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CHAPTER 10: On the Goals of Trade Policy 1 - Ludwig von Mises, Selected Writings of Ludwig von Mises, vol. 1: Monetary and Economic Problems Before, During, and After the Great War [2012]

Edition used:

Selected Writings of Ludwig von Mises, vol. 1: Monetary and Economic Problems Before, During, and After the Great War, edited and with an Introduction by Richard M. Ebeling (Indianapolis: Liberty Fund, 2012).

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


CHAPTER 10

On the Goals of Trade Policy1

I

The elements of a foreign trade policy can be designed based only on an understanding of what emerges from the free play of economic activity: a regional division of labor that results in the greatest supply of goods at the least cost. From this point of view, protectionist policies can never be justified on economic grounds. All theoretical attempts to do so have failed. The arguments of the advocates of free trade, which culminated in Ricardo’s formulation, cannot be shaken, let alone refuted.2 If completely free trade prevails, then each country specializes in that branch of production for which its domestic conditions are relatively most favorable. Every artificial influence that disturbs this arrangement must, in the end, result in a deterioration in the quality and a decline in the quantity of goods.

The free trade argument has not been refuted by Friedrich List’s3 claim that otherwise idle productive resources are employed under a system of protective tariffs. The fact that without the protective tariffs they would not be utilized shows that they are less productive than other resources that can be employed instead.

A tariff to support infant industries also cannot be justified on economic grounds. Older industries have an advantage in many ways over younger ones. The emergence of new industries can be considered economically worthwhile, in general, if their lower productivity in the short run is compensated by their greater productivity in the longer run. If the new enterprises promise to be economically profitable, the private sector will create them without any “aid” from a tariff. With every newly started enterprise it is anticipated that various initial outlays will be recouped later on. It is not a challenge to this argument to point out that almost all countries have supported the development of industries through protective tariffs and other protectionist measures. It remains an open question whether healthy industries would have developed even without such aid. Within a country’s borders similar differences in productive conditions are solved without any such “external” support. In areas within a country that previously were not industrially developed, we see industries emerge that not only successfully compete against older industrial areas of that country, but also often drive them completely out of the market.4

Schüller argued against the idea that unrestricted freedom of trade was advantageous from the international point of view. Generating the largest possible total production, he said, was not only dependent upon taking advantage of the most productive opportunities, but also exploiting the unutilized productive opportunities as well.5 The weakness of this argument is already apparent in the fact to which Schüller refers with particular emphasis: that the conditions under which various producers operate are dissimilar, not only in different countries, but also within the individual countries themselves. Less advantageous production opportunities are exploited only insofar as more advantageous ones are no longer available. The only influence from the protective tariff would be in that less advantageous opportunities are exploited while more advantageous ones elsewhere within that same country remain unutilized. However, that no increase in total productive output can be achieved by this method requires no further explanation.

II

Ricardo’s theory of foreign trade starts with the assumption that the free movement of capital and labor operate solely within a country’s boundaries. Domestically, any regional difference in rates of profits and in employment is equalized through movements in capital and labor. This is not true for differences between several countries. If there was free mobility between countries as well, this would lead to the following result: capital and labor would flow out of the country that offered less advantageous production opportunities and into the country with more advantageous opportunities. A series of emotional factors “which I should be sorry to see weakened” (which Ricardo, the patriot and politician, inserts into the theoretician’s exposition) are raised in opposition to this. Capital and labor remain, in spite of the fact that they suffer from a lower level of income, in their own countries and turn to those branches of production for which they are, if not absolutely more favorably, then at least relatively more favorably qualified.6

The premise for the theory of free trade, therefore, is the fact that capital and labor do not move across national boundaries due to non-economic reasons, even when this would be advantageous from an economic point of view. This may have applied, in general, during Ricardo’s day; however, it has not been true for quite some time now. The obstacles that inhibit the generally free mobility of capital and labor become smaller every day; even the World War will only temporarily hinder this development. When peace returns, those circumstances also will gradually return that, in the decades before the war, cultivated the free mobility of capital and labor between nations. These developments were not random; rather, it was the necessary result of the ever-closer economic ties between the individual countries of the world, that is, the transition from individual national economies to a global economy.

If, however, the basic assumption of Ricardo’s theory disappears due to the effects of free trade, then the theory would disappear with it. There would no longer exist a reason to search out a basic difference between the effects of freedom of trade in domestic trade and foreign trade. If the mobility of capital and labor domestically and their mobility between countries differs only as a matter of the degree, then economic theory cannot make a fundamental distinction between them. The theory must, instead, necessarily arrive at the conclusion that the inherent tendency under free trade is to draw labor and capital into the locations having the most favorable natural production conditions, regardless of political and national boundaries. In the end, unlimited free trade must therefore lead to a change in the conditions under which the entire world is settled; capital and labor will flow out from the countries with less favorable production conditions into those countries with more favorable production conditions.

Even if a theory of free trade like Ricardo’s is modified in this manner, nothing from a purely economic viewpoint would speak against free trade, and everything would warn against protectionism. However, because the theory leads to completely different results in terms of the effect of free trade on the regional distribution of capital and labor, it offers a completely different starting point for examining the economic case for and against a tariff system.

III

The natural conditions for production are unequally distributed among individual countries: there are countries with more favorable and others with less favorable production conditions. This relationship is immutable. Over the course of history, the importance of this fact has often been reduced due to intense metamorphoses resulting from the exhaustion of the soil, through the clearing and utilization of new fertile areas, by changes in the climate, and so on. Of greater importance are those changes that have their origin in advances in production technology, which enable the use of previously worthless or less utilizable natural resources.

