VIII. America Can Compete

VIII. AMERICA CAN COMPETE Should freedom for enterprise stop at our national borders? Can we compete with the "pauper labor" of Asia—or should we try? Would freedom for our traders to buy and sell foreign goods in America break down American standards of living? Why is "free enterprise" good and "free trade" bad? Doesn't the enterprising trader deserve freedom when his enterprise takes him into foreign markets? American businessmen are divided on these questions. According to d recent Fortune Magazine poll 45 per cent of our business executives favor maintaining or increasing present United States tariffs after the war, 55 per cent favor lower tariffs or free trade. Why Trading Nations Prosper Prosperity depends on ABUNDANCE of goods and services: food, clothing, shelter, schools, hospitals, libraries, scientific laboratories, churches, art galleries, museums, theaters, services of dentists and doctors, radios, automobiles, railroads.

Abundance depends on HIGH PRODUCTIVITY. We cannot have high levels of wages and scales of living unless we have high levels of output. High productivity cannot be obtained without DIVISION OF LABOR. This means that people specialize in doing what they can do best. This specialization is necessary to develop skill, to make use of special talents, to stimulate invention of labor-saving machinery and to economize equipment. But division of labor is impossible without TRADE. Prosperity — abundance — high productivity — division of labor — trade—together these provide the economic basis for PROGRESS. That is why civilization has developed first and furthest along trading routes and at trading centers—along seacoasts and rivers, around good harbors and at junctions of highways and railroads. Sparkplugs of Civilization Without trade, arid with everyone producing only for his own needs, people are condemned to the poor and brutish life of savages.

68 DO WE WANT FREE ENTERPRISE? People can produce and enjoy only the barest necessities of life when each family must make its own clothes, shelter, tools and other things as did our early ancestors. Under such conditions there can be no scholars, scientists, artists and doctors. Sickness and death rates are high. People are illiterate and ignorant. In fact, most Americans would die of cold, hunger and disease in the first year if they ceased to specialize and trade with one another. Agriculture unaided can produce subsistence for a few. But civilisation requires trade, transportation and a host of service lines, along with specialists in manufacturing, mining, lumbering, fishing and many other occupations. It is service lines, including trade, which will most of all need developing in the future. (See above, p. 37.) Traders act as sparkplugs of civilization by: 1. searching out more abundant and cheaper sources of supply; 2. finding markets for the more efficient and lower cost producers; 3. extending the use of superior tools and methods of working and living; 4. enabling other producers to increase output by concentrating on their specialties.

Traders Are Producers Some people say, "Traders are not producers. They only distribute what other workers produce." But how much production would we have without trade ? Farmer Brown might have a granary full of grain yet be poor indeed if he could not trade his grain for clothing, fuel and other things. In that case he would soon stop producing so much grain. Tailor Jones might have a shop full of clothing yet starve to death if he could not trade for food. In that case he would soon stop producing so much clothing. Work is productive only if the results are useful and valuable to somebody. Traders add to the usefulness and value of things by arranging for producers to exchange their surpluses. Waste material dealers, for example, seek out old rags, waste paper and metal scraps which have no value or are a nuisance to their present owners. Then they find others who have a good use for these materials.

AMERICA CAN COMPETE 69 All other traders do the same thing. Like fishermen or miners, they create value by taking things from where they have little value to where they have more value. Production means creating utility and helping to make valuable things more abundant. Goods may be processed, but they are not fully produced unless they have reached the final users. They still lack full usefulness and value. Creating such utility—"place utility," "time utility," and "ownership utility"—is the job of the merchant. In doing this job he is as productive as the farmer, manufacturer, miner or lumberman. An efficient trader may do more than an efficient farmer to create jobs, promote prosperity and increase welfare. A good farmer can add a few thousand dollars of value to the material with which he works. A good trader may add hundreds of thousands of dollars to the nation's annual net income by finding new opportunities (markets) for our latent productive energies.

Annual contributions to the national income by traders and their employees in the United States are usually about 30 per cent greater than the annual contribution of agriculture. Trade, finance and transportation together produce as much value and income as all manufacturing industries combined. By arranging trades, or finding markets, the merchant increases the purchasing power of other producers. He gives value to their land, labor and machinery by making the products more salable and valuable. Therefore, he creates credit and helps put it to work in production. In these ways trade increases the demand for labor. Trade Raises Wage Levels The demand for labor consists of wages offered for its services. It does not consist of work to be done. There is never any limit on the work to be done. Every thinking person knows of more things to do than he could accomplish in several lifetimes. If work were all people wanted no one need ever be unemployed. In that case we should all go to the barren places of the earth to live—the North Pole or the Sahara desert.

