INFANT INDUSTRY ARGUMENT

17. INFANT INDUSTRY ARGUMENT

The argument for protection of an industry based on the usual external economies is static in the sense that the assumed distortion due to external economies is by implication a permanent characteristic of the technology of production that would require correction by government intervention of a permanent nature. By contrast, the infant industry argument is explicitly dynamic or more accurately it is an argument for government intervention for a limited time period only to correct a transient distortion. In the infant industry argument, the justification for protection is assumed to disappear with the passage of time. The infant industry argument of Hamilton and List is usually interpreted to imply the need for temporary protection of an industry which would be unable to establish itself against free competition from established foreign producers. These industries would have to incur temporary excessive costs in the initial stages, but they would eventually be able to compete on equal terms with foreign producers in the domestic or world market if they were given temporary tariff protection to enable them to establish themselves. For this argument to be valid, the increase in future national income should exceed what it would have been if the infant industry had not been assisted to maturity by protection. Protection involves a present cost which can only be justified by an increase in future national income above what it would otherwise be. Furthermore, to justify government intervention, external economies should exist that make the social rate of return differ from the private rate of return in the infant stage of production activity. If the higher income accrues later to those who incur the costs initially, and if the capital market functions efficiently, the investment will be privately undertaken unless the rate of return on it is below the rate of return available on alternative investments. In this case the investment would be socially as well as privately unprofitable. To provide an argument for government intervention, the social rate of return must exceed the private rate of return on the investment by a wide enough margin to make a socially profitable investment privately unprofitable. For example, if as a result of infant production activities the knowledge of a certain production technique is acquired by the entrepreneur who has undertaken the investment, then the knowledge may be freely applied by

INFANT INDUSTRY ARGUMENT

other entrepreneurs with little or no cost of acquiring it. That is, the product of investment in the acquisition of knowledge, once created, can be enjoyed by additional users without additional cost of production. Then the social benefit exceeds the private benefit of investment in learning industrial production techniques. It takes time for a firm to establish a new profitable business. If all entrepreneurs and bankers know that computer hardware is a potentially profitable production activity for Korean firms, they should be prepared to accept short term losses as an investment toward long run gains, without any government intervention. In order to justify government intervention, there should be externalities. For instance, an entrepreneur is not usually able to fully capture the benefits of training its employees. Because those employees, once they acquire experience and knowledge of a new production activity, frequently move to other firms who want to start the same production activities, or even start their own firms in the same line of business. Where the social benefits of the learning process exceed the private benefits, the most appropriate government policy would be to subsidize the learning process itself, through such techniques as financing or sponsoring pilot enterprises on the condition that the experience acquired and techniques developed be made available to all would-be producers. A possible reason why the social benefit may exceed the private hinges on the facts that much of the technique of production is embodied in the skill of the labor force, and that the insitutions of the labor market give the worker the property rights in any skills he acquires at the employer's expense. Consequently, the private rate of return to the employer on the investment in on-the-job training may be lower than the social rate of return, because the trained worker may be hired away by a competitor. The appropriate policy in this case would entail the government either financing on-the-job training or establishing institutions enabling labor to finance its own training out of the higher future income resulting from training. In this case, a subsidy on production or on investment in the infant industry would be economically inefficient in principle, since neither type of subsidy would necessarily stimulate the type of investment in knowledge subject to an excess of social over private return. In any case, the government intervention in the form of tariff protection of the infant industry is the second-best policy. The first-best policy is to take care of the transient external economies at the source by using tax and subsidy measures for a limited time period. The private rate of return necessary to induce investment in a certain infant industry may exceed the private and social rates of return on alternative