If one adheres to Ricardo’s assumption that capital and labor are not disposed to emigration abroad, even when more favorable production conditions are present elsewhere, then the result is that the same expenditures of capital and labor lead to different results within individual countries. There are wealthier and poorer nations. Commercial policy interventions cannot alter this circumstance. Such interventions cannot make the poor nations any wealthier. On the other hand, protectionism in the wealthy nations appears completely preposterous.

If one drops Ricardo’s assumption, however, then a tendency toward an equalization of profits and wage rates would prevail across the globe. Thus there are, in the end, not poorer and wealthier nations, but rather more and less densely populated countries.

This is the developmental tendency that the world today is facing. From a purely economic point of view, this outcome cannot be described as harmful. However, this tendency does come into conflict with the principle that reigns over modern politics, that is, the nationalist principle. The nation-state would correspond with the nationalist ideal only if it has an area under its control in which the quantity and quality of the natural conditions for production are such that it can offer its people space for the natural increase in population within its national boundaries without the danger of overpopulation.

A growing population must be able to find employment within the national boundaries without becoming more densely settled than corresponds with its natural production capabilities. The nation ought to be able to develop unimpeded within its national territory; however, the population should not increase within the nation’s borders beyond that level that would be achieved by the complete and free international mobility of capital and labor.

This stipulation, which is derived with obligatory logic from the nationalist principles of the nineteenth century, is contrary to neither the primarily or purely industrial state, nor the primarily or purely agricultural state, nor even the monocultural state. If a country’s economic potential is determined by its natural production possibilities, then in this country the most favorable exploitation of the land and, ceteris paribus, its greatest possibility for supplying goods for the population, will result from the free play of economic forces. A country’s economic potential is negatively affected only if labor increases beyond the level indicated by its natural production possibilities. However, until a country reaches such a situation, its economic possibilities remain “positive,” whether viewed from a global or a national economic point of view.7 If the production conditions were not exceedingly different within individual national economies,8 then these extremely differentiated types would be the norm.

In its commercial application, the nationalist principle does not demand self-sufficiency in the sense of complete isolation from foreign trade. It is in no way intrinsically opposed to an increase in the general welfare by means of an international division of labor. The nationalist principle has nothing in common with the demand, which is increasing due to certain ethical and political outlooks, for maintaining the current status quo in the division of labor, the intensity of international trade, and impediments to the broader expansion of the global economy.

A country’s national character is not endangered by the use of products made by foreign labor. That the German wears American cotton and Australian wool in his clothing, that he drinks Brazilian coffee and eats Italian lemons, remains of no concern to the nation insofar as there exist German products which serve as the means by which such imports may be paid.

The point of conflict must be found elsewhere.

The surface of the globe is divided among the nations. This division is the result of historical processes in the past and does not correspond to the production possibilities and population patterns of the present. Therefore, there are nations whose area would be more densely populated and others that would be less densely populated, if unfettered movement of people and goods were a reality. The problem of relatively over- and underpopulated areas has to be solved by migration, the movement of people.

These migrations have resulted in the citizens of various nations moving from countries where less favorable production conditions prevail to those countries where there are currently more favorable conditions, with population densities adapting to the more or less attractive natural production possibilities around the globe. In a similar manner, capital goods move to where more favorable returns can be earned. The country from which they move loses both capital and labor. The exported capital assists the importing country in exploiting its productive capabilities. The emigrated labor assimilates itself to its new home.

Emigrants who settle in previously uninhabited areas can retain and foster their culture in their new home. They are not lost to their nation, even if they politically separate themselves from their native country. The Canadians, Australians, and the residents of Cape Province in South Africa are not the only members of the English national culture, which spans the globe, but so are the Yankees.

Circumstances unfold differently when the emigration is directed toward an already populated country and the colonists, due to their numbers or their military inferiority, are not successful in driving out the previous inhabitants, such as successfully happened in North America with the European colonists. These numerically inferior emigrants must then, sooner or later, lose their mother tongue, national culture, customs, and manners. They learn the language of their new country, and they soon adapt to it in all other characteristics. Whether the assimilation is completed quickly or slowly depends upon a series of particular circumstances; however, it remains unavoidable. We are not interested here in the origins of this occurrence; the fact that it occurs is sufficient for us.

We now perceive the meaning and the goal of trade policies. Insofar as they do not unnecessarily encourage an already existing developmental tendency, such as industrialization, or are not solely directed against the trade policies of foreign countries, a country’s trade policies are to be guided by the idea of increasing or retaining its territory in defiance of the relative unfavorability of the production possibilities within its national borders.

This goal cannot be achieved, however, at least not in a manner beneficial to that nation. The country with the relatively less favorable production conditions must, as one says, export either citizens or goods. This is true. However, one ignores the fact that the export of goods is possible only if that country enters into competition with nations that have more advantageous production conditions, that is, if, in spite of higher production costs, that country can sell goods just as inexpensively as countries that produce at lower costs of production. This, however, must depress wages and profits on capital within that country. Unless the emigration of capital and labor is legally impeded or forbidden, this will actually boost emigration; this also completely ignores the fact that the cultural level of the citizens is also depressed by such competitive actions.

Over the long term, an overpopulated country (in the sense characterized above) does not have the means to impede the emigration of the superfluous citizenry. Ultimately, the population must decrease to whatever level corresponds to the utilization of that country’s domestic production conditions. As long as the emigrant can find work in the exploitation of possible production that is more advantageous than the least advantageous utilization at home, and insofar as his emigration has not been impeded, the emigrant will improve his economic life through leaving his country. The fact that agricultural tariffs and also industrial protective duties (which offer industry the possibility of retaining high domestic prices through cartels and trusts while marketing underpriced goods abroad) increase the costs of living, requires no more detailed explanation here.

