"The Prohibitory System"

by Don Boudreaux on January 27, 2007

in History, Trade

When I taught at Clemson University I had an office that was literally a stone’s throw from John C. Calhoun’s study at his estate of Fort Hill.  At Fort Hill, on July 26, 1831, Calhoun delivered (or was it, just wrote?; I can’t tell) a famous speech — his Fort Hill Address — aimed chiefly at justifying State nullification of national-government legislation and dictates that States believe to violate the U.S. Constitution.

These arguments are intriguing, but they’re not what ignites this post.  What I write about here is part of Calhoun’s justification for reducing tariffs on manufactured goods.  (The specific national-government measure that prompted Calhoun to write his Fort Hill Address was, indeed, the tariff — what Calhoun called "the prohibitory system.")

The basic facts are these.  The southern U.S. states (which include, of course, Calhoun’s home state of South Carolina) were at that time chiefly agricultural and dependent for large parts of their incomes on sales of staple agricultural goods to buyers on world markets.  The northern states were increasingly manufacturing.  Tariffs were on manufactured goods.

Now here’s Calhoun:

If we turn from the past and present to the future, we shall find
nothing to lessen, but much to aggravate the danger. The increasing
embarrassment and distress of the staple States, the growing
conviction, from experience, that they are caused by the prohibitory
system principally, and that, under its continued operation, their
present pursuits must become profitless, and with a conviction that
their great and peculiar agricultural capital cannot be diverted from
its ancient and hereditary channels without ruinous losses
—all concur
to increase, instead of dispelling, the gloom that hangs over the
future. In fact, to those who will duly reflect on the subject, the
hope that the disease will cure itself must appear perfectly illusory.
The question is, in reality, one between the exporting and
non-exporting interests of the country. Were there no exports, there would be no tariff.
It would be perfectly useless. On the contrary, so long as there are
States which raise the great agricultural staples, with the view of
obtaining their supplies, and which must depend on the general market
of the world for their sales, the conflict must remain, if the system
should continue, and the disease become more and more inveterate. Their
interest, and that of those who, by high duties, would confine the
purchase of their supplies to the home market, must, from the nature of
things, in reference to the Tariff, be in conflict. Till, then, we
cease to raise the great staples, cotton, rice, and tobacco, for the
general market, and till we can find some other profitable investment
for the immense amount of capital and labor now employed in their
production, the present unhappy and dangerous conflict cannot
terminate, unless with the prohibitory system itself.

I’ve highlighted the especially important passages.  Note that Calhoun, in arguing against tariffs on manufactured goods, uses as one of his arguments the fact that such tariffs will cause loss of profits to some domestic producers (namely, southern planters).

Now I have little sympathy for antebellum southern planters, but what’s interesting is that one of the principal arguments that modern protectionists use to justify protection — namely, that the cost and difficulty of transitioning from economic activity protected by tariffs to whatever economic activities would thrive under free trade are too high and onerous to justify lowering tariffs — was used by Calhoun to argue against tariffs.  Calhoun correctly noted that higher tariffs will reduce demand for U.S. exports (southern-state staple commodities) and, hence, require these producers to find other lines of employment for their efforts and capital.  And such efforts are, naturally, troubling.

The deep lesson here is that, just as moving to freer trade does indeed upset some economic apple carts, so, too, does protection upset some economic apple carts.  Given that both free trade and protection cause some specific job and business losses, protection cannot be justified — as so many try to justify it — by pointing to people whose economic expectations will be upset by freer trade.  Free-trade advocates can counter with similar accounts.

Of course, free trade’s justification cannot, then, be found in the fact that protection upsets some economic expectations.  Free trade’s proper economic justification is, in part, this: given that both free trade and the "prohibitory system" "destroy" some jobs and "create" others, it’s best to let commerce and industry be guided by market signals and consumer sovereignty so that each producer is more likely than under protection to specialize in that occupation for which he, she, or it has a genuine comparative advantage.  Thus will grow the wealth of nations.

