SAVING THE X INDUSTRY
THE LOBBIES OF Congress are crowded with representatives of
the X industry. The X industry is sick. The X industry is
dying. It must be saved. It can be saved only by a tariff, by
higher prices, or by a subsidy. If it is allowed to die, workers
will be thrown on the streets. Their landlords, grocers, butchers,
clothing stores and local motion pictures will lose business,
and depression will spread in ever-widening circles. But if the
X industry, by prompt action of Congress, is saved—ah then!
It will buy equipment from other industries; more men will be
employed; they will give more business to the butchers, bakers
and neon-light makers, and then it is prosperity that will spread
in ever-widening circles.
It is obvious that this is merely a generalized form of the case
we have just been considering. There the X industry was agriculture.
But there is an endless number of X industries. Two
of the most notable examples have been the coal and silver
industries. To "save silver" Congress did immense harm. One
of the arguments for the rescue plan was that it would help "the
East." One of its actual results was to cause deflation in China,
which had been on a silver basis, and to force China off that
basis. The United States Treasury was compelled to acquire, at
ridiculous prices far above the market level, hoards of unnecessary
silver, and to store it in vaults. The essential political aims
of the "silver senators" could have been as well achieved, at a
fraction of the harm and cost, by the payment of a frank subsidy
to the mine owners or to their workers; but Congress and the
country would never have approved a naked steal of this sort
unaccompanied by the ideological flim-flam regarding "silver's
essential role in the national currency."
To save the coal industry Congress passed the Guffey Act,
under which the owners of coal mines were not only permitted,
but compelled, to conspire together not to sell below certain
minimum prices fixed by the government. Though Congress
had started out to fix "the" price of coal, the government soon
found itself (because of different sizes, thousands of mines, and
shipments to thousands of different destinations by rail, truck,
ship and barge) fixing 350,000 separate prices for coal!1 One
effect of this attempt to keep coal prices above the competitive
market level was to accelerate the tendency toward the substitution
by consumers of other sources of power or heat—such
as oil, natural gas and hydroelectric energy. Today we find the
government trying to force conversion from oil consumption
back to coal.
Our aim here is not to trace all the results that followed
historically from efforts to save particular industries, but to
trace a few of the chief results that must necessarily follow from
efforts to save an industry.
It may be argued that a given industry must be created or
preserved for military reasons. It may be argued that a given
industry is being ruined by taxes or wage rates disproportionate
to those of other industries; or that, if a public utility, it is being
forced to operate at rates or charges to the public that do not
permit an adequate profit margin. Such arguments may or may
not be justified in a particular case. We are not concerned with
them here. We are concerned only with a single argument for
1Testimony of Dan H. Wheeler, director of the Bituminous Coal Division.
Hearings on extension of the Bituminous Coal Act of 1937.
saving the X industry—that if it is allowed to shrink in size or
perish through the forces of free competition (always called by
spokesmen for the industry in such cases laissez-faire, anarchic,
cutthroat, dog-eat-dog, law-of-the-jungle competition) it will
pull down the general economy with it, and that if it is artificially
kept alive it will help everybody else.
What we are talking about here is nothing else but a
generalized case of the argument put forward for parity prices
for farm products or for tariff protection for any number of X
industries. The argument against artificially higher prices applies,
of course, not only to farm products but to any product,
just as the reasons we have found for opposing tariff protection
for one industry apply to any other.
But there are always any number of schemes for saving X
industries. There are two main types of such proposals in
addition to those we have already considered, and we shall take
a brief glance at them. One is to contend that the X industry is
already "overcrowded," and to try to prevent other firms or
workers from getting into it. The other is to argue that the X
industry needs to be supported by a direct subsidy from the
government.
Now if the X industry is really overcrowded as compared
with other industries it will not need any coercive legislation to
keep out new capital or new workers. New capital does not rush
into industries that are obviously dying. Investors do not eagerly
seek the industries that present the highest risks of loss
combined with the lowest returns. Nor do workers, when they
have any better alternative, go into industries where the wages
are lowest and the prospects for steady employment least promising.
If new capital and new labor are forcibly kept out of the X
industry, however, either by monopolies, cartels, union policy
or legislation, it deprives this capital and labor of liberty of
choice. It forces investors to place their money where the
returns seem less promising to them than in the X industry. It
forces workers into industries with even lower wages and prospects
than they could find in the allegedly sick X industry. It
means, in short, that both capital and labor are less efficiently
employed than they would be if they were permitted to make
their own free choices. It means, therefore, a lowering of
production which must reflect itself in a lower average living
standard.
That lower living standard will be brought about either by
lower average money wages than would otherwise prevail or by
higher average living costs, or by a combination of both. (The
exact result would depend upon the accompanying monetary
policy.) By these restrictive policies wages and capital returns
might indeed be kept higher than otherwise within the X
industry itself; but wages and capital returns in other industries
would be forced down lower than otherwise. The X industry
would benefit only at the expense of the A, B and C industries.
