Econ Articles
Created 3/13/1996
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Econ ArticlesCreated 3/13/1996 |
J. Bradford De
Long[1]
University of California at Berkeley, National Bureau of Economic
Research,
and Federal Reserve Bank of San Francisco
This paper carries a well-known message: America's high late
nineteenth-century tariffs did not accelerate economic growth, or
enhance America's standard of
living.[2]It is, nevertheless, a
message that needs to be reiterated for two reasons.
The first is Louis Johnston's
dissertation,[3] Endogenous
Growth and the American Economy 1840-1900. The line of thought
that it exemplifies opens up new lines of argument, and raises
new--or perhaps very old--questions in economic history. Since the
mid-1950s,[4] the models of
economic growth licensed to economic historians by academic
economists have assumed that the incomes paid to factors of
production were more-or-less their marginal social product. Such
models assumed away any large-scale externalities or linkages
connecting productivity, accumulation, education, and other factors
by taking for granted that total factor productivity was largely
independent of factor
accumulation.[5]
These baseline assumptions led to the conclusion that long-run rates
of growth were very hard to move. No realistic changes in economic
policies or environments could possibly have a persistent visible
impact on rates of economic
growth.[6]
In the 1980s economic theorists changed their minds: under the impact
of the theoretical modelling work of Paul Romer and others, academic
economic theorists began to think that perhaps total factor
productivity growth was due to economic decisions--investments in
techniques, embodied technologies, or in learning about
best-practice. These economic decisions could be profoundly affected
by factor accumulation.[7]
Now this new theoretical license is available for use in economic
history. It has the potential to reopen a large number of old and
important questions that had seemed closed, or at least
well-analyzed,[8]back when the
neoclassical approach to economic growth was dominant. Here I want to
push this line of thought forward by examining the relation between
U.S. late nineteenth century tariff policy and economic growth.
The second reason for this paper is the growth of a current of
thought holding that America's high late nineteenth-century tariffs
were very good thing for growth. That this current is weak in
academic economics departments is no reason for ignoring it: academic
economists' "market share" in our society's knowledge of and debate
over the economy and economic policy is much less than it used to be.
Today a good journalist like James Fallows plays a larger role in
shaping popular, élite, and political visions of economic
policy as Robert Solow or Robert Lucas.
And James Fallows strongly believes that America's high late
nineteenth-century tariffs played a powerful role in making America a
prosperous, leading-edge, high standard of living industrial economy.
In his view, a look back at the nineteenth century reveals that
belief that free trade is good economic policy:
fail[s] a test of history.... [Free trade principles] do not explain how the industrial old guard--first England, than America--rose to power. Indeed, those countries developed fastest when the paid least attention to today's... [orthodox free-trade] principles of economic growth...
The quote is from James Fallows' book, Looking at the Sun: The
Rise of the New East Asian Economic and Political System.[9] The
argument that America's post-Civil War tariff plays an important role
in an argument that free trade with East Asia is not in America's
national interest. Thus the stakes in getting a good picture of the
tariff and American late nineteenth-century development are not
low.
Against this background--the importance of communicating with a
strong current of thought that believes America's late
nineteenth-century tariffs were an effective industrial policy, and
the re-opening of old questions as a result of shifts in fashionable
economic models--this paper surveys what we can say about the tariff
and late nineteenth-century American development.
Its conclusion is that the conventional wisdom of, say, Jeffrey
Williamson's Late Nineteenth-Century American Development is
in good shape, even though the "new growth economics" has revoked
Williamson's theoretical license. Because late nineteenth-century
America relied on imports for a relatively large share of its capital
goods, it is hard to construct a scenario in which the late
nineteenth-century tariff--concentrated on foreign
manufactures--aided accumulation and boosted productivity. Belief in
free trade does not "fail a test of history," at least not in late
nineteenth-century America, because it is very difficult to see any
plausible mechanism by which the particular structure of America's
tariff aided industrial development.
