One of the last bastions of defence for the advocates of protectionist policy is the old "infant industry" argument.
I am well aware of the many theorical arguments against this argument but despite this, the protagonists point to such examples as South Korea and Japan that appear to have very successfully fostered and protected modern industries through strong state intervention in the economy. It is very hard to argue that this kind of rapid development that these countries experienced from the 60's to the 80's would have taken place in the absense of the various government programmes aimed at their promotion.
It is notable that both of these countries were recipients of large amounts of US aid after their respective wars but it does seem to be their protectionist policies that enabled them to develop and end their reliance on aid.
Can it really be argued that their policies failed? That their apparent success was despite these policies and not because of them? That they would have seen such rapid capitalisation and modernisation in the absense of protectionist policies?
I'll repost some links I posted a while ago on the matter. BTW, an argument against the subsidization of investment (aside from it leading to malinvestment) is that it violates consumer preferences...
http://www.foreignaffairs.org/19990501faessay981/michael-e-porter-hirotaka-takeuchi/fixing-what-really-ails-japan.html
http://blog.mises.org/archives/004803.asp
http://org.elon.edu/ipe/wyne.pdf
http://usinfo.state.gov/journals/ites/0107/ijee/hufbauer.htm
http://www.freetrade.org/pubs/freetotrade/chap7.html
http://www.freetrade.org/pubs/freetotrade/chap2.html
There is no real "miracle" to speak of.
Freedom of markets is positively correlated with the degree of evolution in any society...
Fried Egg: One of the last bastions of defence for the advocates of protectionist policy is the old "infant industry" argument.
It's silly on it's face. If Americans (or Canadians for that matter) want protectionism Japan or Korea style, then they had best get used to living like the Japanese and Koreans. A much lower standard of living, a simpler diet and a lot more work.
The basic argument against infant industries goes like this: There are only three possible scenarios. Either the present value (current value of future profits and losses) is positive or negative. If positive, then the industry will be funded privately. If negative, there are two possibilities. Either the losses of infancy will be outweighed by the profits of maturity, or they will not. In the former, the industry will be funded privately, and in the latter, the industry is a waste of resources. In the first two scenarios protectionism is unnecessary, and in the last it is inefficient.
More importantly, the empirical method is totally inappropriate here. Evidence cannot be used to prove or disprove an a priori theory. Any appeal to evidence must be rejected on the grounds that it commits the post hoc ergo propter hoc fallacy. An a priori theory can only be disproven by another a priori theory.
So arguments against infant industries cannot be disproved by appealing to Japan or South Korea. How can we know that Japan prospered because of protectionism, and not in spite of it? Or that Japan would have prospered even more without protectionism? In the end, the only way we can answer these questions is by addressing the level of theory.
AnalyticalAnarchism.net - The Positive Political Economy of Anarchism
liberty student: Fried Egg: One of the last bastions of defence for the advocates of protectionist policy is the old "infant industry" argument. It's silly on it's face. If Americans (or Canadians for that matter) want protectionism Japan or Korea style, then they had best get used to living like the Japanese and Koreans. A much lower standard of living, a simpler diet and a lot more work.
Hey, from what I hear, many Americans could probably do with a simpler diet. But seriously though, one might say in retort that no one is necessarilly claiming that Japan or South Korea have overtaken the USA's standard of living. Only that their protectionist policies allowed the rapid development of new industries and the rapid improvements in the standard of living that would have taken far longer in their absense. I'm not saying that I agree with this, only playing devil's advocate.
Yes, but if consumers demanded that level of progress, they can save/invest more than they consume. To dictate otherwise and then declare the benefits are "undeniable" is to override their preferences. The market aims at the satisfaction of the latter, not growth without qualification.
Fried Egg:But seriously though, one might say in retort that no one is necessarilly claiming that Japan or South Korea have overtaken the USA's standard of living. Only that their protectionist policies allowed the rapid development of new industries and the rapid improvements in the standard of living that would have taken far longer in their absense. I'm not saying that I agree with this, only playing devil's advocate.
But you cannot appeal to evidence to disprove (or prove) a counterfactual theory. If the theory says that protectionism will cause more poverty than otherwise, how can evidence possibly confirm or refute that? All evidence can show is what poverty was under protectionism; evidence cannot show what poverty would have been without protectionism. As Rothbard wrote in America's Great Depression about the ABCT: "For the important thing is that interest rates are lower than they would have been without the credit expansion... we cannot use statistics to estimate what the interest rate would have been. Statistics can only record past events; they cannot describe possible but unrealized events." (p. 81)
In the end, protectionism, like all of economics, must be analyzed on the theoretical level. Empiricism is simply wrongheaded.