The fact that these developmental tendencies could be misunderstood, not only by the political leaders but also by parts of the media, can be traced back to the circumstance that it was previously possible to compensate for market losses in one area that was progressively industrializing, by developing new markets in other areas. By this method, English industry was able to stay ahead of the Germans, as could the French and the Belgians. Soon, however, the time will come when this ability to get ahead of others in a new market will fail. If all of the agricultural countries (insofar as it is possible for them to do so in accordance with their natural production conditions) were to develop industries, then the primarily industrial country would be capable of exporting its goods only insofar as its natural production conditions were superior to these others.

A number of writers have constantly stressed with the greatest emphasis9 the grave peril to the economic future of the “primarily industrialized countries” that will emerge with “industrialization” in agricultural countries. Yet the correctness of our conclusions cannot be questioned by anything that has been offered in opposition to them.

The scientific treatment of the subject has suffered from the fact that it has been merged with the political-economic battle over protective tariffs versus free trade. In fact, the use of protective tariffs has suggested itself to those who have perceived a future danger facing the industrialized countries from the progressive industrialization of agriculture nations. However, as we have seen above, this possibility is not available.

The industrialized countries are not in a position to prevent the agricultural countries from transitioning into being industrial nations, which would have been an effective means of retaining the status quo in the international economy, if it had only been possible to do so. From the national point of view, another method is available: the annexation of colonies that have a primarily agricultural character to the extent that the home country and the colonies together form an area that appears to be, in relation to the quality of its natural production conditions, no more densely populated than the territory of other nations. This is the path that England has followed and which Germany ought to have followed, had it not degenerated into the misery of provincial factionalism while the Russians and the Anglo-Saxons conquered the world.

What can a protective tariff achieve here? It cannot prevent the agricultural countries from closing their own borders through protective tariffs and other administrative measures. Quite the contrary, it actually incites them to do so, because it hampers the marketing of their own agricultural products and challenges them to protect themselves with tariffs against the “dumping” of industrial goods by the already industrially developed country. The industrial exporting country ought to function as a free trading partner in order to convert the agricultural countries to free trade by setting a good example; however, England’s situation demonstrates how little can be achieved by this method.

Thus, the proponents of protective tariffs must ultimately arrive at the conclusion that salvation lies in the limitation of the population. What, then, is the need for a protective tariff? No type of political intervention, however well developed, is necessary in order for German lands to nurture as many citizens as would correspond to the conditions compatible with their natural production possibilities. That is, indeed, the goal of trade policies: to ensure the existence of a larger population within a limited area. To relinquish the achievement of this goal is to absolutely reject the justification for trade policies. Trade policies are, then, left with only small tasks of transient importance; they are no longer ranked among the important tasks in a nation’s global-historical battle for existence.

Ever since humans have lived upon the earth, there has been only one effective and enduring means to battle overpopulation: emigration. Séfur’s statement, that the history of humankind reflects the people’s efforts to continually move from poorer living conditions to better ones, is also true for the present.

IV

The supporters of protectionist policies have not failed to understand that their goals cannot be achieved through this method.10 And, yet, they still do not admit defeat. Indeed, they cry out ever more loudly for the protection of national labor. The history of recent decades demonstrates that they have been quite successful in this: almost all countries in the world currently practice protectionism.

To make an appraisal of modern tariff policies, a distinction has to be made between the policies of overpopulated countries and those of underpopulated countries. In the underpopulated countries (those that are less densely populated than favorably corresponds to their production possibilities), agricultural production almost always outweighs manufacturing in terms of the number of those employed in the farming sector, and more or less in terms of the value of the products produced. These countries are usually characterized as agricultural countries because they are primarily considered to be exporters of agricultural products and consumers of industrial goods. There are two separate types of agricultural countries in which modern protectionism has developed in terms of motives behind the policy.

The first type includes the long-established cultural areas. Even if these countries are primarily agricultural, this does not mean that they are lacking in manufacturing production. Prior to the development of modern, global economic relationships, they already had a manufacturing base that supplied the needs of that country’s domestic market. Now that the country is being gradually drawn into the global market, the old autarky is disappearing. Agricultural products are exported and industrial goods enter the country from abroad. In this way, the larger, foreign industries on the global market meet local autochthonic manufacturing, which mostly operates in the form of less efficient handcrafting and cottage industries, or at most in medium-sized enterprises.

The foreigner, with his economic and technical superiority in manufacturing, initially is “victorious” in this battle. As a result, small manufacturers and workers in the vanquished industries become unemployed. When looked at from a purely economic perspective, there appear to be two options for the workers who have been let go: either to emigrate to more industrially advanced countries and find employment in their larger industries, or to remain in their home country and return to working in agriculture or in one of the other older forms of domestic production.

The second option seems to be almost impossible, because of the practical difficulty for manufacturing workers to transition back into agricultural labor. The first option is a viable one, though it involves certain disadvantages for the first generation of such workers as they transition from small-scale to large-scale factory employment. However, those workers are, then, “lost” by their native country due to their emigration. Rather than patiently wait until increasing economic difficulties force handicraftsmen and journeymen to make this final step, national protectionist policies intervene to limit the “losses” that would result from emigration.

Protectionism fights against this undesired trend before this happens by trying to prevent the misery of the workers. A nation’s protective tariffs accelerate domestic industrial development to hinder the imminent emigration of some of its citizens. Again, this policy cannot be defended from a purely economic perspective, though it is understandable from the point of view of national policy.