Why did post-Civil War America have a high tariff? Because wars are
expensive, the debt resulting from a war is a serious burden, and the
pre-income tax amendment federal government had few alternative
sources of revenue.[10]
The Civil War
In 1860 total spending by the federal government had amounted to
$63.1 million--somewhat less than two percent of national product. By
1865 the federal government spent $1.30 billion--the first time a
federal budget exceeded a billion dollars, and the only time federal
expenditures would surpass a billion dollars until the United States
entered World War I. Because of wartime inflation, nominal national
product had more than doubled between 1860 and 1865, and so 1865
federal expenditures amounted to approximately one seventh of
national product.
After the Civil War, debt interest alone was as large a share of
national product as all federal expenditures had been before the war.
A relatively high tariff of thirty percent of imports, levied on
imports of between six and seven percent of national product, raised
revenue worth some two percent of national product: enough to fund
the interest on the debt, leaving other federal revenues free to pay
for current operating expenditures and for the retirement of debt
principal.
The federal government financed the Civil War through every channel
that was conceivable, and some channels that were no conceivable
before the war--creation of a national banking system to expropriate
private sources of seignorage, large-scale borrowing, the (temporary)
institution of a federal income tax, other internal revenues, and on
top of these a substantial increase in tariffs.
The Tariff
Tariffs tripled as a share of imports as a result of the Civil War,
rising from the level of fifteen percent or less it had reached after
the tariff cuts of the 1850s. Before the Civil War, tariffs had
appeared to be on a long-term downward path. Both the South and the
West had an interest in lower tariffs and cheaper manufactures. This
potential political coalition appeared over time to be gaining
strength, relative to the alternative potential political coalition
of the West and Northeast coalescing behind a platform of industrial
protection to help northern manufacturers coupled with a tariff
revenue-funded program of internal improvements to aid Western
development.[11]
In the absence of the Civil War, it is very hard to envision tariffs
reaching their historical late nineteenth-century levels. It is much
easier to envision a continuation of the slow erosion of tariffs as a
share of imports as politicians took steps to satisfy Southern and
Western importers and consumers. The same process of tariff reduction
did ultimately take place between 1865 and 1930. But in the absence
of the Civil War it would have started from a lower base of ten to
fifteen percent rather than the thirty to forty percent of the late
1860s. And proportional reductions in tariff revenue might well have
proceeded somewhat faster in the absence of the requirement of
amortizing the Civil War
debt.[12]
As figure 3 shows, the post-Civil War tariff structure was roughly
even across broad groups of commodities. Agricultural product-based
consumer goods faced the highest average tariffs of nearly fifty-five
percent, but the average tariffs on other consumer goods and on
capital goods were forty percent or so. A small break was given to
industrial materials on average, with an average tariff of thirty
percent or so ad valorem.
At a finer level of disaggregation, of course, tariff levels varied
widely: a low of ten percent on imports of dyestuffs, and a high of
252 percent on distilled liquors.
For more than twenty years after 1870, the tariff structure was
nearly frozen in the form it had reached in the aftermath of the
Civil War. Over time, duties on some pure revenue goods--like tea and
coffee--were eliminated. Tariffs on some imports were lowered to
satisfy consumer sentiment. Tariffs on other goods were explicitly
raised. Some goods were reclassified to fit into a higher tariff
category, in response to protectionist pressures. Yet all in all, as
figure 2 above shows, there was little reduction in tariffs as a
share of imports for a generation or so after
1870.[13]
There were attempts to decrease and increase tariffs in the
post-Civil War era: Democrats tried to win elections by promising
tariff reductions favorable to Western consumer interests.
Republicans took some election victories as an excuse to raise
industrial tariffs--which were then rapidly reversed. For consumers,
reductions in any tariffs were equally welcome. Industries that had
grown comfortable behind the protectionist walls created by the
more-or-less uniform tariff increases of the war lobbied for the
preservation of their own duties.
Thus the less a commodity was produced in the United States, the
greater was the reduction in its tariff in the post-Civil War rounds
of tariff reductions. As figure 4 below shows, ad valorem
duties on classes of articles fell most for non-agricultural consumer
goods, with ad valorem tariffs on capital goods remaining in
1910 nearly at their 1870 levels. Note, importantly, that capital
goods were certainly not subject to tariff at a rate lower than
average in the post-Civil War United States.