What wageearners and other producers really want is pay for their work, not merely work itself. Whatever increases the rewards for labor increases the demand for labor and increases opportunity for employment of the only kind we care much about—remunerative employment.

70 DO WE WANT FREE ENTERPRISE? Unemployment consists, not in lack of work but in lack of pay for what work is to be done. The rewards offered for labor's services depend on the usefulness, or productivity, of those services. This productivity, in turn, is increased as all workers and all groups of workers specialize on what they can do best and exchange the products. The United States has the world's highest wage levels partly because it has been one of the world's greatest free trade areas. This came about, however, only because the United States Constitution forbade the states' to interfere with interstate commerce. Before the adoption of the Constitution each colony, and after 1776 each state, was erecting more and more tariff barriers against the goods of the others. After the adoption of the Constitution the desire to continue these trade restrictions still existed. The opening of the West, for example, led New England farmers to demand tariffs or subsidies to protect them against cheap wheat from cheap western land. Fortunately for both New England and the West such tariffs were forbidden and subsidies soon became unpopular with consumers and taxpayers.

Without domestic trade the people of Michigan would not have enjoyed many oranges and California would not have had many automobiles. Without foreign trade, silk stockings and rubber-tired automobiles would not have been part of the "American standard of living." In other words, trade increases the demand for labor by increasing the rewards for effort. And this is just as true of foreign trade as of domestic trade. Differences in economic conditions and wage levels increase rather than reduce the advantages of international trade. High Wages No Obstacle to Trade If high wage rates were an obstacle to trade, high-fee doctors would not hire low-wage gardeners. Similarly, wage differences would prevent Massachusetts from doing business with Florida, California with Alabama, or England with India. Despite high wages, the United States for a generation has been running a neck-and-neck race with Great Britain (another highwage nation) for the position of the world's leading exporting nation.

Following are percentages of foreign sales to total output for certain important American producers prior to 1939: AMERICA CAN COMPETE 71 RELATION OF EXPORTS TO TOTAL PRODUCTION autombiles, petroleum products, raw cotton, canned fish, dried fruits, motion pictures, typewriters, refined copper, 12 to 14 per cent 15 ' 40 ' 40 ' 30 ' 30 ' 30 ' 25 ' ' 35 " " ' 60 " " ' 58 " " ' 50 " " < 40 " « • 40 " " 1 35 " " oranges, lard, rye, rice, wheat, tobacco, aircraft, 10 to 20 per cent 25 ' 20 ' 10 ' 10 ' 40 ' 20 ' 33 " " ' 25 " " ' 20 " " 1 18 " " 1 50 " " ' 35 " " These and many other American lines on an export basis have successfully met foreign competition. And the chief competitors of the United States in foreign trade are the highwage nations, not the low-wage nations. Japan was no exception to this rule, for only a minor part of her exports was competitive with ours. Where labor's output per hour is high, costs may be low despite high wage rates-.

Japanese protectionists have said, "How can our flesh-and-blood workers stand up against the competition of American machines and cheap power? We must have tariff protection against the cheap products of American power-driven machinery!" In many lines, especially in those using power-driven machines, the United States can undersell the world, despite high wage levels. In fact, it is our efficiency in these lines which sets the high standard for American wage rates. United States wage levels are ten times as high as wage levels in India, China or Japan only because our labor on the average is ten times as productive. And, since our average productivity is higher than the average productivity of any other nation our costs of production are lower in most Iine9 despite our high wage rates. To keep wages high, however, we must specialize in lines where the productivity of our labor is high and our costs low. We must get by trade the products of industries where the productivity of our labor is low and our costs are high.

For example, if we devote some of our labor to lines where it is only two or three times as productive as Asiatic labor, we thereby drag down the average level of our productivity and reduce the average level of wages. This is because we raise costs for the more efficient lines by forcing them to pay higher prices for their supplies and because we reduce the purchasing power of wages paid in those more efficient lines.

