ESSAYS ON SOME UNSETTLED QUESTIONS OF POLITICAL ECONOMY
by
JOHN STUART MILL
1844
PREFACE.
Of these Essays, which were written in 1829 and 1830, the fifth alone
has been previously printed. The other four have hitherto remained in
manuscript, because, during the temporary suspension of public interest
in the species of discussion to which they belong, there was no
inducement to their publication.
They are now published (with a few merely verbal alterations) under the
impression, that the controversies excited by Colonel Torrens' _Budget_
have again called the attention of political economists to the
discussions of the abstract science: and from the additional
consideration, that the first paper relates expressly to the point upon
which the question at issue between Colonel Torrens and his antagonists
has principally turned.
From that paper it will be seen that opinions identical in principle
with those promulgated by Colonel Torrens (there would probably be
considerable difference as to the extent of their practical application)
have been held by the writer for more than fifteen years: although he
cannot claim to himself the original conception, but only the
elaboration, of the fundamental doctrine of the Essay.
A prejudice appears to exist in many quarters against the theory in
question, on the supposition of its being opposed to one of the most
valuable results of modern political philosophy, the doctrine of Freedom
of Trade between nation and nation. The opinions now laid before the
reader are presented as corollaries necessarily following from the
principles upon which Free Trade itself rests. The writer has also been
careful to point out, that from these opinions no justification can be
derived for any _protecting_ duty, or other preference given to domestic
over foreign industry. But in regard to those duties on foreign
commodities which do not operate as protection, but are maintained
solely for revenue, and which do not touch either the necessaries of
life or the materials and instruments of production, it is his opinion
that any relaxation of such duties, beyond what may be required by the
interest of the revenue itself, should in general be made contingent
upon the adoption of some corresponding degree of freedom of trade with
this country, by the nation from which the commodities are imported.
CONTENTS.
ESSAY I.
Of the Laws of Interchange between Nations; and the Distribution of the
Gains of Commerce among the Countries of the Commercial World
ESSAY II.
Of the Influence of Consumption upon Production
ESSAY III.
On the Words Productive and Unproductive
ESSAY IV.
On Profits, and Interest
ESSAY V.
On the Definition of Political Economy; and on the Method of
Investigation proper to it
ESSAY I.
OF THE LAWS OF INTERCHANGE BETWEEN NATIONS; AND THE DISTRIBUTION OF THE
GAINS OF COMMERCE AMONG THE COUNTRIES OF THE COMMERCIAL WORLD.
Of the truths with which political economy has been enriched by Mr.
Ricardo, none has contributed more to give to that branch of knowledge
the comparatively precise and scientific character which it at present
bears, than the more accurate analysis which he performed of the nature
of the advantage which nations derive from a mutual interchange of their
productions. Previously to his time, the benefits of foreign trade were
deemed, even by the most philosophical enquirers, to consist in
affording a vent for surplus produce, or in enabling a portion of the
national capital to replace itself with a profit. The futility of the
theory implied in these and similar phrases, was an obvious consequence
from the speculations of writers even anterior to Mr. Ricardo. But it
was he who first, in the chapter on Foreign Trade, of his immortal
_Principles of Political Economy and Taxation_, substituted for the
former vague and unscientific, if not positively false, conceptions with
regard to the advantage of trade, a philosophical exposition which
explains, with strict precision, the nature of that advantage, and
affords an accurate measure of its amount.
He shewed, that the advantage of an interchange of commodities between
nations consists simply and solely in this, that it enables each to
obtain, with a given amount of labour and capital, a greater quantity of
all commodities taken together. This it accomplishes by enabling each,
with a quantity of one commodity which has cost it so much labour and
capital, to purchase a quantity of another commodity which, if produced
at home, would have required labour and capital to a greater amount.