Tariff revenues as a share of imports in 1910 were nearly one-third
lower than in the 1870s and 1880s. But the main cause was the
changing pattern of trade. The United States swung from a financial
capital- and manufactures-importing nation to a capital- and
manufactures-exporting nation. Imports of manufactured goods subject
to heavy tariffs fell in relative terms. Imports of consumption goods
subject to lighter tariffs or to no tariffs rose more than
proportionally.[14] As figure 5
below shows, the U.S.--which had always been an important exporter of
food product manufactured goods--had become an important exporter of
non-food manufactures as well by the early years of the twentieth
century. By 1910 the United States was running a positive balance of
trade in non-food product manufactured goods.
The standard neoclassical analysis of the post-Civil War tariff is
straightforward. Suppose for the simplicity's sake that the
elasticity of demand for imports was one. Then a thirty-percent
tariff (a little lower than the average value over 1800-1940) would
reduce the import share of national demand from a counterfactual
level of nine percent to the actual level of about seven percent of
national product. The consumer and producer surplus foregone on each
discouraged import would amount, on average, to fifteen percent of
the import's value.
The net result? A reduction in real total factor productivity of some
0.3 percent of national product as the U.S. was forced to shift
economic activity away from its most efficient pattern of
specialization in the world division of labor. More generally, a
thirty percent tariff would generate a reduction of
0.3(e2) percent in total factor productivity, where
e is the elasticity of demand for imports.
There is little reason to think that such a reduction in real incomes
would fall disproportionately on capital rather than on labor, and so
equalize the distribution of income and wealth. There is good reason
to think that such a reduction in real incomes would transfer wealth
from Western farmers to Eastern industrialists, and so make late
nineteenth-century America a more unequal
society.[15]
Pursuing the chain of implications a bit further, the
0.3(e2) reduction in real incomes (holding
production patterns fixed) is amplified over time: the poorer
tariff-ridden economy is saving less, and using its savings less
productively than the counterfactual richer, tariff-free late
nineteenth-century United States would have
Only if Eastern industrialists had a markedly higher propensity to
save than Western farmers,[16] or
if eastern workers responded to better opportunities in industry by
investing especially heavily in their own educations--and we have no
good reason to think that either of these was the case--would the
standard neoclassical growth analysis suggest that the late
nineteenth century tariff might have boosted the growth of the
American economy.
How does this standard analysis change when we break down the wall
between factor accumulation. on the one hand, and the determinants of
total factor productivity, on the other?
Increasing Returns External to the Firm
One line of thought--the line explored by Louis Johnston in
reinvestigating analyses of the possible impact of Civil War debt
repayment[17]--is that, in a
sense, the economy's "stock of industrial knowledge" is proportional
to its stock of industrial capital. Past net (not replacement)
investments produce not only capital but knowledge: knowledge about
how to employ new production technologies, about how to make machines
run more efficiently, about how to manage workers and businesses in
an industrial environment: knowledge that cannot be kept the
"private" property and resource of the firm that did the investing,
but rapidly becomes available to all producers through inspection of
their competitors' operations and the hiring away of their
competitors' engineers.
In this case, start from the standard neoclassical production
function:
(1) 
where "[[Delta]]y" is the proportional change in total production,
"[[Delta]]n" is the proportional change in the economy's labor
supply, "[[Delta]]k" is the proportional change in the accumulated
net capital stock, "[[alpha]]" is the share of national income earned
by labor, and "[[Delta]]a" is the proportional change in
"technological knowledge" determined by some process of invention and
innovation, unrelated to factor accumulation, elsewhere in the
society.
But "new growth" models allow for feedback from factor accumulation
to technological knowledge, and replace "[[Delta]]a" with
"[[Delta]]a' + u[[Delta]]k"--a portion [[Delta]]a' of advances in
technological knowledge that truly is generated by factors outside
the macroeconomy, and a portion u[[Delta]]k that is a byproduct of
increases in the total net stock of accumulated capital.
The aggregate production function is thus:
(2) 
(3) 
A given increment to the capital stock boosts production by more in
"new growth" models because a given investment not only increases the
productivity of the investing firm, but adds to the stock of
practical experience and social knowledge about how to use modern
machine technologies productively.