72 DO WE WANT FREE ENTERPRISE? The Discriminatory Tariff Tariff duties restricting imports may benefit home producers of the restricted articles. But they do so only at the expense of: 1. exporting industries, which thereby lose foreign markets; 2. processors of the restricted commodities; 3. dealers in the restricted commodities; 4. consumers. Thus tariffs discriminate against various producers and consumers at the same time they give protection to a few. Since those injured are more numerous and important than those benefited, duties of this sort should be called "discriminatory tariffs," instead of "protective tariffs." 1. The following domestic lines gain directly from both imports and exports: transportation and communications, construction, wholesalers, retailers, brokers, finance, hotels, restaurants, bakeries, amusements, education, dentistry, medicine, government service, public utilities, Producers in the above service lines make up half of our peacetime working force. They cannot be injured by competition of foreign producers. On the contrary they benefit from foreign trade (1) as consumers, and (2) as suppliers of services to exporters and importers.

2. An overwhelming majority of farmers and manufacturers would benefit from reduction in American trade barriers as well as foreign trade barriers. Among farmers this includes producers of cotton, tobacco, corn, pork products, wheat and fruits. Among manufacturers it includes producers of automobiles, petroleum products, movies, many textile products, rubber products, radios, sewing machines, many chemicals, agricultural machinery, electrical machinery and apparatus, industrial machinery, and a host of other iron and steel products. These producers would benefit from expansion of home and foreign markets as well as from increased purchasing power in terms of foreign goods. 3. Many of our important domestic industries have depended on cheap foreign materials, such as rubber, sisal, jute, furs, cork, wool, silk, linen, hemp, shellac, chromium, nickel, tungsten, manganese, tin, mercury, hides and leather, scientific instruments and crude drugs. Most of these commodities could have been AMERICA CAN COMPETE 73 produced in the United States, or home-produced substitutes could have been found—but only at higher cost, which would have reduced markets for the finished goods.

The Businessman's Socialism When industries in which our labor is relatively less efficient ask for subsidies or tariffs it is not merely because they need protection against the foreigner. It is equally due to their need for help against the competition of more efficient home industries which are bidding against them for labor, land, machinery and materials. Why does Mr. X, an American manufacturer, have difficulty meeting the competition of, let us say, English manufacturers in the same line? "Because he has to pay higher wages than his English competitors," says the protectionist. But why does Mr. X have to pay these higher wages? Is it not because so many other American employers are offering higher wages than are paid in England ? And who are these highwage employers ? They are employers in lines where American labor is relatively more efficient. For example, American labor is about twice as productive on the average as English labor, mainly because it is equipped with twice as much power-driven machinery. Therefore, on the average, American employers can afford to pa}/ twice as high wages to our workers as those received by English workers.

This is what makes it hard for Mr. X whose workers are only perhaps fifty per cent more productive than the English workers. His trouble is not due to his inefficiency compared to the foreign producer. It is due to his inefficiency relative to other American producers who bid up the price of American labor. It is against this American competition for labor that Mr. X craves help, as well as against the competition of the foreign producers. If subsidies and tariffs for relatively less advantageous industries did not injure other home producers no one except the foreigner could object to our tariffs. But these subsidies and tariffs raise costs and diminish markets for all other home industries which do not need such special help. They drag down the more advantageous industries at the same time they help the less advantageous lines. This is why they are sometimes termed "the businessman's socialism." They help the less prosperous and less efficient only by dragging down the more prosperous and more efficient.

74 DO WE WANT FREE ENTERPRISE? It is true that hourly wage rates may be raised so high by monopolistic labor practices that they reduce employment and wage incomes because workers are asking for more than they can produce. But tariffs make this situation worse. They put an added burden on those industries where labor's productivity is still high relatively to the general level of wage rates. This burden consists of higher costs of materials and diminished markets at home and abroad. Monopolies Reduce Gains from Trade Whenever any producer starts getting by trade (i.e., buying) something which he formerly made for himself, he becomes more dependent on other people. He depends on them to keep on supplying the goods at less than it would cost him to make them for himself. He also depends on them to keep on buying his services so that he can get the money to buy theirs. Economic progress is about proportional to the increase in this mutual dependency, or cooperation, between producers.