The second group of agricultural countries was created out of areas that were more recently colonized. The colonists were primarily farmers, and their demands for manufactured goods were satisfied through imports from their native country. Originally, import tariffs in these colonial areas were introduced for budgetary reasons and evolved into extremely significant sources of revenue. It is also the case that these tariffs encouraged the emergence of colonial industries. Eliminating these tariffs would have negatively affected the citizens of these colonies, the more so because one of the effects was to stimulate immigration for employment in the industries created under the protection of the tariffs. A point was reached when a decision was made to reform the import tariffs into protective tariffs. This occurred, for instance, during the development of the United States and Australia.

The industrial protective tariff is popular in agricultural countries, in spite of the fact that from a purely economic perspective it cannot be justified in terms of the interests of the citizens of those countries. Even the farmers, who are primarily harmed by these tariffs, came to consider them to be beneficial. National and political interests increasingly prevailed over purely economic interests.

The industrial protectionist policies in these agricultural countries were justified through the use of an “exploitation theory” in contrast to the teachings of those who spoke of a “harmony of interests” among nations, similar to the way labor unions in the industrialized countries attempted to use a vulgar, socialist theory of exploitation to give an ethical justification to their fight against the individualistic social order.

The patriot of the agricultural country sees the industrial exporter as the exploiter who unfairly enriches himself through his trading with the agricultural country. He casts a disdainful eye on the wealth of the industrial countries and compares it with the simpler and poorer circumstances of his homeland. The animosity that he bears toward the citizens of the industrial world is the same that the nobles felt toward the burghers and that the squires held for the barons of industry, only aggravated and embittered, now, by national antagonism.

Friedrich List, a German, contributed the most in creating this “neomercantilist” ideology, which has ended up being turned against the German people. The Russian sees an enemy in the German, who upsets the productive development of the Slavic peoples with his superior industry. The name of the originating country, the “made in Germany” stamped on German export goods, has a provocative effect on those who are critical of these imports.

A completely different orientation is found in the protective policies of the overpopulated countries, that is, those that would become the targets of emigrants if there existed full freedom of movement. These are generally industrialized countries. Protectionism does not emerge from one single source in these countries: it does not view development as something undesirable, nor does it wish to either halt or delay the tendency toward development. Two types of protectionism are to be found in these countries. The first type of tariff is meant to foster development in less favorable areas of production, or to maintain production in areas of the economy that have become less favorable due to changes in trading patterns or technology. This type of tariff may be characterized as primarily an agricultural tariff that is justified due to differences in costs of production in the home country compared to abroad. Tariffs of the second type are imposed to support the exporting sectors of the economy. They are supposed to foster the formation of cartels that raise domestic prices so goods may be exported at lower prices. They are cartel tariffs.11

Whether they are “production cost” tariffs or cartel tariffs, their ultimate effects are absolutely identical to all protective tariffs: they reduce national income. They reduce the availability of economic resources in relation to consumption demands, and thus completely fail in terms of the goal they were meant to attain. They can only bring about transitory effects.

The superficial view that sees nothing in the system of protective tariffs other than one-sided class politics advantageous to commercial producers goes far astray in its criticisms of the motives for and effects from protectionism. This much may be conceded: that it is fruitless in the attempt to delay the development of the global economy.

V

In recent years, there have been changes in the lives of people that cannot leave unaffected the assumptions underlying trade policies.

The development of and price reductions in the methods for transportation have offered an unforeseen expansion in the seasonal movement of labor. It is not impossible that emigration will lag behind the international Sachsengängerei12 in extent and importance,13 at which point the businessmen and the laborers will oppose each other. With this alteration in the character of labor migrations, the disadvantages resulting from people being limited to areas with less favorable production conditions will be more strongly felt than they are today. Countries that occupy land less well endowed by nature will not have to fear falling behind other, happier countries in terms of numbers of citizens; however, they will continue to be handicapped in terms of affluence and culture. The nationalist incentives trying to eliminate these factors, however, will not become weaker, but grow in intensity.

Continuing emigration to foreign countries will, predictably, encounter ever more difficulties in the future. Previously and still today, emigrants generally remain at a lower rung of the cultural ladder. They brought little or nothing of their national culture with them on their trip abroad; social climbing in the new country brought them closer to the national culture of the host country. As a consequence, there are no great barriers to assimilation. Schools, libraries, and newspapers, which are founded by well-intentioned groups and supported by the émigrés’ home government, can do nothing to change this. However, it can be altered by an improvement in the education of the emigrants and through increased participation of the lower classes in the national culture. The European emigrant today already takes with him something more than memories of misery and subjugation. Still, this cultural dowry is not enough to prevent assimilation; however, even today it already impedes and retards it.

The problem of immigration, therefore, takes on a new quality. The special interests of industrial workers who are threatened by immigration, and who previously had to acquiesce in the face of the greater national interest of the benefits from immigration, now are able to raise the threat to “national unity” whenever they wish to hold back the arrival of more immigrants. No one can have any doubts that all countries whose national composition is threatened by immigration will effectively close their borders, just as the countries settled by Caucasians have for a long time now closed their borders to Asian immigrants.14

The drop in the birth rate ultimately must also influence the problems that constitute the starting point for economic policies. Indeed, the causes behind migrations cannot be mitigated by a gradual increase, cessation, or decrease in the birth rate, if this were to happen uniformly across the entire globe. If, over a certain period of time, there would occur a similar reduction in the population of every individual country, this by itself would not alleviate the overpopulation of one country relative to the underpopulation of another. Just as previously, there would still be areas too densely populated relative to the favorableness of the conditions of production, and other areas would remain too sparsely populated. The tendency would remain unchanged to bring about an equivalent distribution of people across the surface of the world.

Assuming that the decrease in population does not exceed a certain rate, the total amount produced by a smaller number of workers need not be equal to the decline in the number of workers; rather, due to the law of diminishing returns, the average amount of per capita income might increase with a declining national income. It is abundantly clear that trade policies are able to exercise a greater effect on this type of income pattern than with the case of an increasing population and, ceteris paribus, a declining per capita income.