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{ 5 comments }

james highamj January 27, 2007 at 9:14 am

…Given that both free trade and protection cause some specific job and business losses, protection cannot be justified — as so many try to justify it — by pointing to people whose economic expectations will be upset by freer trade…

I can't see that protection can be justified by any arguments I've hitherto seen. This just puts a further nail in the coffin.

By the way, you've been tagged:

http://nourishingobscurity.blogspot.com/2007/01/meme-six-unusual-things-about-myself.html

true dough January 27, 2007 at 9:54 am

I like this part:

“…and till we can find some other profitable investment for the immense amount of capital and labor now employed in their production, the present unhappy and dangerous conflict cannot terminate, unless with the prohibitory system itself.”

But if the governments of all major trading countries don’t do away with anti-free market policies, the process of reallocating resources to their best use in the US is bound to be plagued by distortions and incomplete information. No wonder it hurts.

I think that one of the reasons that some individuals are unable/unwilling to see the long-term benefits of trade policies that encourage comparative advantage, is because of prisoner’s dilemmas between countries that distort information. For example (if we accept that subsidies represent a policy choice which, like tariffs, punishes global trade), the US highly subsidizes its farmers (Canada dislikes this), while Canadian farmers are sheltered by the Canadian Wheat Board (the US dislikes this).
Neither country wants to make the move to a truly free market because (in part) the reallocation of resources that goes hand in hand with a transition to comparative advantage could hurt them in the short run. Meanwhile, think of how inefficient the current system between the two countries is.
If the WTO would rule against US subsidies, and Canadian farmers would stand up against the wheat board (because many don't even want it), both countries could let the market sort it out.

John Booke January 27, 2007 at 7:57 pm

We're pretty much a service oriented economy now espcially when compared to the mid 1800s. I wonder if Calhoun would support lowering barriers to service imports?

Joe Calhoun January 28, 2007 at 2:13 pm

John C. Calhoun was an ardent free trader who saw free trade as about much more than just commerce:

"I regard free trade, as involving considerations far higher, than mere commercial advantages, as great as they are. It is, in my opinion, emphatically the cause of civilization and peace" (The Essential Calhoun, p. 218).

He would support free trade in services.

Here's an early incarnation of the Laffer Curve from a Senate speech:

"On all articles on which duties can be imposed, there is a point in the rate of duties which may be called the maximum point of revenue–that is, a point at which the greatest amount of revenue would be raised. If it be elevated above that, the importation of the article would fall off more rapidly than the duty would be raised; and, if depressed below it, the reverse effect would follow: that is, the duty would decrease more rapidly than the importation would increase. If the duty be raised above that point, it is manifest that all the intermediate space between the maximum point and that to which it may be raised, would be purely protective, and not for revenue." (The Essential Calhoun, p. 195)

He understood the essential nature of tariffs in raising prices:

"No; it [the protectionist tariff bill] is against neither violence, oppression, nor fraud. . . . Against what, then, is protection asked? It is against low prices" (TEC, p. 196).

He also understood that protectionism was a never ending plea:

"[I]ncreased demand and prices consequent on the exclusion of the article from abroad, would tempt numerous adventurers to rush into the business, often without experience or capital; and the increased production, in consequence, thrown into the market, would greatly accelerate the period of renewed distress . . . and demand for additional protection." (TEC, p. 202)

I first studied Calhoun as a teenager during the great family tree debate in my family. I still don't know my exact relation to the man, but the family debate sparked a love of history in me that has never ended.

Reading Calhoun also shaped my ideas about economics. I remember distinctly when supply side economics, through Jude Wanniski, Art Laffer and Mundell, was becoming popular in the late 70s. Having read Calhoun, I knew the ideas were not new.

I have mixed feelings about Calhoun. As the "Father of the Confederacy" (a title I'm sure he would have rejected) he's a bit embarrasing, but as an economics teacher, he had few peers.

Reach Upward January 30, 2007 at 1:00 pm

Calhoun was right about many things. But he was dead wrong about his vociferous support of the South's "peculiar policy" of slavery. His writings are filled with code words for slavery. If you don't understand those code words, many of his writings seem completely reasonable. When you realize that some of his writings refer directly to human trafficking, the odious repugnancy of the same are revealed. This does not mean that he was incorrect about economic laws and theories.

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