But the soundness of the principle laid down by Mr. M'Culloch as universally received, and which Mr. Senior accepts (with the qualification affecting raw produce) has not passed unchallenged. For greater clearness I shall repeat that principle here. "The gentlemen," says Mr. M'Culloch, "who consume nothing in their families but what is brought from abroad are quite as good, as useful, and as meritorious subjects as they could be if they consume nothing but what is produced at home." And the reason for this is to be found in his Principles of Political Economy where he says that, Foreign commodities are always paid for by British commodities, therefore, the purchase of Foreign commodities encourages British industry as much as the purchase of British commodities" (Principles of Political Economy, p. 152). The important exception to this theorem arising from the nature of the commodities exported and imported has been already dealt with. Let us examine the vital principle of the theorem. "The capital," says Adam Smith, "which is employed in purchasing in one part of the country in order to sell in another, the produce of the industry of that country, generally replaces by every such operation two distinct capitals, that had both been employed in the agriculture or manufactures of that country, and thereby enables them to continue that employment. When it sends out from the residence of the merchant a certain value of commodities it generally brings back in return at least an equal value of other commodities. When both are the produce of domestic industry it necessarily replaces by every such operation two distinct capitals which had both been employed in supporting productive labour, and thereby enables them to continue that support. The capital which sends Scotch manufactures to London, and brings back English corn and manufactures to Edinburgh, necessarily replaces, by every such operation, two British capitals, which had both been employed in the agriculture or manufactures of Great Britain.
"The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry, replaces too, by every such operation, two distinct capitals; but one of them only is employed in supporting domestic industry. The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital. The other is a Portuguese one. Though the returns, therefore, of the foreign trade of consumption should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country.
"But the returns of the foreign trade of consumption are very seldom so quick as those of the home trade. The returns of the home trade generally come in before the end of the year, and sometimes three or four times in the year. The returns of the foreign trade of consumption seldom come in before the end of the year, and sometimes not till after two or three years. A capital, therefore, employed in the home trade, will sometimes make twelve operations, or be sent out and returned twelve times, before a capital employed in the foreign trade of consumption has made one. If the capitals are equal, therefore, the one will give four and twenty times more encouragement and support to the industry of the country than the other."[322]
If this position of Adam Smith's be tenable, it cannot be true, that the purchase of foreign commodities encourages British industry as much as the purchase of British commodities. In order to have a clear idea of his reasoning it will be useful to repeat some of the leading principles which regulate and explain the nature of capital. 1. Capital is usually defined to be the accumulated stock of the produce of labour. A definition which, if not completely satisfactory, is sufficiently correct for our present purpose. 2. Capital is essential to production. 3. Capital employed in production is wholly consumed in the process of production. "Capital," as Mill, and in fact as every political economist says, "is all consumed; though not by the capitalist. Part is exchanged for tools or machinery, which are worn out by use; part for seed or materials, which are destroyed as such, by by being sown or wrought up, and destroyed altogether by the consumption of the ultimate product. The remainder is paid to labourers, who consume it for their daily wants; or if they, in their turn, save any part, this also is not generally speaking, hoarded, but (through savings banks, benefit clubs, or some other channel) re-employed as capital, and consumed."[323] These principles open the way to the understanding of what Adam Smith means by the replacing of capital.
Capital is consumed in production, and must be replaced. How is it replaced? By the new product. It reappears in the new product; in the production of which it was consumed. Moreover it reappears with a profit to the capitalist, who has employed it for the purposes of production. Let us hear well in mind that the capital consumed in production is consumed, not by the capitalist himself, but in the purchase of various things necessary for production, and in wages. All this capital which is employed and consumed in production, is the net spendable income of the producing nation. And it is spent in food, raiment, lodging, and other necessaries; and of course in luxuries too; and when it is spent, or "consumed," as the word is, the nation, so far from being the poorer, has grown richer; because the capital consumed has reappeared, or, as Adam Smith says, has been replaced by the new product, and, in the usual course, with an increase in the form of profit.