Again and again, however, producers and groups of producers have taken shameful advantage of this growing dependency of their fellowmen. They have organized monopolies to divert to themselves a larger and larger share of the gains from trade. Whether this leads to retaliation or not these monopolies reduce the total gains from trade and thereby discourage and restrict it. An outstanding example was the organization and policy of East Indies rubber producers. Their restrictionist policy, which continued even while the Japanese were sweeping towards their plantations, promises to be the chief obstacle to rebuilding their postwar markets. The American public no longer wants to be at the mercy of any such foreign power, private or public* Breakdown and prevention of such restrictionism must be, therefore, a prime requisite for increasing trade. This includes a housecleaning for the United States as well as othei nations.

For example, our policy of crop restriction and government purchase of "surplus commodities" was precisely similar in aim and method to the restrictionist policy of the British and Dutch East Indies' rubber producers. *These monopolies, however, are usually temporary and incomplete. Despite increasing efforts to control the market, the British and Dutch rubber interests were unable tcprevent a decline in the price of crude rubber from an average of 54.6 cents per poundin 1926 to 19.1 cents in 1929 and 3.5 cents in 1932.

AMERICA CAN COMPETE 75 By the Webb Act of 1919 we have permitted American export organizations to carry on in foreign trade monopolistic practices which are forbidden in domestic trade. Certain American producers took advantage of that act to gouge their foreign customers. When will our housecleaning begin ? The first international agreement between the governments of England, United States, Canada, Australia and Argentine concerning postwar economic policy proposes a worldwide wheat cartel. This agreement of 1942 calls for allocation of world markets and price maintenance through trade restriction. If postwar trade policies are to follow this line the Atlantic Charter becomes a mockery. Endorsement of such a proposal by the United States and the British Commonwealth is a betrayal of the liberal traditions which made these nations great. It is black reaction towards medievalism. Monopoly, to be effective for any length of time, usually requires the help of government. At least it must have the connivance of government. This is true of monopolies in both foreign and domestic trade.

Military victory will give the people of the United States and Great Britain power to destroy or emasculate the most important world monopolies. It will give them opportunity to break down the most restrictive trade barriers. Upon the way in which they use that opportunity will depend world peace and progress. Does Foreign Trade Cause War? The most important form of cooperation is economic cooperation. This means exchanging services for the purpose of making scarce and desirable things more abundant. As nations grow in power to produce they can grow equally in power to cooperate—that is, in power to trade. The most productive and industrialized nations are the world's best markets—the United States, Great Britain, Germany, France, Canada, Japan. In other words, our chief competitors in foreign trade are also our chief foreign markets. The United States has had the world's second most valuable empire, but we have sold only 10 to 12 per cent of our exports to it.

Total trade of Germany with Great Britain before World War I was 20 times as great as-her trade with her entire colonial empire.

76 DO WE WANT FREE ENTERPRISE? Holland customarily sold 8 times as much to Germany as to the Dutch East Indies-—one of the world's most valuable colonies. Prior to 1914, France gained an African empire, rich in resources and about the size of the United States. By tariffs she sought to monopolize its trade. Yet her total trade with it was only about one per cent of her total foreign trade. "Pauper labor" makes a nation a poor market and a feeble competitor. Such laborers produce barely enough for their own needs. How can they produce large surpluses for export ? What surpluses they can produce consist mainly of one or a few items for which their climate and natural resources are especially well suited. The markets of backward nations are not worth fighting for. Great Britain lost in decreased trade with Germany after World War I seven times as much trade as Germany's entire prewar colonial trade. Yet, even when Britain acquired the German colonies she could not have monopolized their trade except by restricting and destroying much or most of it.

It is not possible to win the trade of advanced nations by war, even by victorious war. In destroying trade competitors, war also destroys markets, for our chief competitors are our best customers. FALSE IDEAS about possible gains from war and conquest may help cause war. Japanese and German militarists sold their people the notion that they could win markets by war. This belief is a fraud. It is such delusions which cause war. Trade is a force for peace between nations as it is a force supporting law and order in domestic affairs. Informed traders want peace. The Japanese militarists had to assassinate and terrorize hundreds of leading Japanese businessmen and their political representatives in order to get their way. Competition in trade means competition in service; war is competition in destruction. In trade, all can gain. In war, all can lose. By trade, backward nations advance along with the rest of mankind, not by dragging down or plundering their richer neighbors, but by learning from them and cooperating with them to increase prosperity for all.