Industrialitis

Reprinted through the courtesy of Newsweek Magazine. Copyright ¹964 by Newsweek, Inc.

In government circles in nearly every “underdeveloped” nation to­day there is a fixed idea that the economic salvation of the country lies in industrialization.

Among outstanding examples are Egypt with its zeal for dams and India with its mania for a government steel mill. But exam­ples can be found everywhere. I met a typical one in a recent visit to the Argentine. Argentina has now imposed a practical prohibi­tion on the import of foreign cars in order to create a home auto­mobile industry that not only as­sembles cars but makes the parts for them. Some of the chief Amer­ican and foreign producers have established plants there. But it is estimated that it costs today about two-and-a-half times as much to make a car in the Ar­gentine as it would to import one. Argentine officials are apparently not worried about this. They argue that a local automobile indus­try “provides jobs,” and also that it sets the Argentine on the road to industrialization.

Is this really in the interest of the Argentine people? It is cer­tainly not in the interest of the Argentine car buyer. He must pay, say, about 150 per cent more for a car than if he were permitted to import one without duty (or by paying a merely nominal revenue-raising duty). Argentina is devot­ing to car-manufacture capital, labor, and resources that could otherwise be used far more effi­ciently and economically—by pro­ducing more meat, wheat, or wool, say, to buy automobiles rather than to make them.

The effect of all government-forced or subsidized industrializa­tion is to reduce over-all efficiency, to raise costs to consumers, and to make a country poorer than it otherwise would be.

But the authors of the import prohibition might reply with a form of the old “infant indus­tries” argument that played such a large part in our own early tar­iff history. They may contend that once they can get an automobile industry established, they can de­velop the domestic know-how, skills, efficiencies, and economies that would enable an Argentine automobile industry to be not only self-supporting but capable of competing with foreign-automo­bile industries. Even if this claim were valid, it is clear that a pro­tected or subsidized industry must be a loss and not a gain to a coun­try as long as the protection or subsidy has to be retained.

And even if a self-supporting motor-car industry were finally established, it would not prove that the losses in the period of hothouse growth were justified. When the conditions are in fact ripe in any country for a new industry capable of competing with the equivalent foreign in­dustries, private entrepreneurs will be able to start it without government subsidies or prohibi­tions on foreign competition. This has been proved again and again within the United States—for example, when a new textile in­dustry in the South competed suc­cessfully with the long-established textile industry in New England.

There is another fallacy behind the industrialization mania. This is that agriculture is always nec­essarily less profitable than indus­try. If this were so, it would be impossible to explain the prosper­ous agriculture within any of the industrialized countries today.

A popular argument of the in­dustrialization-at-any-cost advo­cates is that it is impossible to point to a purely agricultural country that is as wealthy as “in­dustrialized” countries. But this argument puts the cart before the horse. Once a dominantly agri­cultural economy becomes pros­perous (as the early United States) it develops the capital to invest in domestic industries and therefore rapidly becomes a coun­try of diversified production—both agricultural and industrial. It is diversified because it is pros­perous rather than prosperous because it is diversified.

It is the great superstition of economic planners everywhere that only they know exactly what commodities their country should produce and just how much of each. Their arrogance prevents them from recognizing that a sys­tem of free markets and free com­petition, in which everyone is free to invest his labor or capital in the direction that seems to him most profitable, must solve this problem infinitely better.