Perhaps empericism can at least bring into question the applicability of particular theorems or even suggest that there are other theorems that apply which are not being considered?
I've recently read this chapter of "Human Action": Action in the passing of time: 6. The influence of the past upon action in which Mises says the following:
The truth is that the establishment of an infant industry is advantageous from the economic point of view only if the superiority of the new location is so momentous that it outweighs the disadvantages resulting from the abandonment of nonconvertible and nontransferable capital goods invested in the already established plants. If this is the case, the new plants will be able to compete successfully with the old ones without any aid given by the government. If it is not the case, the protection granted to them is wasteful, even if it is only temporary and enables the new industry to hold its own at a later period. The tariff amounts virtually to a subsidy which the consumers are forced to pay as a compensation for the employment of scarce factors of production for the replacement of still utilizable capital goods to be scrapped and the withholding of these scarce factors from other employments in which they could render services valued higher by the consumers. The consumers are deprived of the opportunity to satisfy certain wants because the capital goods required are directed toward the production of goods which were already available to them in the absence of tariffs.
This argument works if we are considering the economy as a whole but from a particular nation's perspective, does it really apply? Say South Korea's policies to attract foreign investment. This diverted capital from foreign to domestic uses rather than diverting it from other local uses. Thus they increased the productivity of their labour and therefore raised their standard of living (at the expense of people in other nations).
Thus they increased the productivity of their labour and therefore raised their standard of living (at the expense of people in other nations).There are two ways to accomplish this scheme:
1) Subsidies for the "infant industry"2) High tariffs so one particular industry must produce domesticallyIn the first case, obviously, tax payers pay the bill. In the second case, customers in general pay for it because cheap foreign goods that would normally be bought are being replaced by more expensive domestic goods which are, however, still cheaper than they would be as imports.There's no such thing as a free lunch.
Barry Smith has argued that repeated failures at giving a good explanation of certain facts might hint at misspecified/ommitted concepts or botched deductions, exercising retrospective control over the axioms and fundamental concepts of Austrian econ, as it were. However, this is still done on the level of theory. And there is always the matter of identifying whether a given aprioristic theorem applies or not. This is not what the Austrians are arguing against though: they are arguing against the validity of the hypothetico-deductive method in the social sciences. Modern-day epistemology is an utter mess, but that is what it means by "empiricism". I'd recommend Geoffrey Plauche's paper on Aristotelianism and Barry Smith's various works on Austrian econ in this connection.
I was tacking the specific argument used by Mises in that particular chapter of "Human Action". That capital was being diverted from other (more productive) lines. However, if that capital is comming from abroad, then this is not a particular cost that nation has to worry about. I know there are other arguments.
If its consumers are part of an integrated market, how is what goes on in one nation any different from the diversion of capital within the nation (supposing we ought to take seriously the view that a nation has interests which should be given attention)?
Jon Irenicus: If its consumers are part of an integrated market, how is what goes on in one nation any different from the diversion of capital within the nation (supposing we ought to take seriously the view that a nation has interests which should be given attention)?
When considering whether to adopt a protectionist policy with the intention of fostering an "infant industry", a government will concern itself only with the wellbeing of it's own people. As long as their people are generally benefitted by such a policy, what do they care if people in another nation (to whom a different government is accountable) bear the cost? Overall, the market may be less efficient and productive but the protectionist government doesn't care for the market as a whole, only as it affects their own people.
However, if that capital is comming from abroad, then this is not a particular cost that nation has to worry about. I know there are other arguments.Let's assume that North Korea is really good at producing coffee brewers and South Korea is not. For the sake of the argument, we assume that trade occurs between those two countries only. South Korea's capital and labor forces will therefore not waste time, money and opportunity costs for building up an industry that may not be able to compete even in the long run, but instead buy the brewers from NK and use them in, say, coffee shops.Suddenly, SK's government decides to levy import tariffs on NKean brewers. In order to satisfy an existing demand for new brewers, capital and labor have to be employed to produce brewers. It may very well be that many of those who had previously been working in coffee shops will now find employment in brewer factories. The overall amount of coffee shops will decrease which means that a previously profitable market niche was destroyed by an artificially created need for coffee brewer production factories. In other words, Joe Sixpack will not have a coffee shop to go anymore.I don't see how that furthers the national welfare at all.