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investments for a variety of reasons. For instance, entrepreneurs may be excessively pessimistic about the prospects of an industry. In this case the most appropriate policy would involve publication of expert estimates of the prospects for the industry in question. Alternatively, imperfections in the capital market may make the cost of financing the investment in a specific infant industry excessively high, especially if the industry requires a large amount of initial investment to acquire the minimum unit-cost plant size. In this case, subsidizing the provision of capital would be the appropriate policy. The existence of large enough external economies in infant industrial production activities that warrant government intervention implies that the imputed losses associated with an initial period of low returns must be fully recovered (say, by the whole society) with interest at a later date, though not by the individual entrepreneur starting up the activity. The case for a timelimited government intervention is based on the fact that the positive externalities that are generated for a limited period of time from the development of an infant activity will accrue to other than those undertaking the activity initially such as the whole economy. (See Krueger and Tuncer 1982.) An industry stops being an infant industry when it stops generating external economies. According to the two-factor Heckscher-Ohlin theorem, a developing country has a comparative advantage in labor-intensive commodity production. If, however, substantial external economies associated with the production activities of the labor- intensive commodities exist in its early phase of production, those labor-intensive commodities may not be produced domestically and exported to international market without government intervention in the form of export subsidies financed by tax revenue. The government may simply decide to protect the infant industry in which it has potential comparative advantage by restricting import as long as the industry generates substantial external economies. Sooner or later, the infant industry will stop generating any more substantial external economies. By that time, the potential comparative advantage may become the actual one, and the developing country may commence exporting the labor-intensive commodity a la Heckscher-Ohlin. This latter strategy may be called the importsubstitution-oriented growth strategy, in the sense that the country gives up the idea of exporting the commodities with potential comparative advantage and is content with only self-sufficiency in these products until they become matured.

INFANT INDUSTRY ARGUMENT

Hamilton (1791) and List (1841) argued for the promotion of infant manufacturing activities as a vehicle for catch-up; the Pre-War Japan pursued the imperialist colonialism with imported Western technologies for catch-up; and the East Asian NICs pursued the outward-looking export-oriented strategy as a device for catch-up. Myint (1977) acknowledges that the outward-looking approach emphasizes the expansion of external trade as the engine of growth but points out its tendency to underplay the fact that a country may not be able to take full advantage of its external economic opportunities unless its internal domestic economic organization is strengthened and improved. Hamilton and List are cited as the original contributors of the infant industry argument. Many economists recognize the importance of their analysis of the growth-stimulating effect of infant industry promotion. But Hamilton and List are not respected as development theorists or trade theorists. The traditional criticism against them seems to be is that they failed to clarify the concept of the engine of growth and to discover the idea of [transient] external economies associated with a dynamic learning process, and this failure vitiated their approach to the subject. Kemp (1960) even fails to mention List in writing about The Mill-Bastable InfantIndustry Dogma. 3 If one, however, reads carefully the writings of Hamilton and List, one can feel that these criticisms leveled against them might well be unwarranted. The only valid criticism might be that Hamilton and List argued for the promotion of infant manufacturing activities without particularly warning against the possible undesirable results when importsubstitution-oriented approach is adopted in pursuing such an object. A. Alexander Hamilton Hamilton (1791; 1966: 249) believes that manufacturing establishments not only contribute to increase national product but they also contribute to rendering national product greater than they could possibly be, without such establishments. That is, manufacturing activity is the engine of growth. Manufacturing activities furnish (ibid: 254-255) greater scope for the diversity of talents and dispositions, which discriminate men from each other.
3 Kemp defines the case for infant industry promotion as follows. Practice makes perfect and a firm can learn from its own experiences and from those of other firms in the same industry. Even if later profits, suitably discounted, sufficiently exceed the losses of the early learning period, firms will not be willing to shoulder the early losses if the lessons of its experiences would be freely available to any followers. Then the initial subsidy is an essential condition for the establishment of the industry.

