Chapter XV. Special Incentives To Production.
Good government chief.—The productive energy of any country is encouraged chiefly by what we call good government. This means especially security of property rights by prevention of frauds and robbery of every kind, and free interchange of ideas, as well as of products of industry, and general public intelligence. It is not enough that individuals throughout a community be fairly intelligent, but they must have sufficiently mutual ground of intelligence in common purposes and common interests in everyday work to bring without effort a perfectly mutual confidence. Where these essentials are absent no devices can operate extensively for the encouragement of energy in production. Where they are present it is always possible to add extra incentives, to give direction at least to the energies of the people, and perhaps to increase those energies. Some of these incentives are too important to be overlooked.
Premiums.—The most simple means of encouraging enterprise is found in premiums of various kinds offered by individuals, local societies or municipal authority. These operate by adding to the natural advantage of energetic labor some special reward in recognition of its [pg 207] accomplishment. Illustrations are familiar in connection with so-called fairs of all kinds where prizes are distributed for the largest product of a kind, the most profitable crop, the best article for any purpose, the greatest variety of crops or stock, or for any conceivable device which seems to add to the producing power of the community. Governments often offer premiums for plans of public buildings, and sometimes for offensive weapons. All of these operate upon the one principle of arousing special energy by superior advantage given to the successful competitor. Its advantages are evident. Its disadvantages sometimes outweigh advantages. It encourages somewhat the spirit of gambling, resulting in devices for winning the prize through false representation. It exaggerates the importance of showy qualities for the sake of notoriety, and it fosters those jealousies which too constantly interfere with the welfare of communities.
Both advantages and disadvantages are well illustrated in agricultural fairs. These have proved a most admirable stimulant to better agriculture, where clear-headed, intelligent judges have judiciously distributed prizes of such a nature as to have their chief use in establishing the quality of the product shown without catering too distinctly for the enthusiasm of the crowd or for individual profit. The chief end of all such incentives is rightly found in the educational influence from comparison of products and the establishment of standards which the whole mass of the people may be led to accept.
Bounties.—A less common but extensively used incentive [pg 208] is in bounties. These are advantages of various kinds, frequently in money, given by local or general authority for peculiar services or special enterprises. A familiar illustration is seen in the bounty of late years offered by different states for the production of sugar, especially sugar from beets or from sorghum. The object is evidently to arouse the energies of a community in a special direction, with the expectation that the establishment of a new industry will, in the nature of exchange, promote the welfare of all. Some countries have stimulated foreign exchange by a bounty upon exports, such as Germany now pays upon the beet sugar exported to other countries. Of the same nature are the gifts made by local communities for the establishment of mills, factories, railroads, irrigating ditches, all of which are supposed to bring profit to the community in general in much larger proportion than the special enterprises have received. The principle is the same when bounties are offered for the destruction of wolves, foxes and other vermin, or when standing rewards are given for the arrest of criminals.
There can be no question of the right of a community to offer this extra stimulant to particular exertions, but the wisdom is doubtful. In the first place, bounties are liable to withdraw capital and labor from more certain methods of production to more uncertain methods. Indeed, the chief object of the bounty is to entice into experiments those who would otherwise hesitate. The advantage of the bounty is very liable to be overestimated. People hasten in steps to secure bounty without careful study of the business they undertake. This is [pg 209] especially true of bounties for establishment of factories in new locations. They attract the least experienced and most speculative men, without consideration of the far more important elements of immediate market and convenient employment of labor. Railroads are built for the bonds voted without care for future profit. Enterprises of this kind, promoted by bounties, are especially liable to failure. The history of development in the west gives overwhelming evidence of their weakness. Even when the bounty is offered for reduction of vermin, it is often misapplied. Numerous cases are on record where the bounty became a stimulant to enterprise in raising the very animals to be destroyed. Even rewards for the arrest of criminals seem sometimes to create a body of men who thrive by fostering a criminal class, with a hope of sometime getting a profit from arrests. As a means of stimulating general industry they are too unstable to be satisfactory. Most probably political parties are in constant contention over the maintenance of the bounty. No more insidious enemy to the purity of politics can be found than the selfish interest aroused by special bounties.