Similar results would follow any attempt to save the X
industry by a direct subsidy out of the public till. This would
be nothing more than a transfer of wealth or income to the X
industry. The taxpayers would lose precisely as much as the
people in the X industry gained. The great advantage of a
subsidy, indeed, from the standpoint of the public, is that it
makes this fact so clear. There is far less opportunity for the
intellectual obfuscation that accompanies arguments for tariffs,
minimum-price fixing or monopolistic exclusion.
It is obvious in the case of a subsidy that the taxpayers must
lose precisely as much as the X industry gains. It should be
equally clear that, as a consequence, other industries must lose
what the X industry gains. They must pay part of the taxes that
are used to support the X industry. And customers, because
they are taxed to support the X industry, will have that much
less income left with which to buy other things. The result
must be that other industries on the average must be smaller
than otherwise in order that the X industry may be larger.
But the result of this subsidy is not merely that there has been
a transfer of wealth or income, or that other industries have
shrunk in the aggregate as much as the X industry has ex-
panded. The result is also (and this is where the net loss comes
in to the nation considered as a unit) that capital and labor are
driven out of industries in which they are more efficiently
employed to be diverted to an industry in which they are less
efficiently employed. Less wealth is created. The average standard
of living is lowered compared with what it would have
been.
These results are virtually inherent, in fact, in the very
arguments put forward to subsidize the X industry. The X
industry is shrinking or dying by the contention of its friends.
Why, it may be asked, should it be kept alive by artificial
respiration? The idea that an expanding economy implies that
all industries must be simultaneously expanding is a profound
error. In order that new industries may grow fast enough it is
usually necessary that some old industries should be allowed to
shrink or die. In doing this they help to release the necessary
capital and labor for the new industires. If we had tried to keep
the horse-and-buggy trade artificially alive we should have
slowed down the growth of the automobile industry and all the
trades dependent on it. We should have lowered the production
of wealth and retarded economic and scientific progress.
We do the same thing, however, when we try to prevent any
industry from dying in order to protect the labor already
trained or the capital already invested in it. Paradoxical as it
may seem to some, it is just as necessary to the health of a
dynamic economy that dying industries be allowed to die as
that growing industries be allowed to grow. The first process is
essential to the second. It is as foolish to try to preserve obsolescent
industries as to try to preserve obsolescent methods of
production: this is often, in fact, merely two ways of describing
the same thing. Improved methods of production must constantly
supplant obsolete methods, if both old needs and new
wants are to be filled by better commodities and better means.
THE LOBBIES OF Congress are crowded with representatives of
the X industry. The X industry is sick. The X industry is
dying. It must be saved. It can be saved only by a tariff, by
higher prices, or by a subsidy. If it is allowed to die, workers
will be thrown on the streets. Their landlords, grocers, butchers,
clothing stores and local motion pictures will lose business,
and depression will spread in ever-widening circles. But if the
X industry, by prompt action of Congress, is saved—ah then!
It will buy equipment from other industries; more men will be
employed; they will give more business to the butchers, bakers
and neon-light makers, and then it is prosperity that will spread
in ever-widening circles.
It is obvious that this is merely a generalized form of the case
we have just been considering. There the X industry was agriculture.
But there is an endless number of X industries. Two
of the most notable examples have been the coal and silver
industries. To "save silver" Congress did immense harm. One
of the arguments for the rescue plan was that it would help "the
East." One of its actual results was to cause deflation in China,
which had been on a silver basis, and to force China off that
basis. The United States Treasury was compelled to acquire, at
ridiculous prices far above the market level, hoards of unnecessary
silver, and to store it in vaults. The essential political aims
of the "silver senators" could have been as well achieved, at a
fraction of the harm and cost, by the payment of a frank subsidy
to the mine owners or to their workers; but Congress and the
country would never have approved a naked steal of this sort
unaccompanied by the ideological flim-flam regarding "silver's
essential role in the national currency."
To save the coal industry Congress passed the Guffey Act,
under which the owners of coal mines were not only permitted,
but compelled, to conspire together not to sell below certain
minimum prices fixed by the government. Though Congress
had started out to fix "the" price of coal, the government soon
found itself (because of different sizes, thousands of mines, and
shipments to thousands of different destinations by rail, truck,
ship and barge) fixing 350,000 separate prices for coal!1 One
effect of this attempt to keep coal prices above the competitive
market level was to accelerate the tendency toward the substitution
by consumers of other sources of power or heat—such
as oil, natural gas and hydroelectric energy. Today we find the
government trying to force conversion from oil consumption
back to coal.
Our aim here is not to trace all the results that followed
historically from efforts to save particular industries, but to
trace a few of the chief results that must necessarily follow from
efforts to save an industry.
It may be argued that a given industry must be created or
preserved for military reasons. It may be argued that a given
industry is being ruined by taxes or wage rates disproportionate
to those of other industries; or that, if a public utility, it is being
forced to operate at rates or charges to the public that do not
permit an adequate profit margin. Such arguments may or may
not be justified in a particular case. We are not concerned with
them here. We are concerned only with a single argument for
1Testimony of Dan H. Wheeler, director of the Bituminous Coal Division.
