Principles of Political Economy

by Arthur Latham Perry

Economics as a Science is now free from every taint of Mercantileism also, but it lingers on more or less in half-informed minds, and in the less-experienced nations; and the system itself merged itself three half-centuries ago into another, which is not another, namely, into Protectionism. If nation A must sell more goods to nation B than it takes back in goods, so as to get the coveted "balance" in gold from B, would it not help that cause along to put obstacles in the way of restrictions or prohibitions against the introduction of goods from B to A? Less goods, more gold, argues A. A forgets that the same mental processes are going forward in B's mind towards the same conclusion in relation to A. Now, cogitates A, what kind of goods from B had we better restrict or prohibit? A, by the way, consists of some millions of individuals, some of whom are always on the watch to get their axes ground at the government grindstone. What kind of goods shall we prohibit from B? Why, of course, those kinds which we are now making or growing. We can supply these for ourselves. It does not escape the notice of these makers and growers, that the restriction or prohibition of similar goods from B will raise the price at home of their own goods. Scarce is ever costly. On go the restrictions, ostensibly at first in behalf of an imaginary "balance" in gold, which fragile reason soon passes out of mind in the presence of a very real reason for such restrictions, namely, artificial high prices for certain domestic goods, paid indeed by the entire home community to the comparatively few makers or growers of the goods now "protected," as the current phrase is. Mercantileism has passed over into protectionism. The feeble friends of a "balance" have now become the strong friends of a "monopoly." Personal greed to grow rich at the expense of one's own countrymen thus becomes the single or combined force that puts on and keeps on and piles up the so-called "protective" restrictions and prohibitions.

Scientifically Protectionism is as dead as Mercantileism and Bullionism. There is not an Economist in Christendom, of any international or even national reputation, who now undertakes fairly and squarely by means of analysis and induction, to propound or defend a scheme so contrary to common sense and common honesty as this is, and which, universally applied, would annihilate the commerce of the world. But many of the nations are still tinctured more or less by the old subtlety, and powerful classes within them and specially within the United States, classes grown rich and powerful by what is nothing else than public plunder, are strenuous and successful advocates, not in open discussion and fair debate but by clandestine and corrupting methods and combinations, to maintain in the light of the nineteenth century an outworn and decrepit "something" worthy only of the dark ages. The old and foolish cry for a "balance of trade" is merged now in the United States into the insane and hateful clamor for the destruction of public trade in the behalf of private gain.

This is the sole reason why we must now undertake a careful chapter on Foreign Trade. There is no reason in the nature of things, or in the nature of trade, why Foreign Commerce should be treated of separately from Domestic Commerce. The two are precisely alike in all their principles and in all their results. In one as in the other, in every case and everywhere, there are (1) two persons, each of whom has a Service in his hands to sell against a Service in the hands of the other; (2) two reciprocal estimates, by which each owner concludes that he prefers the Service of the other to his own; (3) two mutual renderings, by which each Service comes into the possession, present or prospective, of the new owner; and (4) two personal satisfactions as the result of all, constituting the ultimate motive and the sole reward of Buying and Selling.

There are two possible differences in certain cases between Domestic and Foreign trade, both superficial and but barely worth the mention here. Foreign countries engaged in trade may be more remote from each other than places exchanging products within the same country. The distances, however, between Bangor selling ice to New Orleans for sugar, and Boston selling boots and shoes to San Francisco for fruits and wine, are much greater than those between Liverpool and St. Petersburg, or those between Stockholm and Palermo; so that, it may be said in general, that the trade between all the European countries confronts less distances, and presumably less costs of transportation, than the trade within the United States. And another thing is to be said in this connection: Foreign trade as a general rule is conducted by water-routes, and domestic trade under the same rule is carried on by land-routes; and, therefore, the costs of transportation by the latter are much more expensive.

The other possible difference is more considerable, and considerably more in favor of Foreign as compared with Domestic trade. We have learned perfectly already, and the point is fundamental, that all trade proceeds on the sole basis of a relative Diversity of Advantage as between the two parties exchanging. This relative superiority of each exchanger over the other at different points depends in domestic trade partly upon divergent natural gifts to individuals, partly upon their concentration of mind or muscle or both on a single class of efforts each, and partly upon the use and familiarity in the use of the gratuitous helps of Nature aiding that class of efforts. But in foreign trade there are commonly some additional grounds of Diversity, since the various countries of the earth have received from the hands of God a diversity of original gifts, in climate, soil, natural productions, position, and opportunity. And besides these original international differences, there has been developed of course in the history of the inhabitants of these countries a diversity of tastes, aptitudes, habits, strength, intelligence, and skill to avail themselves of the forces of Nature around them. International trade, accordingly, is somewhat more broadly and firmly based than the home trade can be, inasmuch as these international differences are apt to be more inherent and less flexible than domestic differences between individuals; it is on these diversities, original, traditional and acquired, that international commerce hangs; it could never have come into existence without them; and it would cease instantly and completely were they to fade out. Men engage in foreign trade,—not for the pleasure of it,—but for the sake of the mutual gain derivable to both parties; they desist from it so soon as that mutual gain disappears; and there is no gain in any series of exchanges, unless each party has a superior power in producing that which is rendered, compared with his power in producing that which is received.