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. . And [therefore]. . . the results of human exertion may be immensely increased by diversifying its object. When all the different kinds of industry obtain in a community, each individual can find his proper element, and can call into activity the whole vigour of his nature. Hamilton believes that (ibid: 242) manufacturing activities open a wider field to exertions of ingenuity than agriculture and that (ibid: 256) the spirit of enterprise. . . must necessarily be. . . expanded in proportion to the. . . variety of the occupations and productions (ibid: 156). Hamilton does not only emphasize a fuller utilization of the given existing resources but also the longer run changes in the supply of productive factors. According to Hamilton (ibid: 256), manufacturing activities tend to provoke exertion, cherish and stimulate the activity of human mind by which the wealth of a nation may be promoted which is of greater consequence in the general scale of national exertion.4 Hamilton believes that (ibid: 268), because of the natural disadvantages of a new undertaking, to maintain between the recent establishments of one country and the long matured establishments of another country, a competition upon equal terms, both as to quality and price, is in most cases impracticable. The disparity. . . must necessarily be so considerable as to forbid a successful rivalship, without the extraordinary aid and protection of government. According to Hamilton (ibid: 266-267), the strong influence of habit and. . . the fear of want of success in untried enterprisesthe intrinsic difficulties incident to first essays towards a competition with those who have previously attained to perfection in the business to be attempted[make the changes from agriculture to manufacturing] likely to be more tardy than might consist with the interest either of individuals or of the society. . . . . To produce the desirable changes, as early as may be expedient, may therefore require the incitement and patronage of government [as may be capable of overcoming the obstacles]. Hamilton believes that (ibid: 269) the existence of assurance of aid from the government. . . may be essential to fortify adventures against. . . [those who enjoy] the advantages naturally acquired
Hamilton believes that (ibid: 249) manufacturing activities will have a considerable influence upon the total mass of industrious effort in a community that will add to the community a degree of energy and effect, which are not easily conceived. Hamilton observes that (ibid: 260) the multiplication of manufactories not only furnishes a market for [the surplus produce of the soil]. . . but it likewise creates a demand for such as were either unknown or produced in inconsiderable quantities.
4

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from practice and previous possession of the ground. . . According to the U.S. constitution (ibid: 302-303), the National Legislature has express authority to lay and collect taxes, duties, imports and excises. . . and provide for the common defense and general welfare. And according to Hamilton, the phrase [general welfare] is as comprehensive as any that could have been used. Hamilton (ibid:302) believes that it is the interest of the society. . . to submit to a temporary expense, which is more than compensated, by an increase of industry and wealth, by an augmentation of resources and independence; and by the circumstance of eventual cheapness. . . Hamilton believes that (ibid: 286) the internal competition, which takes place, soon does away every thing like monopoly, and by degrees reduces the price of the article to the minimum of a reasonable profit on the capital employed. . . In a national view, a temporary enhancement of price must always be well compensated by a permanent reduction of it. Hamilton and List are often criticized for their failure to understand the second best nature of tariff protection of infant industries. Hamilton, as well as List, however, seem to have been well aware of the first-best nature of taxcum-subsidy approach. Hamilton states that (ibid: 298-301) pecuniary bounties are the most efficacious means of encouraging manufactures. . . overcoming the obstacles which arise from the competition of superior skill and maturity elsewhere because they tend to stimulate and uphold new enterprises [undertakings]. . . in the first attempts avoiding the inconvenience of a temporary augmentation of price.5 Hamilton believes that (ibid: 301 & 336) the public encouragement of the acquisition of a new and useful branch of industry leads to a permanent addition to the general stock of productive labor and hence bounties and premiums as well as tariff protections are productive, when rightly applied and particularly in the infancy of new enterprises [they are] indispensable. Hamilton (ibid: 307) emphasizes the needs for the encouragement of new inventions and discoveries, at home, and of the introduction into [the home country]. . . of such as may have been made in other countries; particularly those, which relate to machinery. Hamilton (ibid: 338) recommends the creation of a fund for paying the bounties and let the commissioners be
5 According to Hamilton (ibid: 304), premiums serve to reward some particular excellence of superiority, some extraordinary exertion or skill, and are dispensed only in a small number of cases. But their effect is the stimulation of general effort. . . they address themselves to different passions; touching the chords as well of emulation as of interest. They are accordingly a very economical mean of exciting the enterprise of a whole community.