Businesses, however, do not take into account the effect of their
investment decisions on overall economy-wide productivity: because
all their competitors rapidly gain access to the same "technological
knowledge" as well, benefits of increased economy-wide productivity
show up one-for-one in higher wages, and have no effect on firm
profits. But the economy as a whole exhibits increasing
returns. Thus policies that boost savings, investment, and
overall capital accumulation make a significant difference in faster
productivity and economic growth, and higher standards of living.
Could adopting this approach reverse the presumption that high
late-nineteenth century tariffs lowered output and retarded growth?
The answer is "No." The key problem is that the United States levied
its heavy tariffs on those manufactured capital goods whose
accumulation is the trigger for advances in knowledge and total
factor productivity.
To see this, close the model above with a simple capital accumulation
equation: the proportional rate of growth of the capital stock
[[Delta]]k depends on the depreciation rate d, on the economy's
savings rate s, and on the price of capital goods, pk,
relative to the price of output in general:
(4) 
where capital Y and capital K are the levels of production and
of the accumulated net capital stock, respectively. And, for
simplicity, assume that labor force growth [[Delta]]n and the
exogenous component of productivity growth [[Delta]]a (or
[[Delta]]a') are constant.
Johnston used this model to analyze the effect of debt-retirement
policies after the Civil War. But it can easily be used to analyze
the tariff. Consider three cases: the neoclassical model, in which
total factor productivity growth is unconnected with factor
accumulation (u=0); the particular specification used by Louis
Johnston (u=0.05), with the magnitude increasing returns estimated
from his study of industry location in the nineteenth century; and a
specification giving a stronger role to increasing returns
(u=0.10).
The parameter values needed for the models made up of (1) and (4) or
(3) and (4) to replicate growth over the post-Civil War generation
1870-1910 in the "baseline" high-tariff case are shown in table 1
below.
In the neoclassical specification, made up of (1) and (4), annual
exogenous total factor productivity growth of 1.13% per year, annual
labor force growth of 2.7% per year, a depreciation rate of 3%, a
savings share of national product (including foreign capital inflows)
of 19.5%, and a labor share of national income of 68 percent together
replicate 1870-1900 growth. In the alternative specification, made up
of (3) and (4), the dependence of productivity growth on investment
forces truly exogenous growth to be lower for the baseline to track
history. In the "low externality" (u=0.05) version, approximately
one-quarter of 1870-1900 TFP growth is a byproduct of capital
accumulation; in the "high externality" (u=0.10) version, nearly
one-half is a byproduct of accumulation.
What is the effect of removing the tariff on this model? First, there
is a one-time boost to total factor productivity. The tariff had
artificially depressed the relative price of agricultural goods, in
which the U.S. had an enormous comparative advantage. Removal of the
tariff allows the U.S. to shift labor and capital from some low
value-added non-agricultural sectors to the high value-added
agricultural sector. With a counterfactual import share of GDP in the
late nineteenth century of eight percent, and with a thirty percent
average tariff, the one-time boost to economy-wide total factor
productivity as a result of tariff elimination is 0.3 percent under
an assumed unit elasticity of demand.
Second, the tariff had artificially elevated the relative prices of
industrial goods, including the relative price of capital goods. A
higher price of capital goods means that any given savings effort
will generate less investment. Thus with a high tariff the rate of
growth of the capital stock will be lower than with free trade
no matter what the original stock of capital. No matter where the
economy starts, capital accumulation will be lower with a higher
tariff--and so, over time, productivity will fall further behind both
because a lower-productivity economy will support a lower savings
effort and because the higher price of capital goods translates the
lower savings effort into a still lower amount of net investment.
The structure of the post-Civil War American economy was such that a
higher price of imported capital goods could do significant damage to
economic growth. The tariff made a very wide range of investment
goods--from British machine tools and steam engines to steel rails to
precision instruments--more expensive. For more than a generation
after the end of the Civil War, British machinery and iron and steel
exports remained competitive in much of the United States market,
implying that the roughly 50 percent tariffs imposed on imports of
capital goods from abroad had an impact not only on the one to two
percent or so of national product spent on imported goods for
investment, but on prices of domestically-produced capital goods as
well.