Monopoly privileges.—Government monopolies have been a favorite method in past ages of fostering particular enterprises. These are in the nature of an exclusive privilege, granted to individuals or corporations for the manufacture or sale of particular commodities, and occasionally for special public services. These were once a method of showing royal favor, and the word monopoly has in its very nature the idea of inequality. Hence they are unpopular under all circumstances, except when permanent and universal advantage is secured.
License.—The monopoly of service is secured by the issue of a license. If granted through official favoritism, the wrong is easily appreciated; if granted to all who conform to necessary requirements for the general welfare, as in showing qualifications for teaching, compounding of drugs, or practice of medicine, the license is recognized as useful. In fact, it seems to furnish security for satisfactory governmental service, and is the basis of all promised reform in civil administration.
Patent and copyright.—The chief illustrations of a genuine monopoly maintained by government authority are found in the patent upon inventions and the copyright upon publications. A patent is conferred upon the inventor of “any new and useful art, machine, manufacture or composition of matter, or any improvement thereof,” upon proof that the invention is original, not previously in use anywhere, and likely to be beneficial rather than detrimental. This patent secures to the inventor the sole right to make, use or exchange articles manufactured after the pattern described, or upon the principle involved in construction. This monopoly is limited usually to a term of years supposed to be sufficient to secure to the inventor a reward for his exertion. The patent laws of the United States protect the rights of an inventor for seventeen years, entitling him to damages upon proof in the proper court of infringement upon his patent. Such protection extends, of course, only throughout the territory under the same government. It may be secured, however, in foreign nations under special regulation, so as to cover [pg 211] the most of the civilized world. The copyright serves the same purpose, and is limited in much the same way, for securing to the products of thought or of taste a proper reward for the powers exerted. It gives to an author control over publication of his thoughts during a period of twenty-eight years, in order that the users of his thoughts may actually pay what they are worth. This, too, is confined to the limits of the government issuing it, unless by agreement an international copyright is provided by the laws of the several countries.
Franchises.—A still more noticeable monopoly is granted by municipalities under what is called a franchise for the establishment and maintenance of water supply, public means of artificial lighting and heating, or means of public transportation. These are under government control usually in cities, because they employ the public streets for carrying on the enterprise. The franchise is really an extension of the license in particular directions. This is usually issued with the expectation of great public benefit from a large investment of capital which would not be made without relief from competition, because not immediately profitable. The franchise usually carries with it certain restrictions as to use of public highways and limitation to a term of years. It necessarily involves the right of government inspection and control for the general welfare.
Difficulties from monopoly privileges.—All of these monopolies are granted for the purpose of conferring upon the whole community benefits that could not [pg 212] otherwise be secured. They are wise only so far as they secure this result. If the patent right system wastes the energies of inventors in contrivance of useless devices, there is loss; if it builds up a class of mere speculators, there is waste; if it fosters monopoly beyond the giving of a fair reward for invention, it is robbery. The exact limit of time during which a patent is good stimulates to the utmost exertion for wide introduction of its benefits, and at the same time prevents the burden of lasting monopoly. The dangers are chiefly in the administration of patent laws, from the careless issue of undeserved patents, or in a combination under a series of patents to maintain a constant monopoly. It is a safe rule to issue patents only for particular applications of scientific principles and not for the discovery of the principle, which can be protected in publication by copyright. Departures from this rule cut off the possibility of more perfect contrivances and fair competition in devices and methods. There can be no question of the general advantage of protecting a genuine inventor from the trespass of others to secure him a fair compensation. No other plan for a fair exchange of such services has even been suggested. The unsettled question is the proper limit of time for a patent to run.
The advantages and disadvantages of copyright are essentially the same in character, though the dangers are less. Since the large part of the reward of an author or an artist is in the repute he may secure, there is little danger of fostering an unfair spirit of monopoly. The franchise is subject to the same principles, [pg 213] but its dangers in practice are very great. So long as the advantages to the corporation securing the franchise may be enormous, if it is sufficiently extended, there is great temptation to bribery, both in the original issue and in the maintenance of inspection and municipal control. Nothing has so interfered with good government of cities as the manipulation of franchises. These abuses underlie the popular call for municipal ownership of water works, lighting plants and street railways.