VI

The experiences of the World War allow arguments in favor of economic self-sufficiency to appear particularly relevant. Only those countries would be in a position to victoriously survive a war that are independent of foreign imports for the supply of goods needed to wage war and maintain the existence of their populations during the conflict. Where issues of national defense are concerned, all other considerations fall by the wayside. The trade policies of the future, therefore, would aim at bringing about an equivalent distribution of labor between all branches of domestic agriculture and industry.

The advocates of extreme collectivism will not be persuaded in any way concerning the unattainability of these goals of trade policy. They will argue that emigration can be forbidden in order to impede the drop in the number of citizens. They will claim that emigration has nothing to do with the fact that a nation to whom history has granted a narrow, limited area upon the earth (an area poorly endowed by Nature) will have to live more humbly than other, happier nations. They will say that moral and bellicose virtues flourish more widely in poverty than in affluence. The new, national ideal is created, under which all things are judged in terms of making of primary economic importance the possibility of waging a war of starvation.

Yet there is a substantial error in this line of reasoning. It overlooks the fact that in war it is not the mere existence of equipment and weapons that is important, but also their quality. The nation that has to produce the material means for waging war under less favorable conditions of production will be more poorly equipped and armed than its opponents in the field. Up to a certain point, personal bravery can compensate for these material inferiorities; however, there is a limit beyond which all the valor and self-sacrifice in the world can no longer suffice.15

VII

A country can gaze tranquilly upon its future that controls settled areas of such a size and quality of natural conditions of production that any increase in population need not cause a danger of overpopulation. We consider a country to be overpopulated whenever it is more densely populated than would be the case if there were freedom of movement around the entire world. This is true in the same way for both large and small countries. For larger nations, however, the political implications of this situation are admittedly different than they are for smaller nations. If a larger nation’s future is secure, then its position as a world power is also secured.

At the beginning of the twentieth century, we see three large, global empires that have risen far beyond other nations in the size of their territories and the numbers of their citizens: England, the United States, and Russia. In each of these empires, the attempt has been made to employ trade policy in order to influence the regional divisions of labor in favor of their own countries. In each, the concept of national economic self-sufficiency as a national ideal is growing, and events from distant history (the division of the world’s surface as completed during the seventeenth and eighteenth centuries) offer the possibility of their realizations.

The problem appears simplest in Russia. A generation ago, Russia was an enormous agricultural country with almost no industry and few industrial characteristics, although there was a strongly increasing demand for industrial goods. High protective tariffs enabled the creation of industry in many sectors, and in others it merely accelerated this process. The Russian people are in the fortunate position of controlling a large expanse of the world’s surface that is provided with favorable production conditions. The Russians need not fear being removed from the list of great nations within the foreseeable future. Their sons can remain in the country, which offers room for an increasing population due to a multiple of factors.

The situation is similarly favorable for the English people. Great Britain became an industrialized nation one hundred years ago: the world became its sales market and granary. When, at the end of the nineteenth century, the increasing industrialization of these overseas markets appeared to place the future of British manufactured exports in doubt, the British politicians turned their attention to their large colonial settlements. Thus, there is room for an increasing population within the English empire. Not only India, but also Canada, Australia, and South Africa appear as the foundation for the global position of the English people.

The United States is also large enough and wealthy enough in natural resources to be able to feed its current population several times over.

It is possible that others will join these three great global empires of the present. The external indicators appear favorable for China and India. In any case, the following nations have developed into global powers of the second rank: Japan; Spain, in connection with formerly Spanish South America; and perhaps Portugal in connection with Brazil; and Italy due to its expansion in North Africa. For the French nation as well, the political and economic prerequisites are favorable for an expansion along the northern coast of Africa if a different birth rate resulted in an increase in their population.

The foundations of a global empire are its population, which must increase at approximately the same rate as in other global empires, along with the territory under its control so it can offer the room for its expanding population. Trade policies can add nothing to the foundation of a nation as a global empire if these conditions are lacking.

The German people currently lack these foundations. Germany can only provide for the population within its territory by manufacturing goods made with foreign-supplied raw materials that are then sold to foreign buyers, in order to acquire those raw materials required for its own consumption, and to pay wages and other industrial incomes. This situation cannot be sustained over the long term. For this reason, the German people need colonies for settlement if they do not wish to lose their global ranking.16

There are other nations that find themselves in a similar position. However, by far the largest and most powerful of the “unsatisfied” nations is Germany. When German men and women leave their homeland, they cannot find another country in which they can maintain their nationality. This is because all of the lands in which Caucasian people could prosper as farmers and laborers are in the hands of foreign countries, with the exception of a negligibly small amount of land offered in southwestern Africa.17 Everywhere in the world, wherever there is free space for white men, there Germans have settled over the last 150 years. Five million Germans (not including Austrians) immigrated to the United States alone during the years 1820 to 1906.18 They and all of their descendents are lost to the German people.19

Even though German foreign policy has hardly attempted, up to now, to acquire foreign areas for settlement, the fact is that all other peoples who control more land than they will need for their own future development consider Germany their natural opponent in this endeavor. Of all the reasons for the unfriendly attitude toward Germany (which the neutral foreign countries adopted during the World War), this one is more understandable due to the solidarity of interests of those people who, at the time when the world was politically divided up, did not arrive too late, unlike the poet who did.20