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empowered to apply the fund confided to them to defray the expenses of. . . manufactures in particular branches of extraor-dinary importanceto induce the prosecution and introduction of useful discoveries, inventions and improvements, by proportionate rewards, judi-ciously held out and applied [and] to encourage by premiums both honorable and lucrative the exertions of individuals. Hamilton believes that (ibid: 301) there is no purpose, to which public money can be more beneficially applied, than to the acquisition of a new and useful branch of industry. . . [that results in] a permanent addition to the general stock of productive labor. B. Friedrich List The critique of the laissez faire system of Adam Smith by Friedrich List (1885: XIX) begins in the following fashon: Adam Smith (Wealth of Nations, Book IV, Ch.2). . . urges the following argument against the protective commercial policy. . .: A country can indeed by means of such [protective] regulations produce a special description of manufactures sooner than without them; and this special kind of manufactures will be able to yield after some time as cheap as or still cheaper production than the foreign country. But although in this manner we can succeed in directing national industry sooner into those channels into which it would later have flowed of its own accord, it does not in the least follow that the total amount of industry or of the incomes of the community can be increased by means of such measures. The industry of the community can only be augmented in proportion as its capital increases, and the capital of the community can only increase in accordance with the savings which it gradually makes from its income. Now, the immediate effect of these measures is to decrease the income of the community. But it is certain that which decrease that income cannot increase the capital more quickly than it would have been increased by itself, if it, as well as industry, had been left free. List began his criticism of Smith by pointing that Adam Smith has merely used the word capital in that sense in which it is necessarily used by rentiers of merchants in their book-keeping and their balance-sheets namely as the grand total of their values of exchange in contradistinction to the income accruing therefrom. According to List, Adam Smith has forgotten that he himself includes [in his definition of capital] the mental and bodily abilities of the producers under this term [capital]. He wrongly maintains that the revenues of the nation are dependent only on the sum of its material capital. His own work, on the contrary, contains a thousand proofs that these revenues are chiefly conditional on the sum of its mental and bodily powers,

INFANT INDUSTRY ARGUMENT

and on the degree to which they are perfected, in social and political repects [especially by means of more perfect division of labor and confederation of the national productive powers], and that although measures of protection require sacrifices of material goods for a time, these sacrifices are made good a hundred-fold in powers, in the ability to acquire values of exchange, and are consequently merely reproductive outlay by the nation. According to List, Smith has forgotten that the ability of the whole nation to increase the sum of its material capital consists mainly in the possibility of converting unused natural powers into material capital, into valuable and income-producing instruments, and that in the case of the merely agricultural nation a mass of natural powers lies idle or dead which can be quickened into activity only by manufactures. . . He [Smith] reduces the process of the formation of capital in the nation to the operation of a private rentier, whose income is determined by the value of his material capital, and who can only increase his income by savings which he again turns into capital. List believes that (1841; 1966: 226) the revenue of the nation are dependent. . . on the sum of mental and bodily powers and that (ibid: 170) aggregate of the productive powers of the nation is not synonymous with the aggregate of the productive powers of all individuals, each considered separatelythat the total amount of these powers depend chiefly on social and political conditions, but especially on the degree in which the nation has rendered effectual the division of labor and the confederation of the powers of production within itself. List thereupon visualizes the economic system in which the existing incomplete development of economic organization would leave room for the nations long-run productive potentialities to be brought out more fully by the dynamisms generated by the promotion of infant manufacturing activities. List further believes that (ibid: 144) history has proved that a manufacturing power developed in all its branches forms a fundamental condition of all higher advances in civilization, material prosperity, and political power in every nation, and (ibid: 153) the nation which has cultivated manufacturing industry in all branches within its territory to the highest perfection will therefore possess most productive power, and will consequently be the richest. 6 List also suggests a concept akin to the Marshallian externality (ibid: 152-153): The productive powers of every separate manufactory are also increased in proportion as the whole manu6 List believes that (ibid: 197) the spirit of striving for a steady increase in mental and bodily acquirements, of emulation, and of liberty characterize. . . a state devoted to manufactures and commerce.

