The infant industry argument is one of the most famous arguments for protection against free international trade. The argument claims that protection is justified for new industries especially in less developed countries in order to establish them sufficiently. These infant industries are unable to compete with the old and well established industries located mostly in developed countries. The main reasons are differences in efficiency in production, information, knowledge and capital endowment (Suranovic, 2004). Since Friedrich List (1789-1846) had developed this argument at the beginning of the Nineteenth Century, since then infant industry protection has been immensely criticized among economists. Most economists agree to some reasonable circumstances that would justify the temporary and limited protection of an infant industry (Melitz, 1999). Nevertheless, there is a big community of opponents who claim that protection is likely to be only the second-best policy rather than the firstbest policy (Suranovic, 2004). Despite this opposition, almost all countries of the world have developed their industrial base by applying to infant industry protection (Krugman and Obstfeld, 2003 and Shafaeddin, 1998). This essay aims to examine Friedrich List’s theory of the infant industry argument in detail. First, it explores the origin of List’s theory by giving a general explanation and some background information, by identifying the pattern of protection and by examining the justification for his theory. Secondly, it critically examines List’s theory under a contemporary perspective by discussing the current issues of the infant industries argument. Finally, it asks the question, if List’s theory is still valid.
Table of Contents
1. Introduction
2. The Origin of the List’s Theory
2.1. Pattern of Protection of List’s Theory
2.2. Justification of List’s Theory
3. Contemporary Perspectives of List’s Theory
3.1. Future comparative advantage
3.2. Domestic Market Failure and “Pseudoinfant” industries
3.2.1. Imperfect Capital Markets
3.2.2. Appropriability Argument / External economies
3.3. Political Economy Problem
3.4. Example for a general disagreement with the infant industry argument
3.5. Example for a general agreement with the infant industry argument
4. Conclusion
Objectives and Topics
This essay aims to provide a detailed examination of Friedrich List’s theory regarding the infant industry argument. The primary objective is to analyze the historical origins and justifications for List’s protectionist views, evaluate them through a contemporary economic lens, and ultimately determine whether his theory maintains validity in the context of modern international trade.
- Historical background of Friedrich List and his opposition to Classical economics.
- The structural stages of economic development and the necessity of state protection.
- Dynamic vs. static comparative advantage in international trade theory.
- Analysis of domestic market failures, including imperfect capital markets and external economies.
- Critical assessment of the infant industry argument regarding modern economic policy.
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2. The Origin of the List’s Theory
Friedrich List (1789-1846) was a critic of economic theory. He was an American citizen, a German patriot and universalist who believed in the ultimate harmony of national interests. His famous work, The National System of Political Economy (1841) was written to oppose the free-trade doctrines of Classical economics (Fonseca and Ussher, 2004 and Lind, 1998).
After the first industrial revolution List developed the infant industry argument to react to the divergence of the industrial development between Great Britain, the main European countries and the United States. At this time Great Britain was more developed than these other countries, largely due the fact that industrial revolution took place mainly in that country (Shafaeddin, 2000). ‘Adam Smith and the school of economic liberalism represents List’s principal theoretical opponent’ (Bolsinger, 2004). List (1841) argued that Adam Smith’s universal theory of international trade have been mainly influenced by the perspective of Great Britain. He wrote that Smith ‘… omits a vital intermediate stage between the individual and the whole world. This is the nation, to which its members are united by the tie of patriotism’ (List, 1841).
A world of free trade can not be achieved instantly due to the divergence of the industrial development of the nations. A precipitate acceptance of global free trade would enduringly favour the industrialised countries (like Great Britain in the 19th century and the United States nowadays). To enable the infant industries of the developing countries to catch up, they had to be protected. After this stage of development, the recently developed nations should slowly reduce protection to be more engaged in free trade with the rest of the world (Lind, 1998).
Summary of Chapters
1. Introduction: This chapter introduces the infant industry argument as a critique of free trade and outlines the essay's intent to explore the theory's origin, justification, and modern validity.
2. The Origin of the List’s Theory: This section details Friedrich List’s historical context, his opposition to Adam Smith’s universal trade theory, and his categorization of economic development stages requiring temporary protection.
3. Contemporary Perspectives of List’s Theory: This chapter evaluates the theory through modern economic concepts, including dynamic comparative advantage and specific market failures like imperfect capital markets.
4. Conclusion: The concluding chapter summarizes that List’s theory is context-dependent and emphasizes that it is frequently misinterpreted as a strictly anti-free-trade stance.
Keywords
Friedrich List, Infant industry argument, Protectionism, International trade, Comparative advantage, Industrialization, Market failure, Economic development, Adam Smith, Dynamic theory, Capital markets, External economies, Trade policy, Political economy, National interest.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines Friedrich List's "infant industry argument," which suggests that developing nations should protect new industries until they become competitive enough to operate in a global free-trade market.
What are the primary themes discussed in the text?
The core themes include the historical origins of List's theory, the developmental stages of nations, the difference between static and dynamic comparative advantage, and the role of government intervention in market failures.
What is the ultimate goal of the author?
The goal is to determine if List’s 19th-century theories regarding protectionism remain valid and relevant in the current economic landscape.
Which scientific methodology is applied?
The work employs a qualitative analysis of historical economic texts combined with a review of contemporary economic perspectives and theoretical arguments surrounding trade policy.
What topics are covered in the main body of the work?
The body covers the historical context of the industrial revolution, the specific patterns and justifications List proposed for protection, and modern critiques regarding "pseudo-infant" industries and political economy problems.
Which keywords best describe the content?
The content is best described by terms such as infant industry argument, protectionism, dynamic comparative advantage, List's national system, and economic industrialization.
How does List define the "engine of growth"?
List considers the manufacturing industry to be the "engine of growth" because it provides far more opportunities for intellectual development and industrial innovation compared to the agricultural sector.
What is the "Pseudo-infant" industry argument?
This refers to industries that are protected but never actually become efficient, suggesting that their survival is due to continued government protection rather than genuine industrial success.
Why did List believe that Adam Smith's theory was flawed?
List argued that Smith focused too much on individual and global welfare while ignoring the "vital intermediate stage" of the nation, which requires specific policies to reach an equal level of industrial development.
- Quote paper
- Matthias Hilgert (Author), 2005, International Trade: Friedrich List's Theory of the infant industry argument, Munich, GRIN Verlag, https://www.grin.com/document/38226