Protective duties.—A still more widely extended method of stimulating industry by special incentives is seen in what is called a protective tariff. This is a system of duties upon articles produced in foreign countries so levied as to check the natural competition by increasing their cost to consumers. The increased cost of such articles, if not too great to destroy the demand, increases the incentive to manufacture similar articles within the country.
The schedule of tariffs becomes then a very important element in all productive industry, and requires the nicest adjustment to the needs and abilities of the nation. If associated, as is usually the case, with the raising of government revenues, the adjustment becomes more difficult, and requires the judgment of experts in commerce as well as in statistical knowledge of industries and government necessities. While in any country the existing tariff is presumed to have been established to meet public need, the fact that there is necessarily a restriction upon freedom of exchange makes it always open to question. The tariff laws, like [pg 214] all laws restricting freedom of action, must always have evident reason for existing. The burden of proof rests with the one who defends such laws. This is especially true with reference to tariffs, because the trend of civilization is certainly toward greater freedom of intercourse in all directions. The barriers between nations are generally giving way before the introduction of ready transportation and quick communication. The statesman who maintains the necessity of restrictive tariff must always stand ready to explain this obstacle to more complete association. For this reason we have the constant agitation of tariff questions and the impossibility of permanent settlement in any particular.
For the same reason there are always two phases of a tariff discussion. The student of social science inquires chiefly as to the tendencies of advancing society with reference to such restriction, and, seeing the barriers becoming less and less, is likely to seek the final removal of every such restriction. The statesman, busied with the immediate conditions of the limited community whose interests he guards, is liable to be for or against any particular restriction as it fosters or hinders those interests. For this reason statesmen, of whatever party, are subject to the bias of local interests, and have even been known to change their views with a change of such interests. In our own country, when party lines are drawn upon the tariff, it is quite possible that sectional lines may also mark the party supremacy. In fact, it is possible for any man to believe in freedom of trade as the ultimate condition to be sought, while he favors in immediate practice restriction or even [pg 215] prohibition by a definite tariff. The purpose in this chapter is to give a brief outline of arguments for and against such tariff in general, leaving entirely to practical statesmanship the decision of special questions.
Reasons for protective tariff.—A system of restrictive tariffs is thought to contribute to the welfare of an entire community by artificially increasing the natural diversity of employments. If new enterprises can be fostered, exchanges are greatly increased, all the advantages of exchange are secured within the country, and the general intelligence of the people is increased. With this comes the enormous advantage of what is called a home market for the cruder products of industry. This is especially to the interest of farmers raising bulky products or those not likely to bear transportation. It is further thought to foster a better agriculture by a more natural return to the soil of elements removed in cropping, the nearer body of population making such return possible. It is also thought to make at once available the natural resources of a country in mines, quarries, water powers, etc., which might otherwise long remain useless. It is contended for as a means of checking unfair competition between a long established community with special advantages for factory methods, either in large accumulations of capital or low wages of laborers, and a newer country where capital is scarce and wages are high. It is sometimes held to be a means of maintaining a high standard of wages through the advantage actually conferred upon certain lines of industry, upon a supposition that competition at home without these favored industries would [pg 216] reduce the wages maintained in other industries. If a tariff on wool calls into profitable use a large amount of farm capital in sheep raising, every wheat raiser is at the same time benefited by reduction of competition in the wheat market. If the capital and labor employed are enticed from other countries, the effect is the same by increasing the demand at home for the wheat. That this does not operate so long as wheat raisers come to a market where a surplus must be consumed in other countries does not destroy the argument, since the tendency is to reduce the surplus. The system is also thought to encourage, in lines of industry likely to prove productive, a rapid development of labor-saving machinery and new methods of manufacture, which may some time give to a nation superiority in the markets of the world. To many there seems a much more important reason for restrictions, in order to establish every needed form of production for the sake of national independence. That nation which contains within its own borders the means of supplying all the wants of its people is supposed to be more capable of independent growth, and to be freed from hampering competitions of trade, that may lead to wars and, perhaps, to extreme suffering in case of foreign war.