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facturing power of the country is developed in all its branches, and the more intimately it is united with all other branches of industry. This sentence can be interpreted to imply that production costs of individual firm do not decrease only with its own size but also decrease with the size of the industry. List apparently understands that the productivity of a firm depends on how large an industry it is part of rather than on the size of the firm itself. List does not seem to regard the promotion of infant industry solely as a means for import-substitution oriented growth. He apparently takes an outward-looking approach and takes the eventual international price-quality competition as a natural sequence to follow the promotion of infant industry. According to List (ibid: 199): A manufacturer has a hundred times more opportunity for developing his mind than the agriculturist. In order to qualify himself for conducting his business, he must become acquainted with foreign men and foreign countries; in order to establish that business, he must make unusual efforts. . . [T]he continual competition of his rivals, which perpetually threaten his existence and prosperity, are to him a sharp stimulus to uninterrupted activity, to ceaseless progress. . . These circumstances produce in the manufacture an energy which is not observable in the mere agriculturist. . . [M]anufacturing occupations. . . develop and bring into action an incomparably greater variety and higher type of mental qualities and abilities than agriculture does. The infant industry argument of List is closely interwoven with the theory of development. To List, the manufacturing activity is the engine of growth.7 He addresses to the long-run mutual interaction between the promotion of infant manufacturing activities and economic development, involving invention and discovery. He believes that the expansion of manufacturing activity would lead to a more than propotional increase in the amount of human resource that is devoted to the inventive research activity. He apparently understands that technological progress arises in large part
7 Adam Smith (1776, 1937: 6) seems to have been a little bit apprehensive about agriculture because the nature of agriculture does not admit of so many subdivisions of labor and hence the improvement of the productive powers of labor [in agriculture] does not always keep pace with their improvement in manufactures. List, however, prefers manufacturing activities on a very different ground. List believes that (ibid: 197): In a country devoted to mere raw agriculture, dullness of mind, awkwardness of body, obstinate adherence to old notions, customs, methods, and processes, want of culture, of prosperity, and of liberty, prevail. The spirit of striving for a steady increase in mental and bodily acquirements, of emulation, and of liberty, characterize, on the contrary, a state devoted to manufactures and commerce.

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because of intentional activities taken by people who respond to market incentives. According to List (ibid: 200-202): Manufactures are at once the offspring, and at the same time the supporters and the nurses, of science and the arts. . . in the manufacturing state there is no path which leads more rapidly to wealth and position than that of invention and discovery. Thus, in manufacturing state genius is valued and rewarded more highly than skill, and skill more highly than mere physical force. . . manufactures operate beneficially on the development of the mental powers of the nation. . . the competition of. . . talents. . . has a most beneficial influence not merely on the further progress of science itself, but also on the further perfection of the arts and of industries. . . . The science and industry in combination have produced that great material power. . . [Furthermore] a manufacturing nation has a hundred times more opportunities of applying the power of machinery than an agricultural nation. . . It is evident that canals, railways, and steam navigation are called into existence only by means of the manufacturing power. List believes that the superiority of one country over another in one branch of industry, say, manufacturing, often arises simply from having begun it sooner (ibid: 316): under a system of perfectly free competition with more advanced manufacturing nations, a nation which is less advanced than those, although well fitted for manufacturing, can never attain to a perfectly developed manufacturing power of its own, nor to perfect independence, without protective duties. . . . List states that (ibid: 299300), the reason for this is the same as that why a child or a boy in wrestling with a strong man can scarcely be victorious or even offer steady resistance. List apparently addresses to a country with potential comparative advantages in (say, labor-intensive) manufacturing and the problem of converting its potential advantages into the actual ones by taking care of the transient externalities. List understands that initial advantage can cumulate over time because such an advantage is selfreinforcing due to better flow of information, more flexible labor market, more specialized suppliers of inputs and technical services, and so on. According to List (ibid: 294), it is the more difficult to set new business going in proportion as fewer branches of industry of a similar character already exist in a nation; because, in that case, masters, foremen, and workmen must first be either trained up at home or procured from abroad, and because the profitableness of the business has not been sufficiently tested to give capitalists confidence in its success. Many contemporary economists argue that, although individual firms may exhaust internal economies of scale at verly low level of production