VIII

A widely held view argues that national antagonisms would eventually be removed by the economic solidarity of interests. Insofar as this idea claims to be an expression of the fact that the purely economic point of view speaks for free trade and against national isolation through protective policies, it may possibly be true.21 As was demonstrated earlier, protective policies can only find their justification in non-economic arguments. At least for the next few years, any expectation that purely economic considerations about the handling of trade policy problems could triumph over national-political ones must be rejected as unfounded. In contrast, the principle of nationality is politically gaining ever more momentum at present.22

In terms of the national problem in Austria-Hungary, this idea tends to be expressed in a particular sense. The economy is the unifying tie that holds together all of the people of the Austro-Hungarian Empire, who for nationalist reasons are otherwise striving to be free. This is primarily Karl Renner’s point of view.23

Renner views the modern state as an “economic community,” that is, as an “organized economic area.” Countries, nowadays, are “political units, because they are externally enclosed by the tariffs walls of other nations, and are internally connected by the blood, veins, and nerves of their transportation system that surrounds the fixed and powerful centers of their capital cities.” With the second statement, Renner actually indicates the geographic basis of state unity; we will not busy ourselves with that any further.

We are interested in the concept of the state as a tariff community. Renner reverses the situation: it is not the political unit, but instead the tariff community that appears as the constitutive characteristic of the state. “One can, for example,” Renner continues, “hardly conceive of an odder acquisition of hitherto existing statehood, than Austria’s acquisition of Galicia.24 The association, which lasted more than one hundred years, made this area organically part of the political body of the monarchy: its wood and grains, its petroleum, gasoline, and ethyl alcohol would be immediately lacking in every household, in every factory, if the territory were occupied by the enemy. Reciprocally, the entire paper, textile, and iron industries would feel the abrupt loss of the market area.”

Is it any less true, however, that wool, cotton, rubber, coffee, tea, hides, and so on are just as important for supplying the western Austrian markets, and would not the sugar industry feel the loss of its usual market territory no less heavily than any other sector of the economy? Would one not have to come to the conclusion that the United States, England and its colonies, and Brazil, in short, that the entire world is just as organically connected to western Austria as is Galicia? Had the Détente Powers25 succeeded in dividing Germany and Austria in the usual manner, then a proponent of Renner’s doctrine might have found, after around one hundred years of association, that Brandenburg was “organically” connected to Russia, Westphalia to France, Tyrol to Italy.

It is true that a long-term tariff association forges strong economic relationships. An alteration in these circumstances, whether it is due to the erection of new tariff boundaries, the removal of existing tariffs, or an increase or reduction in the tariff rates, brings with it, as a result of the new circumstances, a great rearrangement in production and sales relationships. However, similar rearrangements occur as a result of every other change in the conditions of production: every new invention, every discovery of new sources of raw materials may bring this about.

Renner finds the separation of a primarily agricultural country from an industrial economic area to be particularly ruinous, because it lowers the value of the land. However, the same effect would have been generated by the removal or lowering of agricultural tariffs; would Renner dispute this, as well? It is true that, from a purely economic point of view, the primary goal is to expand the economic community into a free trade area to the greatest extent possible, and the entire populated surface of the earth is the largest of these possible areas. However, as we have already seen, special interest groups in individual nations currently demand the establishment of economic autarky. On the other hand, the free trade idea makes the case for tariff reductions and always throws into question the rationale for protectionism; the undeniable power of the argument for free trade, sooner or later, will triumph over every tariff that is not justified by the principle of nationalism.

Naumann’s Mitteleuropa [Central Europe] also suffers from the complete misunderstanding of these facts.26 According to Naumann, it is particularly difficult for the smaller nations to maintain their independence next door to the larger nations of the world, that is, next to the Anglo-Saxons, the Russians, and the Asians. In Naumann’s words, nothing binds these smaller peoples more closely together than that they find in unity the power to resist; and nothing appears more natural than that the German people, as the greatest and most well endowed among the weaker peoples, should assume the leadership of this federation. However compelling this may seem in the name of national self-preservation, two circumstances currently hinder the path to this conclusion.

On the one hand, there is the authoritarian and authoritative state of mind and constitution of the Germans, which has surpassed for quite some time that of other peoples around the world.27 The fact that the future German federation is primarily planned as an economic federation is no less important. The Magyars, Romanians, Serbians, Bulgarians, and all of the other peoples between Berlin and Baghdad can and will not forgo creating their national industry. They do not want to remain merely agricultural countries, sales territories, and suppliers of raw materials to German industry. They will not passively observe as their surplus population eventually immigrates to Germany, and becomes Germanized as laborers in German factories. They may perhaps agree to a political federation with the German Reich, as a defensive and offensive alliance to guarantee their own national independence; however, they will never agree to an economic and tariff alliance. They would happily observe the market possibilities for their agricultural products expanded into Germany and Austria; however, they will not forgo the creation of their national industry and the gradual replacement of German imports.

The tariff and economic associations are claimed to be the ties that bind the individual members of a nation-state to an empire.

Let us first examine the relationship between Austria and Hungary. The two countries form a unified tariff area, though they are legally completely independent, with each entitled to direct its commercial relations with foreign countries without consideration of the other. This unity is advantageous to both countries. It offers the Austrian industry a profitable sales territory in which it does not have to fear competition from superior industrial countries; Hungarian agriculture can sell its products in Austria at a price that exceeds the global market price by the amount of the tariff. However, on the other hand, the tariff association does inhibit the development of a Magyar national industry. This makes the tariff association unbearable to Magyar nationalist feelings; it would have gone to pieces long ago if the Hungarian legislature and administration had not understood how to wage a decisive campaign against Austrian exports to Hungary, even without tariffs. Austria and Hungary are indeed part of a tariff and currency union; however, they do not associate in an economic relationship; rather, they exist in a state of permanent economic warfare. Thus, they have succeeded in starting up and protecting industry in Hungary without creating an intratariff zone. However, this was possible only through constant frictions, expansions, and controversies between the two halves of the monarchy, which have generated much bad blood. The coexistence of the two countries in this association was conceivably the worst possible situation, not in spite of, if not primarily because of, the tariff association.28