For abundant examples in support of these various propositions, appeal is made to the history of the world by comparing countries developed under a restrictive tariff with less developed ones free from such restrictions. The history of our own country, under the ups and downs of tariff legislation, is also appealed to. Even the extra cost of certain articles to the whole [pg 217] people, which is the sole basis of advantage to the fostered interest, is thought to be more than compensated by the direct advantage of increasing competition at home, where it will have the most wholesome effect upon the market price. Proof of this, too, is sought in the rapid development of iron and steel manufacture, where protective tariffs have been most persistent.
Reasons against protective tariff.—Against a system of protective tariffs many strong arguments are not wanting. It is contended that a tariff on iron goods, for instance, is just so much an added burden upon all consumers of iron, and, since the bulk of consumption enters into the cost of articles of universal use, the greater part of the burden is borne by the poorer classes of people, who consume as much as the more wealthy. If the restrictive tariff actually limits the introduction of foreign goods, as must be the case if it acts as a stimulant in production, the revenues received are far from being in due proportion with the cost to the people, since essentially the same tariff is paid by the consumer whether the article is imported or manufactured at home. Although it is not true that in every instance the tariff is a tax, in so far as it benefits the home manufacturer by advanced prices it must be. In so far as it operates for protection of favored industries, it certainly fails to serve the purposes of revenue. The diversity of employment evidently fostered by tariff is said to be unnatural and likely to continue expensive, and any advantages of market at home are sure to be overestimated, especially with reference to staple products of the farm, since the surplus necessarily forming [pg 218] a basis for prices must be sold in foreign countries without the advantage of direct exchange for articles of their own production. That is, if our tariff restrictions limit the market of a foreign people, they also limit the ability of that people to purchase the products which we are obliged to sell them. It is contended further that a rapid development of varied industries, instead of maintaining soil fertility, tends to more rapid exhaustion by making more probable the consumption of cruder products of the farm in villages and cities too remote for return of fertility, although within the same country. The development of natural resources under stimulant of a tariff is admitted by its opponents, but represented as a waste of effort, since the tendency is to withdraw capital and labor from more productive industries into less productive, and that, too, at the expense of the more productive. If factories cannot give an equal profit with farming, it is absurd to tempt capital away from the farms into factories. So, although wealth may be accumulated in showy enterprises, the people, as a whole, are less thrifty and bear unequal burdens. It is further contended that the total labor of the community, when a part is used in unprofitable development of resources, is made on the whole less productive, and therefore the people are less able to buy their neighbors' products, and must live with diminished comforts. In that case all the haste in developing natural resources is actual waste.
If, on the other hand, the restrictive tariff invites capital from abroad for the sake of gaining the trade of a country, the diminished profit of labor in some foreign [pg 219] country compels emigration, and such emigrants are likely to follow the capital. Only the poorest of foreign laborers will be compelled to help themselves by emigration, and only those will gain by the change of location. Thus it is said a restrictive tariff encourages the least desirable form of immigration. This is illustrated in the development of the mining industry through the fostering effects of the tariff.
There can be no question that any restriction upon trade may foster the contrivance of combination to secure monopoly. Hence it is often claimed that the existence of trusts is due in great measure to tariff restrictions, preventing the competition natural in the commercial world. It is certainly true that the restriction of a patent right may make possible the abuses of a trust. If trusts were confined to protected industries or to countries maintaining protective systems, the weight of the argument would be stronger. It is certainly true, however, that the wider the range of competition without restriction, the greater the protection against combination for sake of monopoly. The monopoly in kerosene oil would be a greater menace but for the possible check of competition from abroad.
Such artificial restrictions, again, prevent the naturally rapid growth of international commerce, which gives the surest foundation for more permanent conditions of peace and greater extension of welfare over the world. The tremendous interests of the commercial world are the strongest safeguard against unnecessary warfare, and the best protection to any nation is the fact that it makes itself needed by all the rest of the world.