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11

and hence operate with constant or decreasing returns to scale, the industry as a whole may enjoy scale economies because, as the overall size of the industry grows, specialized machineries and equipment would begin to be produced, railroads and other transportations facilities would be built, better educational and research institutions would be established for industry, and so on. Although List failed to give an explicit formulation of [transient] external economies, he gets to the essence of Marshallian externalities (ibid: 300): the entrepreneurs in advanced industrial country can obtain skilled and experienced workmen in the greatest number and at the cheapest wages, the best technical men and foremen, the most perfect and the cheapest machinery, the greatest benefit in buying and selling advantageously; further, the cheapest means of transport, as respects raw materials and also in respect of transporting goods when sold, more extended credit for the manufacturers with banks and money institutions at the lowest rates of interest, greater commercial experience, better tools, building arrangements, connections, such as can only be acquired and established in the course of generations. . . List apparently understands that the infant manufacturing activity will generate substantial external economies that will accrue, with time lag, to those who are not the initial undertakers of infant manufacturing activities. List believes that (ibid: 145) if a sacrifice of value [of exchange, i.e., current consumption] is caused by protective duties, it is made good by the gain of a power of production [i.e., an increase in the aggregate amount of the productive powers of the nation], which. . . secures to the nation an infinitely greater amount of material goods. . .8 This sentense sounds almost like an endogeneous perpetual growth model. List continues: therefore the sacrifices of material goods for a time [to take care of the transient externalities]. . . are. . . merely reproductive outlay by the nation (ibid: 226). List apparently understands that the external effects that arise from knowledge spillovers in manufacturing activity cause the investment in manufacturing to be undercompensated, and therefore a temporary protection
List admits that (ibid: 169) protective duties secure to the home manufacturers a monopoly to the disadvantage of the home consumers. . . [However,] if the producers at first obtain higher prices, they run great risks, and have to contend against those considerable losses and sacrifices which are always connected with all beginnings in manufacturing industry. But. . . the competition at home which follows later on, . . . as a rule, always lowers prices further than the level at which they had steadily ranged under the free competition of the foreigner.
8

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or subsidy for manu-facturing industry would increase the growth rate of an economy. List believes that (ibid: 226-227) the ability of the whole nation to increase the sum of its material capital consists mainly in the possibility of converting unused natural powers into material capital, into valuable and income-producing instruments, and. . . in the case of merely agricultural nation a mass of natural powers lies idle or dead which can be quickened into activity only by manufactures. List not only emphasizes the vent-forsurplus mechanism that is brought into play by the promotion of infant manufacturing industry, but also catches a glimpse of the transient nature of the infant industry promotion. According to List (ibid: 315), bounties are to be justified as temporary means of encouragement, namely where the slumbering spirit of enterprise of a nation merely requires stimulus and assistance in the first period of its revival, in order to evoke in it a powerful and lasting production and an export trade. . . . It is interesting to notice that List emphasizes export trade rather than import-substitution.9 If Adam Smiths trade theory can be considered as an attempt to study the long-run mutual interaction between trade and economic development by incorporating the long-run changes in factor supplies (i.e., capital accumulation) and their productivity (through the division of labor), Hamilton and
List, however, warns against excesses: [P]rotection is only beneficial to the prosperity of the nation so far as it corresponds with the degree of the nations industrial development. Every exaggeration of protection is detrimental; nations can only obtain a perfect manufacturing power by degrees. On that account also, two nations which stand at different stages of industrial cultivation, can with mutual benefit make reciprocal concessions by treaty in respect to the exchange of their various manufacturing products. The less advanced nation can, while is not yet able to produce for itself with profit finer manufactured goods [say, capital- or technology-intensive goods]. . . nevertheless supply the further advanced nation with a portion of its requirements of coarser manufactured goods [say, simple unskilled labor-intensive manufactures]. Such treaties might be still more allowable and beneficial between nations which stand at about the same degree of industrial development, between which, therefore, competition is not overwhelming, destructive, or repressive, not tending to give a monopoly of everything to one side, but merely acts, as competition in the inland trade does, as an incentive to mutual emulation, perfection, and cheapening of production. List seems to have anticipated the modern approaches to international trade in terms of inter-industry and intra-industry trades. List further suggests that (ibid: 314) nations which have not yet made considerable advances in technical art and in the manufacture of machinery should allow all complicated machinery to be imported free of duty. . . .
9

