Infant industries

8/13/2019 Infant industries

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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 fu ture 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 undertakenunless 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 1


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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 allentrepreneurs 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 thelearning 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 invest-ment in the infant industry would be economically inefficient in principle,

since neither type of subsidy would necessarily stimulate the type of invest-

ment 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

INFANT INDUSTRY ARGUMENT2


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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 largeamount 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 time-

limited 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 generatingexternal 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 thedeveloping country may commence exporting the labor-intensive commodity

a la Heckscher-Ohlin. This latter strategy may be called the import-

substitution-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.



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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 theengine 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 Infant-Industry 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 import-

substitution-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 suchestablishments. 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.


3Kemp 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 casesimpracticable. 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 fortifyadventures against. . . [those who enjoy] the advantages naturally acquired


4Hamilton 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.


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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. . . tosubmit 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 tax-

cum-subsidy approach. Hamilton states that (ibid: 298-301) pecuniarybounties 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 inconve-

nience 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; particularlythose, which relate to machinery. Hamilton (ibid: 338) recommends the

creation of a fund for paying the bounties and let the commissioners be


5According 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 whichpublic 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 yieldafter 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,



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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 theaggregate 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 manu-

facturing 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 cultivatedmanufacturing 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 manu-


6List 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 mereagriculturist. . . [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


7Adam 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

c om me r ce.


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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 havingbegun 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: 299-

300), 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 initi al

advantage can cumulate over time because such an advantage is self-

reinforcing 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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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 agriculturalnation a mass of natural powers lies idle or dead which can be quickened into

activity only by manufactures. List not only emphasizes the vent-for-

surplus 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 byincorporating the long-run changes in factor supplies (i.e., capital accu-

mulation) and their productivity (through the division of labor), Hamilton and


9List, 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. . . .


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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 aretraditional. 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 shouldbe 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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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 ownexperiences, 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

f i r m s .

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: OxfordUniversity Press, 1974.

Hamilton, Alexander, Report on M a nu fa ct ures, reprinted in The Papers of

Alexander Hamilton, edited by H.C. Syrett, New York: Columbia Univer-

sity 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: Long-

mans, 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.


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