Thus inter-dependence of nations rather than independence is the essential aim of those who seek the world's welfare. An alliance of two peoples for commercial purposes is the best guaranty of mutual support of national institutions.
In proof of all these statements, the experience of the world in widely varying regions is appealed to. The natural breaking down of prohibitory tariffs has given opportunity for observation. Especially has the commerce between states of the Union, where it is absolutely free, shown the general advantage of such freedom in rapid development of wealth and welfare. While these states have a common interest in government, they are nevertheless widely distinguished in peculiarities of local government and in characteristics of people. While, therefore, there is possible doubt as to the wisdom of rapid removal of restrictions, there is every probability that such restrictions will gradually be outgrown. Even the temptation to make retaliatory duties, where other governments restrict against our products, is growing less with increasing experience of the true advantage in exchanges. The world is gradually coming to see that the better market any region of country affords for the rest of the world, the better market the rest of the world affords for it.
Incidental tendencies from tariff.—The incidental effects of restrictive tariffs, and especially of the necessary instability of restrictive legislation, are too interesting to pass by, though very limited space can be afforded them. In the first place they contribute to a speculative enterprise which leads to waste of wealth in [pg 221] unpromising undertakings because of a necessary over-estimate of the advantage given. On the other hand, a reduction of the same tariff after a series of years is almost sure to bring panic in that line of industry previously fostered. So the fluctuations of tariff laws are one element in periodic expansion and contraction of business. The tariff laws are certain, also, to involve the worst element of influence through the lobby upon legislative bodies. Even though the charge of bribery be utterly false, the general respect for legislative bodies is lowered by charges and countercharges for political effect. As an occasion for such charges scarce any other form of legislation serves as well. Even the people themselves are easily assumed by their neighbors to weigh their opinions upon a tariff measure by their personal interests.
The indirect influence of a new tariff law upon the industries of a country can scarcely be foreseen. So interlocked are all the varieties of manufacture and trade that a change in price of any one article of commerce may affect hundreds of others, sometimes much more than the article restricted. It is easily seen that a duty upon iron of a particular shape or quality may actually prohibit the use of that iron in some product which already touches the margin of profit. These incidental effects can scarcely be foreseen by even the wisest statesman. The practical adjustment of conflicting interests in the framing of tariff laws should be the work of experts. If all parties could unite in establishing a bureau of commerce, domestic and foreign, as dignified as the Supreme Court of the United States, and [pg 222] as independent of party interference, such a body might frame a consistent tariff law, gradually perfecting it in adjustment to all interests and explaining its bearings to all parties. Such a body could take account of the great interests of agriculture in the commerce of the world, and weigh properly the indirect influence of restrictions. The marked influence of fluctuating tariff upon sheep raising, so familiar to all farmers, might then be fairly appreciated. Under present methods it is very certain that any tariff law is largely a compromise, with limited judgment, between agitating conflicts of interested promoters. The farmers, of all people, can afford to be conservative of all interests, and should favor such methods as will work toward enlargement of commerce without destruction of industries. If possible, they will wisely seek the removal of tariff questions from practical politics.
In concluding this subject, it is wise to suggest that the true principle of regulations for national industry are the same as those for true family economy. The family should so plan its work and ways as to make the best possible use of the powers of every member. It is no economy to buy cheap things unless the members of the family can be better occupied than in making them. It is poor economy to make those things which cost more time and effort than would be used in making something else for exchange. Home production is best when this makes the home labor more effectual, but worst when it interferes with the profit of labor. The farmer who stops harvesting to mend his harness when he might employ the harness-maker is wasteful; but if he [pg 223] mends it on a rainy day he saves time which would otherwise be less profitably used. So the nation whose capital and labor are not well employed may do wisely in developing new industries, even at a considerable expense for introducing the new industries. But if all the nation's energies are profitably employed, the costly development of resources may wisely wait for future capital and labor. So all special incentives require a constant inquiry as to beneficial results supposed to follow, and the policy of the government must conform to the needs of general welfare. Even vested rights are subject to the law of welfare involved in the original act establishing special privileges. Public use, not private interest, is the true reason for the existence of any such privileges or protection.