It is plain, then, according to this reasoning, that for every portion of capital consumed in production, a new capital re-appears. If two capitals are consumed in production, two new capitals reappear in their place: if three are consumed, three reappear; and so on. Let us now go back to Adam Smith's words quoted above: "The capital which sends British goods to Portugal, and brings back Portuguese goods to Great Britain, replaces, by every such operation, only one British capital. The other is a Portuguese one. Though the returns, therefore, of the foreign trade of consumption should be as quick as those of the home trade, the capital employed in it will give but one half of the encouragement to the industry or productive labour of the country." Applying this principle to the subject in hand, we find that Absenteeism inflicts an injury upon Ireland, in addition to, and quite distinct from the one, which results from the nature of the commodities sent by Ireland to England. An Irish absentee in London buys British commodities with Irish commodities. In doing so, he replaces two capitals, one British and one Irish; but if he resides in Ireland, and buys Irish commodities with Irish commodities, he replaces two Irish capitals instead of one, as happens, when he resides in England; and thus gives double the encouragement to Irish industry which he would give to it if he resided in England.
"The entire price or gross value of every home-made article constitutes net revenue, net income to British subjects. Not a portion of the value, but the whole value, is resolvable into net income and revenue maintaining British families, and creating and sustaining British markets. Purchase British articles with British articles, and you create two such aggregate values, and two such markets for British industry. Whereas, on the contrary, the entire value of every foreign article imported is net income to the foreigner and sustains foreign markets. Purchase foreign articles with British articles, and you only create one value for your own benefit instead of creating two, and only one market for British industry instead of two. You lose the acquisition of the entire value on one side, which you might have had, as well as on the other, and you lose a market for British industry to the full extent of that gross value."[324]
If the principle laid down by Adam Smith were unsound, that the man who buys British commodities with British commodities replaces two British capitals, whilst he who buys foreign commodities with British commodities replaces but one British capital, Mr. M'Culloch had an inviting opportunity of exposing its unsoundness in the edition of The Wealth of Nations edited by him; and in fact he has written an elaborate note on the passage, but, as it seems to me, without proving the doctrine which it enunciates to be incorrect. Here is the portion of Mr. M'Culloch's footnote which deals with the subject: "Dr. Smith does not say that the importation of foreign commodities has any tendency to force capital abroad; and unless it did this, it is plain that his statement with respect to the effect of changing a home for a foreign trade of consumption, is quite inconsistent with the fundamental principle he has elsewhere established, that industry is always in proportion to the amount of capital." From this, his opening sentence, it would seem that Mr. M'Culloch mistook the force and tendancy of Adam Smith's reasoning, who does not, in the passage annotated by Mr. M'Culloch, advocate the change of a foreign for a home trade of consumption. He only goes to prove that a home trade is more profitable to a nation than a foreign one, in as much as it replaces two home capitals, whilst the foreign trade replaces but one. For a country with vast manufactories, like Great Britain, the home trade would not be at all sufficient, but—as far as it goes—it is double as advantageous as the foreign trade. Adam Smith seeks to prove no more. But Mr. M'Culloch meets the question more directly as follows: "Suppose, for the sake of illustration, that the case put by Dr. Smith actually occurs—that the Scotch manufactures are sent to Portugal; it is obvious, if the same demand continue in London for these manufactures as before they began to be sent abroad, that additional capital and labourers will be required to furnish commodities for both the London and Portuguese markets. In this case, therefore, instead of the industry of the country sustaining any diminution from the export of Scotch manufactures to a foreign country, it would evidently be augmented, and a new field would be discovered for the profitable employment of stock."
As this reasoning is only a continuation of the misconception of Adam Smith's meaning just noticed, a very few words upon it will suffice. If the same demand continue in London for the Scotch manufactures as before they were sent to Portugal, or elsewhere, the Scotch manufacturers will be only too glad to continue to supply London and Portugal too; and the trade of the nation will be expanded; and the capital of the nation will be augmented by the foreign trade, because by that foreign trade British capital is replaced, and with a profit; but surely this does not in any way disturb the principle that the Scotch manufactures sold in London replace, or re-produce two British capitals, whilst those sold in Portugal replace, or reproduce only one.
From these considerations on Absenteeism, it may, I think, be fairly inferred that popular belief regarding its injurious effects is well founded, although misconceptions may be entertained as to the precise way in which the injury occurs.