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13

List may be attributed to have focused on the more fundamental dynamic nature of trade and growth, i.e., the manufacturing activity as a sharp stimulus to human exersion, the spirit of enterprise, invention, discovery, and the drive for perfection of domestic economic organization (see Myint, 1977). Smith emphasized the division of labor but List emphasized also the confederation of the powers of production within a nation.

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Central to the Mill-Bastable version of the infant-industry dogma is the notion that practice makes perfect and that a firm can learn from its own experiences and, possibly, from those of other firms in the same industry. Since it is brief and has hardly been improved upon, Mill's account is quoted in full. 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 one branch of production often only arises 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 . . . But it cannot be expected that individuals should, at their own risk, or to their certain loss, introduce a new manufacture, and bear the burden of carrying it on until the producers have been educated up to the level of those with whom these 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 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 for a fair trial of what they are capable of accomplishing. Bastable remarked that the mere prospect of overcoming a historical handicap is not enough. It is necessary, further, that the ultimate saving in costs should compensate the community for the high costs of the protected learning period. It is necessary that, when a suitable discount is applied to the early excess costs and to the eventual cost savings, the commodity still should be worth producing. Not only the Mill test but a Bastable test must be passed. The Mill-Bastable dogma implies that, if an indsutry passes the Mill test and the Bastable test, it should be protected until it can stand on its own feet. The essential feature is the postulation of a dynamic learning process, which relies upon external economies and diseconomies of production. If firms can learn from the experiences of other firms and if there is no entry barrier to new firms on an equal cost footing with the pioneer firms, the entire saving in costs would be passed on to the domestic consumer. It is

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15

clear that, in this case, the initial protection is an essential condition for of the establishment of the industry. No firm would be willing to shoulder the losses of the early learning period if the lessons of the experiences are fully and freely available to any follower. In this case, then, the Mill-Bastable dogma comes through unscathed. However, if the learning process is internal to the firm, that is, if firms can learn only from their own experiences, the prospect of later profit may be sufficiently attractive to warrant the shouldering of losses during the initial learning period. Then there are in this case no grounds for protection. In practice, of course, a firm may benefit both from its own experiences and from those of other firms. REFERENCES Bastable, C.F., The Commerce of Nations, rev. T.E. Gregory, London, 1921, pp. 140-43, and The Theory of International Trade, 4th ed., London, 1903, p. 140. Corden, W. Max, Trade Policy and Economic Welfare , London: Oxford University Press, 1974. Hamilton, Alexander, Report on Manufactures, reprinted in The Papers of Alexander Hamilton, edited by H.C. Syrett, New York: Columbia University Press, 1966. Johnson, Harry G., Optimal Trade Intervention in the Presence of Domestic Distortions, in Trade, Growth and the Balance of Payments, edited by R. E. Caves, P.B. Kenen and H.G. Johnson, Amsterdam: North-Holland, 1965, pp.3-34. Kemp, Murray C., The Mill-Bastable Infant-Industry Dogma, Journal of Political Economy, February 1960, pp. 65-67. Lipsey, R.G., and Lancaster, K., The General Theory of the Second Best, Review of Economic Studies, Volume 24, 1956-7, pp.11-32. List, Friedrich, The National System of Political Economy, London: Longmans, Green & Co., 1885, reprinted by Fairfield: Augustus M. Kelley, 1977. Meade, James E., Trade and Welfare , London: Oxford University Press, 1955. Mill, John Stuart, The Principle of Political Economy, Ashley ed., p. 92. Smith, Adam, The Wealth of Nations, New York: The Random House, 1937.