Let us now leave the Austrian situation. Germans and Czechs, the two strongest nations according to the number of their peoples, have the same interests in regard to Cisleithania [Austria and Crownlands] as do the Hungarians and other countries. Indeed, industry in the German-speaking area of the Sudetenland is more highly developed than in the Czech-speaking areas.29 Yet even the industrial development in the Czech lands (in comparison to what is common in Austria) is quite extraordinary. A large portion of the industry in the Czech-speaking lands still remains in the hands of German industrialists; however, even these facilities contribute to increasing and strengthening the Czech nation, and the Czechs additionally hope that sooner or later the leadership of these industries will become Slavified. Both nationalities making up the population of the Sudetenland have the same national interests regarding the parts of the monarchy that are still primarily agricultural. Both feel threatened by the increasing closeness of the Austro-Hungarian Monarchy’s common tariff area; both fear the industrialization of Hungary or Galicia. In comparison with these internal and powerful external common interests, the superficial observer overlooks the bitter economic battle that is constantly being waged domestically. There, every subsidiary, every business, every individual facility becomes a battleground. There is, admittedly, no conflict on the basis of purely economic reasons, nor is it led by the manufacturers, who are only concerned about the profitability of their operations. It is a national fight. Its proponents are primarily the politicians and literati, those whom Renner derisively calls the Wirtschaftlosen, those without access to capital.

However, behind these leaders stand not only all of those who might hope to gain an advantage from the expected changes; the entire nation stands solidly behind them, because the country strives for national greatness and national prosperity through industrialization. The autonomous administrations in the countryside, regions, and communities participate in this battle, as do also the powerful national banking institutions, savings banks, and confraternities, who also think about the “national advantage” along with profit opportunities in all their dealings.

It is not only Austria’s German manufacturers, against whom the Czechs have initiated economic warfare, who lament these circumstances; all do who feel themselves to be and call themselves Austrians. These are the circumstances that force Austria into the background in the competition with the Great Powers. Because, when the not very large and poorly endowed economic area of Austria is reduced in this fashion into a number of tiny economic regions, then any possibility is lost for developing specialized industries. One can lament these circumstances (and I will not line up to declare that I also lament them), but there would be no purpose in denying them.

Of the other nationalities that are included in the Austro-Hungarian tariff area, the Ruthenians, Romanians, and Slovenians still stand at such a low level of economic and political development that they cannot yet consider an industrial protective policy. Within their economic areas, their national political efforts are devoted to intensifying their agricultural operations. In this, they are supported by the monarchy’s agricultural trade policy. There can remain no doubt that in the foreseeable future even these nations will attempt to create a national industry, the rudiments of which are already present today.

[1. ][This article originally appeared in German in the Archiv für Sozialwissenschaft und Sozialpolitik, vol. 42, no. 2 (December 1916).—Ed.]

[2. ][David Ricardo (1772-1823) was one of the leading and most influential “Classical” economists of the nineteenth century. His formulation of the logic of division of labor and comparative advantage in The Principles of Political Economy and Taxation (1817) in Piero Sraffa, ed., The Works and Correspondence of David Ricardo, vol. 1 (Cambridge: Cambridge University Press, 1951), pp. 128-49, became the foundation and rationale for a system of free trade; see also Ludwig von Mises, Human Action: A Treatise on Economics (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 4th rev. ed., 1996), pp. 159-64; and Gottfried Haberler, The Theory of International Trade, with Its Applications to Commercial Policy (London: William Hodge and Co., 1936), pp. 125-208.—Ed.]

[3. ][Friedrich List (1789-1846) was a German political economist who formulated a five-stage theory of economic development in his 1841 book, The National System of Political Economy. He argued that, for an industrializing nation like Germany in the nineteenth century, economic protectionism was essential to national development.—Ed.]

[4. ][See Ludwig von Mises, “The Disintegration of the International Division of Labor” (1938) in Richard M. Ebeling, ed., Money, Method, and the Market Process, Essays by Ludwig von Mises (Norwell, Mass.: Kluwer Academic Press, 1990), pp. 113-36, especially pp. 114-15 on the infant industry argument.—Ed.]

[5. ]See Schüller, Schutzzoll und Freihandel [Protective Tariffs and Free Trade] (Vienna, 1905), p. 228.

[6. ][See Ricardo, The Principles of Political Economy and Taxation, p. 136: “Experience, however, shows, that the fancied or real insecurity of capital, when not under the immediate control of its owner, together with the natural disinclination which every man has to quit the country of his birth and connections, and entrust himself with all his habits fixed, to a strange government and new laws, check the emigration of capital. These feelings, which I should be sorry to see weakened, induce most men of property to be satisfied with a low rate of profits in their own country, rather than to seek a more advantageous employment for their wealth in foreign nations.”—Ed.]

[7. ][See also Ludwig von Mises, Nation, State, and Economy: Contributions to the Politics and History of Our Time (Indianapolis: Liberty Fund, [1919] 2006), pp. 46-63; also Lionel Robbins, “The Optimum Theory of Population,” in T. E. Gregory and Hugh Dalton, eds., London Essays in Economics: In Honor of Edwin Cannan (London: George Routledge & Sons, 1927), pp. 103-34.—Ed.]

[8. ]See Schüller, op. cit., pp. 9ff.

[9. ]From the comprehensive literature, see especially Wagner, Agrar- und Industriestaat [Agricultural and Industrial States], 2nd ed. (Jena, 1903); Hildebrand, Die Erschütterung der Industrieherrschaft und des Industriesozialismus [The Shattering of the Rule of Industrialism and Industrial Socialism] (Jena, 1910).