The effect of the tariff on the quantity of investment in
domestically-produced capital goods is hard to assess. In the
post-Civil War generation, some 16 percent of national product on
average was invested in domestically-produced, non-residential
constructioninvestment. If each $1 of tariff imposed on a
foreign-made capital good raised the cost of its domestic substitute
by as little as 12.5cents, then a 50 percent tariff on imported
manufactures would diminish the share of national product devoted
total investment in by two percentage points of national product.
If each $1 of tariff imposed on a foreign-made capital good raised
the cost of its domestic substitute by 37.5cents, then a 50 percent
tariff on imported manufactures would diminish the share of national
product devoted to investment by four percentage points of national
product. Use this range of two to four percent of national product
for the boost to investment, holding the savings rate constant,
generated by tariff elimination.
Table 2 shows the effect of tariff elimination in these three
specifications for two cases: the "low effect" case in which removal
of the tariff would have boosted net investment by only two percent
of national product, and the "high effect" case in which removal of
the tariff would have boosted net investment by four percent of
national product.
In the neoclassical "no externalities" model, removal of the tariff
would have generated a substantial boost to economic growth: total
national product in 1900 is 4.3 to 7.8 percent higher, depending on
whether tariff elimination has a relatively small or a relatively
large effect on the price of investment goods in the U.S., if the
U.S. had eliminated its tariff in 1870 and used alternative taxes to
fund the Civil War debt.
When analyzed in "new growth" models--models that assume a link
between investment, learning-by-doing, and the stock of social
"technological knowledge" that boosts total factor productivity--the
late nineteenth-century tariff imposed even higher costs on the U.S.
economy.National product in 1900 was depressed by between 5.1 and
11.4 percent because of the late nineteenth-century tariff.
In all the models, the mechanisms by which tariffs retard growth are
the same. A high-tariff economy throws away some of the potential
gains from the international division of labor. A high tariff economy
is a low-investment economy, hence a slower growth economy. And these
effects are larger because the link between investment and growth is
stronger as we move away from the simple neoclassical specification.
The one-sector model above contains the skeleton of the argument: the
late nineteenth-century tariff appears more destructive in the "new
growth" models that posit externalities from investment because the
most significant channel through which the tariff affected U.S.
growth was its impact on the price of manufactured goods, and thus
the amount of real investment the U.S. achieved from its national
savings effort.
Is this case that a nineteenth century tariff reduced economic growth
airtight? No. The argument contains three key assumptions: First,
that the savings rate does not depend on the distribution of income
across sectors and factors of production--that Western farmers have
as high a marginal propensity to save and invest as do Eastern
manufacturers. Second, that "investment" in publicly available new
technologies and techniques is in some sense "like"--or at least
proportional to--investment in physical capital.
These assumptions could be subjected to challenge. Perhaps the tariff
transferred income from Western farmers with a low propensity to save
and invest to Eastern industrialists with a high propensity to
accumulate. Perhaps a more general model that did not tie advances in
productivity so closely to investments in physical capital, and thus
did not necessarily force a tariff that made it harder to purchase
imported manufactures to also diminish the pace of productivity
growth, might be more favorable to the hypothesis that America's late
nineteenth-century tariff was an aid to overall growth. But there is
no particular reason to think that these factors are particularly
powerful.
There is a third possible way around the argument of the previous
section.The argument assumed that all forms of production and
investment are the same as far as learning-by-doing and generating
technological knowledge through invention and production are
concerned--that the economy is well-described by a one-sector model.
In the section above, investment in agriculture and investment in
industry had identical effects at boosting Americans' abilities to
use modern machine technologies efficiently.
Suppose not? Suppose only investments in nonfarm sector
capital goods had the potential to set in motion the upward spiral of
learning-by-doing, increased adaptability at handling modern
technologies, increased productivity, and increased investment to
generate more learning-by-doing?
