In the struggle for Free Trade, as on other points, Smith was forestalled by the Physiocrats. But again has he shown himself superior in the breadth of his outlook. Physiocratic Liberalism was the result of their interest in agriculture, foreign trade being of quite secondary importance. Smith, on the other hand, considered foreign trade in itself advantageous, provided it began at the right moment and developed spontaneously.[230] Although his point of view is far superior to that of the Physiocrats, even Smith failed to give us a satisfactory theory. It was reserved for Ricardo and his successors, particularly John Stuart Mill, to find a solid scientific basis for the theory of international trade. The doctrine of the Scotch economist is somewhat lame. But the hesitancy of a great writer is often interesting, and some of his arguments deserve to be recalled.
Already in our review of his theory of money we have become familiar with Smith’s criticism of the balance of trade theory. But the balance of trade theory is not the whole of Protection, and we find in Smith something more than its mere refutation. In the first place, we have a criticism of Protectionism in general considered in its Mercantilistic aspect, followed by an attempt to demonstrate the positive advantages of international commerce.
The first criticism that he offers might be summed up in the well-known phrase: “Industry is limited by capital.” “The general industry of the society can never exceed what the capital of the society can employ.” But Protection, perhaps, increases the quantity of capital? No, “for it can only divert a part of it into a direction into which it might not otherwise have gone.” But the direction spontaneously given to their capital by individuals is the most favourable to a country’s industry. Has not Smith demonstrated this already? Protection, consequently, is not merely useless; it may even prove injurious.[231]
The argument does not appear decisive, especially when we recall the criticism of Smith’s optimism given above. To borrow an expression of M. Pareto, it is the maximum of ophelimity and not the maximum of utility that is realised by the capitalists under the action of personal interest.
A second and a more striking argument shows the absurdity of manufacturing a commodity in this country at a great expense, when a similar commodity might be supplied by a foreign country at less cost. “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.… What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”[232] It is foolish to grow grapes in hothouses in Scotland when better and cheaper can be got from Portugal or France. Everybody is convinced of that. But a similar stupidity prevails when we are hindered by tariffs from profiting by the natural advantages which foreign nations possess as compared with ourselves. All “the mean rapacity and the monopolizing spirit of merchants and manufacturers”[233] was necessary to blind men to their true interests on this point. According to Smith, there exists a natural distribution of products among various countries, resulting in an advantage to all of them. It is Protection that hinders our sharing in the advantages. This is the principle known as the “territorial division of labour.”
But the argument is inconclusive, for capital and labour do not circulate from one nation to another in the same way as they do within a country. The distribution of industry among the various nations is regulated, not by absolute cost of production, but by relative cost of production. The credit of having shown this belongs to Ricardo.
Smith’s demonstration of the inconveniences of Protection is incomplete, and we feel the incompleteness all the more when he attempts to prove the advantages of international trade.
The real and decisive argument in favour of free exchange turns upon a consideration of the consumer’s interests. Increased utilities placed at his disposal mark the superiority of free exchange, or as John Stuart Mill puts it, “the only direct advantage of foreign commerce consists in the imports.”[234] With Smith this is the point of view developed least of all. True, he wrote that “consumption is the sole end and purpose of all production. But, in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer.”[235] This criticism, however, was placed at the end of his examination of the Mercantilist system in chap. 8 of Book IV. It is not found in the first edition of the work, and was only added in the third.[236]
It is the point of view of the producer that Smith invariably adopts when attempting to illustrate the advantages of international trade.[237]
Just now foreign trade seemed to afford a means of disposing of a country’s surplus products, and this extension of the market, it was argued, would lead to further division of labour and increased productivity.[238] But one is led to ask why, instead of producing the superfluous goods which it must export, it does not produce those things which it is obliged to import.