To render the importation of an article more advantageous than its
production, it is not necessary that the foreign country should be able
to produce it with less labour and capital than ourselves. We may even
have a positive advantage in its production: but, if we are so far
favoured by circumstances as to have a still greater positive advantage
in the production of some other article which is in demand in the
foreign country, we may be able to obtain a greater return to our labour
and capital by employing none of it in producing the article in which
our advantage is least, but devoting it all to the production of that in
which our advantage is greatest, and giving this to the foreign country
in exchange for the other. It is not a difference in the _absolute_ cost
of production, which determines the interchange, but a difference in the
_comparative_ cost. It may be to our advantage to procure iron from
Sweden in exchange for cottons, even although the mines of England as
well as her manufactories should be more productive than those of
Sweden; for if we have an advantage of one-half in cottons, and only an
advantage of a quarter in iron, and could sell our cottons to Sweden at
the price which Sweden must pay for them if she produced them herself,
we should obtain our iron with an advantage of one-half, as well as our
cottons. We may often, by trading with foreigners, obtain their
commodities at a smaller expense of labour and capital than they cost
to the foreigners themselves. The bargain is still advantageous to the
foreigner, because the commodity which he receives in exchange, though
it has cost us less, would have cost him more. As often as a country
possesses two commodities, one of which it can produce with less labour,
comparatively to what it would cost in a foreign country, than the
other; so often it is the interest of the country to export the first
mentioned commodity and to import the second; even though it might be
able to produce both the one and the other at a less expense of labour
than the foreign country can produce them, but not less in the same
degree; or might be unable to produce either except at a greater
expense, but not greater in the same degree.
On the contrary, if it produces both commodities with greater facility,
or both with greater difficulty, and greater in exactly the same degree,
there will be no motive to interchange.
"If the cloth and the corn, each of which required 100 days' labour in
Poland, required each 150 days' labour in England; it would follow, that
the cloth of 150 days' labour in England, if sent to Poland, would be
equal to the cloth of 100 days' labour in Poland: if exchanged for corn,
therefore, it would exchange for the corn of only 100 days' labour. But
the corn of 100 days' labour in Poland, was supposed to be the same
quantity with that of 150 days' labour in England. With 150 days' labour
in cloth, therefore, England would only get as much corn in Poland as
she could raise with 150 days' labour at home; and she would, in
importing it, have the cost of carriage besides. In these circumstances
no exchange would take place.
"If, on the other hand, while the cloth produced with 100 days' labour
in Poland was produced with 150 days' labour in England, the corn which
was produced in Poland with 100 days' labour could not be produced in
England with less than 200 days' labour; an adequate motive to exchange
would immediately arise. With a quantity of cloth which England produced
with 150 days' labour, she would be able to purchase as much corn in
Poland as was there produced with 100 days' labour; but the quantity,
which was there produced with 100 days' labour, would be as great as the
quantity produced in England with 200 days' labour.
"The power of Poland would be reciprocal. With a quantity of corn which
cost her 100 days' labour, equal to the quantity produced in England by
200 days' labour, she could in the supposed case purchase in England the
produce of 200 days' labour in cloth." But "the produce of 150 days'
labour in England in the article of cloth would be equal to the produce
of 100 days' labour in Poland [1]."
The remainder of what Mr. Ricardo has done for the philosophical
exposition of the principles of foreign trade, is to shew, that the
truth of the propositions now recapitulated is not affected by the
introduction of money as a medium of exchange; the precious metals
always tending to distribute themselves in such a manner throughout the
commercial world, that every country shall import all that it would have
imported, and export all that it would have exported, if exchanges had
taken place, as in the example above supposed, by barter.
To this branch of the subject we shall, in the sequel of this essay,
return. At present it will be more convenient that we should continue to
suppose, that exchanges take place by the direct trucking of one
commodity against another.
It is established, that the advantage which two countries derive from
trading with each other, results from the more advantageous employment
which thence arises, of the labour and capital--for shortness let us say
the labour--of both jointly. The circumstances are such, that if each
country confines itself to the production of one commodity, there is a
greater total return to the labour of both together; and this increase
of produce forms the whole of what the two countries taken together gain
by the trade.