[10. ]See especially Wagner, op. cit., pp. 81ff.

[11. ]For this article, which limits itself to the basics, there is no purpose in discussing the other means of protective policy (e.g., export premiums, railway duties), because these are similar in their effects to either the cartel tariffs or the tariffs on production costs.

[12. ][“Going to Saxony,” where the sugar beet harvest marked the annual beginning of the seasonal migration of agricultural workers.—Ed.]

[13. ]See Moritz J. Bonn, Die Idee der Selbstgenügsamkeit [The Idea of Self-Sufficiency], Festschrift für Lujo Brentano (Munich and Leipzig, 1916), p. 68.

[14. ][See Ludwig von Mises, “The Freedom to Move as an International Problem,” (1935) in Richard M. Ebeling and Jacob G. Hornberger, eds., The Case for Free Trade and Open Immigration (Fairfax, Va.: Future of Freedom Foundation, 1995), pp. 127-30.—Ed.]

[15. ][See Mises, Human Action, pp. 828-30, on “War and Autarky.”—Ed.]

[16. ]See Jentsch, Der Weltkrieg und die Zukunft [The World War and the Future] (Berlin, 1915), pp. 96ff.

[17. ][From 1884 to 1915, the present African nation of Namibia was a colony of Imperial Germany, under the name of German Southwest Africa. In the first decade of the twentieth century, several rebellions by the native African population led to a brutal German military response. By the time of the First World War, about 10,000 Germans had settled in the colony, in comparison to about 200,000 native African inhabitants. The German military forces surrendered to an invading British army from neighboring South Africa in 1915, which permanently ended German control.—Ed.]

[18. ][Between 1820 and 1914, an estimated 3.7 million people immigrated to the United States from Austria-Hungary.—Ed.]

[19. ]The German emigration statistics indicated a large decrease in the number of emigrants over the last two decades. This does not contradict that which appears above in the text. On the one hand, this decrease coincided with the complete development of German industrialism and with the fortification of the defense system, according to the efforts of the era of Chancellor Count Georg Leo von Caprivi, which had to lead to a temporary containment of emigration. However, it should be observed that for Germany, a particular characteristic is the emigration of highly skilled workers (technicians, commercial associates, etc.), which is not highlighted in the statistics.

[20. ][This refers to Johann Wolfgang von Goethe (1749-1832) and his presence at the Battle of Valmy when the Revolutionary Army of France defeated an invading German army under Duke Carl August of Saxe-Weimar on September 19, 1792, as recounted in Goethe’s Kampagne in Frankreich [Campaign in France]. See G. P. Gooch, “Goethe’s Political Background,” in Studies in German History (London: Longmans, Green, 1948), pp. 166-89, especially 172-74.—Ed.]

[21. ][See Mises, “The Clash of Group Interests,” (1945) in Ebeling, ed., Money, Method, and the Market Process, pp. 202-14.—Ed.]

[22. ][See Mises, “Economic Nationalism and Peaceful Economic Cooperation,” (1943) in Ebeling, ed., Money, Method, and the Market Process, pp. 155-65.—Ed.]

[23. ]See esp. Renner, Oesterreichs Erneuerung [Austria’s Renewal], 2nd ed. (Vienna, 1916), pp. 30-35. [Karl Renner (1870-1950) was a leading Austrian socialist who headed two coalition governments of the new Austrian Republic between November 1918 and the summer of 1920. In April 1945, at the end of the Second World War, he formed a provisional government under the supervision of the Soviet Union that proclaimed the reestablishment of Austria as a democratic republic; in November of that year, he was elected president of Austria, a position that he held until his death.—Ed.]

[24. ][Galicia was the easternmost area of the imperial Austrian domains under the Austro-Hungarian Empire, containing the city of Lemberg (now Lvov), the birthplace of Ludwig von Mises. It was annexed by Austria in 1772 as a result of the first partition of Poland. It was incorporated into the re-created state of Poland at the end of the First World War. Most of Galicia, including Lemberg, was annexed by the Soviet Union in September 1939 as a result of the military conquest and division of Poland between Nazi Germany and the U.S.S.R. Since 1991, it has been part of the Republic of Ukraine.—Ed.]

[25. ][The “Détente Powers” refers to the victorious nations in the war against Napoleon, who following the defeat of France reorganized the borders of the countries of Europe at the Congress of Vienna in 1815.—Ed.]

[26. ][Friedrich Naumann (1860-1919) was a social liberal reformer who attempted to organize programs to improve the conditions of the German working class as a counterbalance to the Marxian and Social Democratic appeal for more radical social change. He was also strongly nationalistic. His book Central Europe (New York: Alfred A. Knopf, 1917) made the case for unifying the small states of central and southeastern Europe under German leadership to form an “economic and protectionist community.”—Ed.]

[27. ]See Preuß, Das deutsche Volk und die Politik [The German People and Politics] (Jena, 1915).

[28. ][See Eugen von Philippovich, “Austrian-Hungarian Trade Policy and the New German Tariff,” Economic Journal (June 1902), pp. 177-81.—Ed.]

[29. ][The Sudetenland was the westernmost area of Bohemia bordering on Germany. It was incorporated into the new nation of Czechoslovakia at the end of the First World War, even though the vast majority of its population was German-speaking. In September 1938 the area was annexed by Nazi Germany as a result of the Munich agreement between Germany, Great Britain, France, and Italy. It was returned to Czechoslovakian control at the end of the Second World War, and the approximately 3.5 million German-speaking residents were expelled from the country as part of an Allied Powers agreement.—Ed.]