Hearings on extension of the Bituminous Coal Act of 1937.
saving the X industry—that if it is allowed to shrink in size or
perish through the forces of free competition (always called by
spokesmen for the industry in such cases laissez-faire, anarchic,
cutthroat, dog-eat-dog, law-of-the-jungle competition) it will
pull down the general economy with it, and that if it is artificially
kept alive it will help everybody else.
What we are talking about here is nothing else but a
generalized case of the argument put forward for parity prices
for farm products or for tariff protection for any number of X
industries. The argument against artificially higher prices applies,
of course, not only to farm products but to any product,
just as the reasons we have found for opposing tariff protection
for one industry apply to any other.
But there are always any number of schemes for saving X
industries. There are two main types of such proposals in
addition to those we have already considered, and we shall take
a brief glance at them. One is to contend that the X industry is
already "overcrowded," and to try to prevent other firms or
workers from getting into it. The other is to argue that the X
industry needs to be supported by a direct subsidy from the
government.
Now if the X industry is really overcrowded as compared
with other industries it will not need any coercive legislation to
keep out new capital or new workers. New capital does not rush
into industries that are obviously dying. Investors do not eagerly
seek the industries that present the highest risks of loss
combined with the lowest returns. Nor do workers, when they
have any better alternative, go into industries where the wages
are lowest and the prospects for steady employment least promising.
If new capital and new labor are forcibly kept out of the X
industry, however, either by monopolies, cartels, union policy
or legislation, it deprives this capital and labor of liberty of
choice. It forces investors to place their money where the
returns seem less promising to them than in the X industry. It
forces workers into industries with even lower wages and prospects
than they could find in the allegedly sick X industry. It
means, in short, that both capital and labor are less efficiently
employed than they would be if they were permitted to make
their own free choices. It means, therefore, a lowering of
production which must reflect itself in a lower average living
standard.
That lower living standard will be brought about either by
lower average money wages than would otherwise prevail or by
higher average living costs, or by a combination of both. (The
exact result would depend upon the accompanying monetary
policy.) By these restrictive policies wages and capital returns
might indeed be kept higher than otherwise within the X
industry itself; but wages and capital returns in other industries
would be forced down lower than otherwise. The X industry
would benefit only at the expense of the A, B and C industries.
Similar results would follow any attempt to save the X
industry by a direct subsidy out of the public till. This would
be nothing more than a transfer of wealth or income to the X
industry. The taxpayers would lose precisely as much as the
people in the X industry gained. The great advantage of a
subsidy, indeed, from the standpoint of the public, is that it
makes this fact so clear. There is far less opportunity for the
intellectual obfuscation that accompanies arguments for tariffs,
minimum-price fixing or monopolistic exclusion.
It is obvious in the case of a subsidy that the taxpayers must
lose precisely as much as the X industry gains. It should be
equally clear that, as a consequence, other industries must lose
what the X industry gains. They must pay part of the taxes that
are used to support the X industry. And customers, because
they are taxed to support the X industry, will have that much
less income left with which to buy other things. The result
must be that other industries on the average must be smaller
than otherwise in order that the X industry may be larger.
But the result of this subsidy is not merely that there has been
a transfer of wealth or income, or that other industries have
shrunk in the aggregate as much as the X industry has ex-
panded. The result is also (and this is where the net loss comes
in to the nation considered as a unit) that capital and labor are
driven out of industries in which they are more efficiently
employed to be diverted to an industry in which they are less
efficiently employed. Less wealth is created. The average standard
of living is lowered compared with what it would have
been.
These results are virtually inherent, in fact, in the very
arguments put forward to subsidize the X industry. The X
industry is shrinking or dying by the contention of its friends.
Why, it may be asked, should it be kept alive by artificial
respiration? The idea that an expanding economy implies that
all industries must be simultaneously expanding is a profound
error. In order that new industries may grow fast enough it is
usually necessary that some old industries should be allowed to
shrink or die. In doing this they help to release the necessary
capital and labor for the new industires. If we had tried to keep
the horse-and-buggy trade artificially alive we should have
slowed down the growth of the automobile industry and all the
trades dependent on it. We should have lowered the production
of wealth and retarded economic and scientific progress.
We do the same thing, however, when we try to prevent any
industry from dying in order to protect the labor already
trained or the capital already invested in it. Paradoxical as it
may seem to some, it is just as necessary to the health of a
dynamic economy that dying industries be allowed to die as
that growing industries be allowed to grow. The first process is
essential to the second. It is as foolish to try to preserve obsolescent
industries as to try to preserve obsolescent methods of
production: this is often, in fact, merely two ways of describing
the same thing. Improved methods of production must constantly
supplant obsolete methods, if both old needs and new
wants are to be filled by better commodities and better means.
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