My dear Prime Minister,

I have read the confidential Report of the Committee on the Tariff
[1] with the greatest interest. Possibly you may be interested to
have my reactions and in this letter I shall attempt to set them
out as briefly as possible.

I do certainly think that the Committee accomplished a good deal
and have in most respects adequately stated the lines of enquiry
that are essential if Australia is to follow a policy of economic
sanity. In what follows, I do not propose to make any comments
where I find myself in full agreement with the Committee.

This letter will probably be rather long and I shall, therefore,
divide it into three parts:

(a) Comments on certain omissions.

(b) Comments on the Report and Appendix.

(c) Certain suggestions as to the Organization of Economic
Research.

A. Before considering the actual points of the report, I was
rather struck by the difference in attitude between the Report
itself and the questions and tentative answers which were appended
to the Report. My guess would be that Wickens [2] had a great deal
to do with the form of the Report but that some one with a very
strong tendency towards orthodox economics had a predominant part
in the answers to the questions. This guess may be ridiculously
wrong.

To my mind the two main omissions from the document are these:-

(a) No weight has been given to the question of the extent to
which the indiscriminate application of high protection to
secondary industries, for which Australia, at her present stage of
development, is not well suited, is limiting the effectiveness of
those secondary industries in which Australia ought to have a
reasonable chance of production on a basis of cost not too far
removed from that of older industrialised countries.

(b) It is commonly argued in Australia that one reason for using
high protection to establish new secondary industries is that such
action has a very marked effect in increasing the population. The
Committee does not seem to have either expressed a view on that
problem or to have set it out in the questionnaire as a major
matter for consideration.

I would like to see this question considered-
Having regard to the history and present circumstances of
secondary industries in Australia, will the expenditure of a given
amount of capital, ability and energy on the development of new
secondary industries lead to a more rapid development of
population than the expenditure of an equal amount of these
factors devoted to the development and/or improvement of (a)
primary industries; (b) well established secondary industries?
B. Coming now to the Report. Section 1 (The Effect of the
Australian Tariff Policy). I should think that paragraph 7 could
be expressed a good deal more forcibly without departing from the
truth. I do not think the comparison of the cost of living between
1914 and today is nearly so significant as comparisons based on
post war years. The following table shows the way in which
wholesale prices in Australia have failed to react to the same
degree as those of other countries.

Wolesale price. Index numbers.

Table shows relative increases from 1914 level in various
countries.

Country Australia Great Britain Canada
(Melbourne)

1914 100 (1913) 100 100
1922 162 159 152
1923 179 159 153
1924 173 166 155
1925 169 159 160
1926 168 148 156
1927 167 141 152

Again, the Australian price indices for manufactured goods show
that, during the last three years, there has been a fairly
substantial rise in the price of manufactures whereas in other
countries there has been a marked decrease.

Sect. 1. Para 8. I am doubtful as to the value of comparisons of
'production efficiency' as between the whole of secondary
industries and the whole of primary industries. It would be much
more instructive if the productive efficiency of four groups of
production were compared-(1) Unsheltered agricultural and pastoral
industries i.e. wheat and wool; (2) Semi-sheltered primary
industries, Dairying (Paterson Scheme) [3], Fruit; (3) Secondary
Industries not based on protection i.e. Power, Light, etc.; (4)
Protected Secondary industries.

Sect. 11. Suggested modifications of Tariff Policy.

Para. 1. After reading and re-reading this paragraph, I am not
quite clear as to whether the Committee recommend a Tariff
holiday. Naturally this has been made quite clear to you. Pending
the further consideration of tariff policy, a tariff holiday has
much to recommend it.

Para. 5. I cannot too heartily endorse the views expressed in this
paragraph. It is the argument for a discriminating protection.

Para. 6. In this paragraph and later in the appendix the Committee
has referred to the question of increasing returns in
manufacturing and decreasing returns in agriculture. They have not
made any definite assertion but have suggested and have quoted
Marshall [4] in support of the idea that, in agriculture, in
contra-distinction to manufacturing industries, the law of
diminishing returns comes into effect. I wonder whether this is at
all the case where agriculture has remained in the main extensive
as in Australia rather than intensive as in England, and Eastern
Europe? It seems to me that for many years to come the application
of brains, capital and energy to Australian agricultural and
pastoral pursuits will give increasing returns i.e. returns larger
than the expenditure and I personally doubt whether under
undiscriminating protection the same will hold good for secondary
industries.

Para. 11. I suggest that in the last sentence the word 'would'
should be amended to 'might'! The appointment of an economist to
the Tariff Board might have very useful results but a great deal
would depend upon the individual. A pure free trader would be
useless. What would, in my judgment, be necessary would be an
economist or perhaps better a practical man with an understanding
of economics who realised that the problem to be faced is not the
height of the tariff on certain articles but the economic muddle
that has resulted from years of undiscriminating protection. I
will return to this subject at the end of this letter.

The Appendix. Section 1-'The effect of Australian Tariff on the
extension of Local Industry'.

Q.3. The doctrine of comparative advantage is most important and
if it could be realised in Australia great progress would become
possible. It seems to me that the following gospel ought to be
preached-'Industries that must permanently rely upon a high tariff
(say of 25 % ad valorem) may be desirable for political or
sociological reasons (sugar) or for defence but the country should
realise that economically speaking every such industry costs the
country something and the industry does not contribute to the
national dividend. It obviously follows that Australia cannot
afford the luxury of an unlimited number of such industries, in
other words Australia cannot afford undiscriminating protection'.