It is important to state that there is little reason to think this is
the case: little reason to think that the investments in agricultural
machinery, in transport, in food storage and processing, in
everything that made late nineteenth-century American agriculture the
most mechanized and capital intensive agriculture ever seen--little
reason to think that these investments were in any way less
efficacious than investments in industry proper. Particularly when
you reflect on Alfred Chandler's vision of the key role played by the
agricultural product-transporting U.S. railroads in the development
of modern enterprise, there seems little reason to adopt a
priori the view that "industrial" production generated powerful
technology-boosting externalities and "agricultural" production did
not.[18]
A Two-Sector Model
But suppose it did. Adapt a model from Jeffrey Williamson's Late
Nineteenth Century American Development and assume that there are
two sectors, farm (f) and nonfarm (i) with production functions given
by:
(5) 
and
(6) 
The proportional rate of growth of agricultural production is equal
to labor's share in agriculture, [[alpha]]f, times the
rate of growth of the agricultural labor force, plus the rate of
growth of overall farm-sector productivity. The proportional rate of
growth of nonfarm production is equal to labor's share in the nonfarm
economy, [[alpha]]n, plus nonfarm total factor
productivity growth, plus the proportional growth in the capital
stock, [[Delta]]k, times a term that is the sum of capital's share in
the nonfarm economy 1-[[alpha]]n and the external effects
on productivity of higher nonfarm capital accumulation u.
Total output is the sum of farm and nonfarm output:
(7) 
Investment and the proportional growth of the nonfarm capital stock
depend on the savings rate, the price of capital goods, the current
capital-output ratio, and the depreciation rate:
(8) 
The farm and nonfarm labor forces together add up to the total,
exogenously-growing labor force:
(9) 
The proportion of the labor force in agriculture falls over time,
with the speed of the decline depending on the gap between nonfarm
and farm wages:
(10) 
And farm and nonfarm wages are calculated as equal to labor's share
in the sector times per worker productivity:
(11) 
(12) 
Table 3 reports the parameter values needed for this two-sector model
to track post-Civil War American growth. Relative factor shares in
the production function, and the depreciation rate have been taken
from Jeffrey Williamson's Late Nineteenth Century American
Development. The other parameters are the values needed to match
the historical pattern of long-run growth.
What would have been the effect of dropping the tariff entirely, and
funding the post-Civil War government out of broad-based taxes, in
this two-sector model? The first effect would have been to boost
prices in the agricultural sector. A likely second effect would be to
reduce the relative price of capital goods even more than the
relative price of nonfarm output in general--and thus to provide a
boost to the real share of national product devoted to nonfarm
investment.
Table 4 reports results from the two flavors of the two sector
model--the neoclassical version, and the version with increasing
returns in nonfarm production as estimated in Louis Johnston's
Endogenous Growth and the American Economy--under the
assumptions that tariff removal raised the price of farm-sector
output relative to output in general by half the eliminated tariff,
and that tariff removal lowered the price of non-residential capital
goods by ten percent and boosted the real nonfarm investment share of
national product by two percentage points. For each model, the first
line reports the effect of shifting farm prices alone; the second
line reports the full effect of eliminating the tariff.
The two sector model shows an American economy in the first decade of
the twentieth century very different from actual history. The first
line shows that, in the neoclassical no-increasing-returns
specification, the boost to farm prices from the elimination of the
tariff leads to a gain in real national product of some 0.5 percent
because more of the American economy remains concentrated in
high-value temperate agriculture: the farm labor force is one-tenth
higher in the first decade of this century in the absence of the
tariff.
Gains to real GDP leap to 6.3 percent--and the boost to the
turn-of-the-century farm labor force is reduced from one-tenth to
one-twentieth--when we take account of the boost to real investment
from the decline in relative capital goods prices as well. In the
two-sector neoclassical model, the effect of eliminating the tariff
is a boost on the order of half a percent of national product from
improved allocation of resources across sectors, and a boost on the
order of five percent of national product because tariff removal
cheapens investment, and allows for faster capital accumulation. Note
that this two-sector story is, so far, exactly the same as the
conclusions of the one-sector model above.
Now consider the impact of removing the tariff in the flavor of the
model with external productivity benefits from nonfarm capital
accumulation. Removing the tariff raises the relative price of farm
goods, retards the rate at which the labor force flowed from farms
into the cities, and shifts America to a more agricultural-heavy
pattern of development. But the economy does not suffer--although
fewer Americans are at work in industry, more capital is invested in
industry (with a constant savings rate) because richer farmers need a
place to put their savings. America's industrial economy at the turn
of the century employs fewer workers but has more capital, a higher
capital-output ratio, and higher manufacturing productivity.
