few, and imports the subsistence and accommodation of a great number. The other exports the accommodation and subsistence of a great number, and imports that of a very few only. The inhabitants of the one must always enjoy a much greater quantity of subsistence than what their own lands, in the actual state of their cultivation, could afford. The inhabitants of the other must always enjoy a much smaller quantity’ (Smith, [1776] 1979, pp. 677–678).

¹⁰ On this question it is interesting to note that Hirschman, though expressing himself in terms of linkages, can be argued to share Smith's observation that there is more scope for type-1 division of labor in manufactures than in agriculture. In his words, ‘agriculture certainly stands convicted on the count of its lack of direct stimulus to the setting up of new activities through linkage effects: the superiority of manufacturing in this respect is crushing.’ He then went on to declare, ‘This may yet be the most important reason militating against any complete specialization of underdeveloped countries in primary production’ (Hirschman 1958, pp. 109–110). In recent years such considerations have re-surfaced in certain research works. See, for instance, Hausmann et al. (2007) and Hidalgo et al. (2007).

¹¹ This brings us back to their rejection of Smith's consideration of the type-2 specialization and foreign trade. In the case of List, this rejection of a free trade policy specifically applied when he considered temperate zone countries that were on the verge of transitioning from an ‘agricultural condition’ to that of the ‘agricultural–manufacturing condition’ or one of ‘agricultural–manufacturing–commercial condition’ (List, [1841] 1991, pp. 177–178).

¹² This rhymes nicely with the emphasis placed by Hirschman (1958) on ‘inducement mechanisms’ and ‘induced investments’ in bringing to life sequences of events that constitute the process of development.

¹³ Compare with this observation of Kaldor as he pondered how to replace ‘equilibrium economics’: ‘The difficulty with a new start is to pinpoint the critical area where [equilibrium] economic theory went astray. In my own view, it happened when the theory of value took over the centre of the stage – which meant focusing attention on the allocative functions of markets to the exclusion of their creative functions – as an instrument for transmitting impulses to economic change’ (Kaldor, 1972, p. 1240, emphasis in original). See also Young (1928).

¹⁴ List indicated that the quotation is from Book I, Ch. I of the Wealth of Nations. As is often the case with him, it is actually a paraphrase and summary of some passages, in this case apparently from Smith ([1776] 1979, pp. 22–23). To be fair to Smith, his woolen coat example does not just relate to a separation of workmen by ‘trades’, but also by ‘occupations’, consequent upon the type-1 of division of labor and the introduction of machinery. Indeed, right at the end of that example, he specifically alludes to the ‘assistance and co-operation of many thousands’ (Smith, [1776] 1979, p. 23).

¹⁵ In his Natural System he similarly maintains that ‘the success of one branch of industry always depends upon the success of another branch of industry’, and ‘all factories are linked together and that one cannot succeed unless the others also succeed’ (List, [1837] 1983, pp. 72, 73).

¹⁶ In a manner that smacks of Hamilton's consideration of the benefits of having a ‘variety of the occupations and productions’ (subsection 2.2 above), List argues that ‘[t]he whole social state of a nation will be chiefly determined by the principle of the variety and division of occupations and the co-operation of its productive powers’, for, among other considerations, ‘the separation and variety of the operations of business, and the confederation of the productive powers, press with irresistible force the various manufacturers towards one another. Friction produces sparks of the mind’ (List, [1841] 1991, pp. 159, 204, emphasis in original).

¹⁷ Although this is similar to Smith's woolen coat example, unlike Mill, Smith does not make distinctions between ‘previous’ versus ‘subsequent’ operations in relation to any particular phase of production.

¹⁸ See, for instance, Mill ([1871] 1965, pp. 183, 185; [1874] 1974, pp. 105–106).

¹⁹ The endorsement passage reads: ‘The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production, often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superi­ority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field: and besides, it is a just remark of Mr. [John] Rae, that nothing has a greater tendency to promote improvements in any branch of production than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, intro­duce a new manufacture, and bear the burthen of carrying it on until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reason­able time, might sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But it is essential that the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing’ (Mill, [1871] 1965, pp. 918–919).

²⁰ Sometime between the introduction of Mill's England−Germany model and the formulation of general equilibrium analysis, Marginalism emerged and became a key element in the latter. However, the treatment of ‘production’ processes using marginalist tools in general equilibrium frameworks continues to restrict the manner in which development processes are comprehended and analyzed. See also n. 24 below.

²¹ These assumptions maintain that: subsidies can be financed by ‘non-distorting’ taxes; taxation involves no collection costs; there are no costs of disbursement of subsidies; and the income distribution effects of various policies can be neglected (Corden, 1997, ch. 3).

²² See the letters to Frederick Milnes Edge, George Kenyon Holden, Archibald Michie, and Edward William Stafford in Mill (Collected Works, vol. XVI, pp. 1150, 1420, 1515–1516, and 1520–1521). Prior to those letters, Mill had indicated in an 1865 letter to Henry Soden that the ‘temporary aid’ to support an infant industry could be ‘either of a subsidy from the Government or of a protecting duty’ (ibid., p. 1044).

²³ One exception is Irwin (1996, p. 122), who concludes that Hamilton's study of policy instruments ‘is quite insightful’ for his period. Several pages later he turns his attention to List and wrote, ‘Unlike … Hamilton, List did not mention any preference for subsidies over tariffs as the way to promote industry’ (Irwin, 1996, p. 127). This is an erroneous conclusion.

²⁴ This passage appears after Hirschman (1958, pp. 65–66) quotes lengthily from Scitovsky (1954, pp. 148–149). He particularly strongly concurs with the first part of that quotation, which in fact greatly resembles the gist of the passage quoted here in the main text. Interestingly, Chenery (1959) also takes note of that particular passage in Scitovsky, and he strikes a contrast between that and competitive equilibrium analysis, claiming that, ‘The maintenance of competitive equilibrium over time requires that present prices must accurately reflect future as well as present demand and supply conditions and that investors should react in such a way that their price expectations are continuously realized. These are very strong conditions. Under these assumptions, the “pecuniary” or market effects of one investment on the profitability calculations of other investors are part of the mechanism by which the market coordinates action among investors and eliminates the differences between private and social profitability of the initial investment.’ However, ‘[w]hen the continuous adjustments needed to maintain competitive equilibrium are not assumed to take place, these market effects have a quite different significance’ (Chenery, 1959, pp. 83–84). And that is what Scitovsky and Hirschman sought to draw attention to.

²⁵ With precisely this subject in mind, though considering a sample period in the nineteenth century, O'Rourke (2000, p. 476) writes, ‘The construction of a superior index of protection, on a uniform basis, for as many countries as possible during the late 19th century should be a major research priority’ (emphasis added).

²⁶ Significantly, in some of these works (e.g., Nelson, 2009) economic development assumes more of an evolutionary process, during which both market and non-market institutions are continually transformed. While market failures still figure in such analysis, they are only parts, but not the entirety, of the picture of underdevelopment.

²⁷ Panagariya (2011) is a good reminder that the debate is far from settled.