With these few preliminaries, we pass now, in the first place, to unfold in order the common and universal principles of foreign trade. For the sake of illustrating these, we will now take a simple supposed case, a trade between England and France in cottons and silks, and follow it through clearly to the end.

1. When will it be mutually profitable for England, that is, for certain English merchants, to send cottons to France to buy silks with, and for France, that is, for certain French traders, to send silks to England to buy cottons with? Money and all other commodities except these two, silks and cottons, are wholly out of the question now and should be wholly out of our minds the while, though for simplicity's sake we shall use the denominations of money for comparing the respective efforts, translating pounds and francs into dollars. The answer is easy: the trade will be mutually profitable, when efforts bestowed in France upon silks will procure through exchange with England more of cottons than the same amount of efforts bestowed in France upon cottons will produce of cottons directly; and then, when efforts bestowed upon cottons in England will procure more of silks through exchange with France than the same amount of efforts bestowed in England upon silks will produce of silks directly. It is not a question of the absolute cost of either commodity to the parties producing it, or of a comparison of those absolute costs at all, but a question of the relative cost of that produced in either country compared with what would be the cost of the other commodity were it to be produced in that country. So long as there is a difference of relative efficiency in the production of the two commodities in the two countries, so long, setting aside the costs of carriage, may there be a profitable exchange of the two. A demand in each country for the product of the other is of course presupposed in the illustration.

Suppose now, that Efforts in England on certain cottons be gauged at $100, and that Efforts in France on certain silks be gauged at $80, and that these finished commodities then exchange even-handed against each other: is that a losing trade for England and a gainful trade for France? That is more than we can tell yet. That depends upon the further decisive question, whether the Efforts gauged at $100 if expended in England in the manufacture of silks will procure as many and as good silks as the same obtain in exchange with France; and whether the Efforts gauged at $80 if expended in France on cottons directly will secure as many of them as if expended on silks directly and then traded off for cottons. In effect the Frenchmen ask, Can we get more and better cottons by working on silks and then trading them off for English cottons than we can get by equivalent Efforts in working on cottons at home? Likewise the Englishmen ask, Can we get more and better silks by working on cottons at home and then trading with France for silks than we can get by trying to make silks directly? France by climate and soil and habitudes is better adapted to silks than cottons: England by virtue of the same is better adapted to cottons than silks.

2. How does the Diversity of relative Advantage practically work in foreign trade? Let us suppose that while the cottons cost $100 in England, it would cost $120 to manufacture there as good silks as can be made in France for $80; and that while the silks cost but $80 in France, it would cost $96 to make cottons there as good as the English can make for $100. On this supposition France can make both the silks and the cottons at a cheaper absolute cost than England can. What of it? Does that destroy the motive and the gain of an exchange between the countries in these two articles? Let us see. By an exchange with England, France gets for $80 in silks, cottons which would otherwise cost her $96, which is a handsome gain of 20%; while England gets for cottons costing her $100 silks which would otherwise have cost her $120, which is another handsome gain of 20%. Although France can make each commodity for less absolute money than England can make either of them, there is a Diversity of relative Advantage; and, therefore, there might be in this case, as there is actually in many such cases, a very profitable trade. The efficiency of France in making silks relatively to the efficiency of England in making silks is in the ratio of 80 to 120, namely, a difference of 50%; while the aptitudes of France in making cottons relatively to that of England in making the same is only in the ratio of 96 to 100, namely, a difference of 4¹⁄₆%. So long as England offers in cottons a good market for French silks, how utter the folly and large the loss of France in going to work to make cottons!

In the majority of cases, doubtless, foreign trade takes place in articles, in the production of one of which each of the respective countries has an absolute advantage over the other; but an every way advantageous trade may be carried on in commodities, in the production of both of which one nation shall have an absolute superiority over the other, provided only that this superiority be relatively diverse in the two commodities, as has just been shown. This is an effectual answer to the ignorant clamor of some, we take it, who make objection to importing articles which might be made at home for the same sum of money as foreigners expend in making them; admitted, that they might be so made, does it follow that the country importing them would get them as cheaply by making them itself? By no means does that follow. Let no nation, then, be in haste to drop a trade, because it thinks it can make the goods received in exchange as cheaply as the other nation makes them, so long as it has an advantage absolute or relative over the other in making the goods rendered in exchange; and when that advantage ceases, it may be sure, that the trade will drop of itself; because it always takes motives to make the mare go.