Q. 4. Probably the way in which the tentative answer to this
question is stated is quite accurate. The case of the Tinplate
industry in U.S.A. might, however, have been cited. America
protected her tinplate industry, found the competition from South
Wales so serious that I believe the tariff rates were brought up
to 100% ad valorem. Owing to her huge home market, she has,
however, been successful and today is exporting tinplate in
competition with South Wales to a very considerable extent. A very
strong point in favour of discriminating protection but no
argument for a tinplate industry in Australia at the present time.

For my information I should be very glad to know whether the
Committee would agree that 'comparative advantage' can be assessed
by the ability of an industry to compete in the world's markets
with exports.

Sect. 111. Tariff and Revenue.

Q. 3. Preferential Tariffs. The section dealing with this subject
is doubtless theoretically sound but I think a closer study of the
facts would show that each year there are less goods upon which a
preferential tariff is not of marked value to Great Britain. One
is so accustomed to the economist who says that where Great
Britain has practically a monopoly of supply the preference is
meaningless. Of course this is true. It's true that the Australian
preference on British Whisky is of little practical value, it's
equally true that the British preference on Empire teas has
comparatively little point but today there are few articles on
which this would be true. Perhaps the finer counts of cotton cloth
and a few other things. just because Great Britain supplies
Australia with over 90% of her requirements of certain forms of
iron and steel, that does not mean that the preference is
meaningless-very far from it. The dictum should run that where
Great Britain has a world monopoly in the supply of certain goods,
a preference on those goods is meaningless. To estimate whether an
Australian preference is of value to Great Britain one should
examine the position of Great Britain in the supply of those goods
to a foreign country such as Argentina.

Q. 4. Tariff level indices. I was very interested to find that the
Committee had studied the League of Nations document. [5] I might
have spared you the infliction of my own summary of the document.

Schedule 4. This table is intensely interesting. In my stupidity,
I had to study it for some time before I could see exactly what
column (g) meant and I am not yet quite clear as to column (c). I
should like to see this method applied to a number of other
industries. It is a subject which Wickens and I discussed in a
rather different form when I was in Melbourne in 1924. If you
think it expedient, I should particularly like to hear from
Wickens in further elaboration of this table but I shall not write
to him about it as your letter indicates that I must regard this
report as very confidential and I do not know whether Wickens
knows that you have sent me a copy.

Sect. V. Tariff and International Trade.

Q. 4. I was very interested in the remarks of the Committee on
Labour costs. There can be little doubt that a much larger volume
of reliable information is needed under this head. Has it occurred
to the Committee that the Economic Section of the League of
Nations and/or the International Labour Office might be moved to
provide this information? The British Empire must contribute a
very large share of the funds for the League of Nations and he who
pays the piper ought to be entitled to call at least some of the
tunes. I feel that we ought to make these bodies do a good deal of
work that would be directly advantageous to the solution of some
of our Economic problems. The Economic Section is, of course,
ideally situated to obtain data.

C. Suggestions about the Economic Research recommended by the
Committee.

The proposal to entrust the Council for Scientific & Industrial
Research with the duty of forming an Economic Research Department
seems to me to be the most practical step at the present time,
although one is a little doubtful whether it is entirely fair to
the C.S.I.R. with its very heavy load of Scientific problems, all
needing time before results can be achieved and all needing public
confidence in C.S.I.R. if they are to be proceeded with properly.

An Economic Research Department might lead to the extreme
protectionist becoming hostile to C.S.I.R. However I cannot make a
better suggestion as to where an Economic Research Department
should be based. [6]

I assume it will be your intention to make such a Department small
and inconspicuous, at least initially. One really first class man
with two or three assistants and with your Committee to consult
would be able to do a good deal especially if a considerable
proportion of the work was farmed out, a point to which I will
return.

I feel very strongly that the officer in charge ought to visit
London at a very early stage. For political reasons, it might be
better if he was sent over here before he commenced his duties at
least publicly. I have already mentioned this to you. Such a man
could get the atmosphere here very quickly and I could help him a
good deal. I should suggest a visit to Geneva to make contacts
with the Economic Section of the League of Nations, who could be
useful. I would try to take him over there, if you approved.

As regards farming out some of the work-would it not be possible
to interest the Universities in a number of problems and to
arrange with the Economic faculties that really promising young
men might do post graduate theses upon some of the problems with
the assistance of (a) the teaching staff; (b) the proposed
C.S.I.R. Economic Dept.; (c) the Statistical office.

The C.S.I.R. might pay small fees for such work. These theses
would have no official significance but good young men ought to be
able to do a great deal of the donkey work and to put forward the
facts in an orderly way and thus help towards the clear vision of
the position which must precede sound solutions.

In addition to work in the Australian Universities, it might be
possible to arrange for some similar work to be done at the London
School of Economics or at Cambridge. I expect I could make some
such arrangements. If the subject matter could be described as
having any bearing upon agricultural economics, the Empire
Marketing Board could finance some such research either in the
United Kingdom or on a 50-50 basis in Australian Universities.

This letter has grown to an inordinate length and has occupied a
very large part of my last day of convalescence from the mumps! I
trust you will not find it too boring.

Yours sincerely,
F. L. MCDOUGALL