These effects are greatly amplified when we take account of how
removing the tariff boosted the investment share by lowering the
price of capital goods relative to nonfarm output in general.
According to the flavor of the model with increasing returns to
capital accumulation, American national product in the first years of
this century would have been eight percent higher in the absence of
the post-Civil War tariff.
Thus the particular structure of the late nineteenth-century American
tariff makes it hard to see how the fact that production is carried
on in different sectors might reverse the one-sector model's
conclusion that the tariff was bad for growth. Perhaps a tariff that
focused on light manufactures or consumer goods, and left investment
goods free of duty might have been good for economic growth. But a
tariff that lay heavily on capital goods needed for industrialization
and accumulation was not.
The central message I have is that the dynamic effects of factor
accumulation on productivity promised by the "new growth theory" are
a sharp sword with two-edges. Yes, the theorists of the new growth
theory have issued us a license to think of policies as possibly
having effects orders of magnitude larger than in conventional
neoclassical approaches to growth. However, destructive
policies--like tariffs that diminish national product and make
investment especially expensive--have their quantitative effects
amplified as well.
Thus it will not be simple or straightforward to argue that the
benefits of the late nineteenth-century tariff, in concentrating
labor in industrial sectors where external economies and effects
may have been important, were an order of magnitude larger
than the costs of the late nineteenth-century tariff in raising the
price of imported manufactures and capital goods, and thus making it
more difficult and costly to construct the network of factories and
railroads that made the U.S. an industrial economy.
It may be that shifting income from farm to city would have boosted
the savings rate. It may be that a different model that tied external
productivity benefits not to investment and capital accumulation but
to production might generate different results.
Most important, perhaps, it may be that a model that paid greater
attention to the wider world might lead to different conclusions.
This paper has let trade be free but kept international factor
mobility at historical levels. But in the absence of the late
nineteenth century tariff, certainly more farmers would have left
Europe to farm the Great Plains: immigration would have been even
higher. And would investment from abroad--the flow of capital to
build the Erie and Northern Pacific railroads, and to fund Andrew
Carnegie and George Westinghouse--have been higher or lower in the
absence of the tariff? These issues have been completely ignored in
this analysis. And in a better--longer--bite at the apple they would
not have been.
Even with these caveats, however, it remains the case that it will be
very hard for anyone to use the new growth theory to "revise" our
current view of the post-Civil War tariff's effect on the American
economy. You cannot argue that the benefits of the tariff for growth
had dynamic effects that greatly multiply their impact on national
product without also implicitly arguing that the costs--a higher
price of investment goods, and thus a reduced flow of investment and
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Moses Abramovitz, "The Search for the Sources of Growth: Areas of
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Jeremy Atack and Peter Passell, A New Economic View of American
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Bennett D. Baack and Edward John Ray, "Tariff Policy and Comparative
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Bennett D. Baack and Edward John Ray, "The Political Economy of
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Eric Bartelsman, Ricardo Caballero, and Richard Lyons, "Customer- and
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Susan B. Carter and Richard Sutch, "The Myth of the Industrial Scrap
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Journal of Economic History 56, 1 (forthcoming March
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Alfred D. Chandler, TheVisible Hand: The Managerial Revolution in
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Paul David, "Invention and Accumulation in America's Economic Growth:
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J. Bradford DeLong and Lawrence H. Summers, "Equipment Investment
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Michael Edelstein, Overseas Investment in the Age of High
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Richard Edwards, "Economic Sophistication in Nineteenth Century
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Judith Goldstein, Ideas, Interests, and American Trade Policy
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John Hansen, "Taxation and the Political Economy of the Tariff,"
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C. Knick Harley, "The Antebellum American Tariff: Food Exports and
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Clayne Pope, "The Impact of the Ante-Bellum Tariff on Income
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Paul Romer, "Growth Based on Increasing Returns Due to
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Jeffrey Williamson, "Watersheds and Turning Points: Conjectures on
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Econ ArticlesCreated 3/13/1996 |
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Professor of Economics J. Bradford DeLong, 601
Evans |