It is the purpose of the present essay to inquire, in what proportion
the increase of produce, arising from the saving of labour, is divided
between the two countries.
This question was not entered into by Mr. Ricardo, whose attention was
engrossed by far more important questions, and who, having a science to
create, had not time, or room, to occupy himself with much more than the
leading principles. When he had done enough to enable any one who came
after him, and who took the necessary pains, to do all the rest, he was
satisfied. He very rarely followed out the principles of the science
into the ramifications of their consequences. But we believe that to no
one, who has thoroughly entered into the spirit of his discoveries, will
even the minutiae of the science offer any difficulty but that which is
constituted by the necessity of patience and circumspection in tracing
principles to their results.
Mr. Ricardo, while intending to go no further into the question of the
advantage of foreign trade than to show what it consisted of, and under
what circumstances it arose, unguardedly expressed himself as if each of
the two countries making the exchange separately gained the whole of the
difference between the comparative costs of the two commodities in one
country and in the other. But, the whole gain of both countries
together, consisting in the saving of labour; and the saving of labour
being exactly equal to the difference between the costs, in the two
countries, of the one commodity as compared with the other; the two
countries taken together gain no more than this difference: and if
either country gains the whole of it, the other country derives no
advantage from the trade.
Suppose, for example, that 10 yards of broad cloth cost in England as
much labour as 15 yards of linen, and in Germany as much as 20. If
England sends 10 yards of broad cloth to Germany, and is able to
exchange them for linen according to the German cost of production, she
will get 20 yards of linen, with a quantity of labour with which she
could not have produced more than 15; and will gain, therefore, 5 yards
on every 15, or 33-1/3 per cent. But in this case Germany would obtain
only 10 yards of cloth for 20 of linen. Now, 10 yards of cloth cost
exactly the same quantity of labour in Germany as 20 of linen; Germany,
therefore, derives no advantage from the trade, more than she would
possess if it did not exist.
So, on the other hand, if Germany sends 15 yards of linen to England,
and finding the relative value of the two articles in that country
determined by the English costs of production, is enabled to purchase
with 35 yards of linen 10 yards of cloth; Germany now gains 5 yards,
just as England did before,--for with 15 yards of linen she purchases 10
yards of cloth, when to produce these 10 yards she must have employed as
much labour as would have enabled her to produce 20 yards of linen. But
in this case England would gain nothing: she would only obtain, for her
10 yards of cloth, 15 yards of linen, which is exactly the comparative
cost at which she could have produced them.
This, which was not an error, but a mere oversight of Mr. Ricardo,
arising from his having left the question of the division of the
advantage entirely unnoticed, was first corrected in the third edition
of Mr. Mill's _Elements of Political Economy_. It can hardly, however,
be said that Mr. Mill has prosecuted the inquiry any further; which,
indeed, would have been quite as inconsistent with the nature of his
plan as of Mr. Ricardo's.
1. When the trade is established between the two countries, the two
commodities will exchange for each other at the same rate of interchange
in both countries--bating the cost of carriage, of which, for the present,
it will be more convenient to omit the consideration. Supposing, therefore,
for the sake of argument, that the carriage of the commodities from one
country to another could be effected without labour and without cost, no
sooner would the trade be opened than, it is self-evident, the value of
the two commodities, estimated in each other, would come to a level in
both countries.
If we knew what this level would be, we should know in what proportion
the two countries would share the advantage of the trade.
When each country produced both commodities for itself, 10 yards of
broad cloth exchanged for 15 yards of linen in England, and for 20 in
Germany. They will now exchange for the same number of yards of linen in
both. For what number? If for 15 yards, England will be just as she was,
and Germany will gain all. If for 20 yards, Germany will be as before,
and England will derive the whole of the benefit. If for any number
intermediate between 15 and 20, the advantage will be shared between the
two countries. If, for example, 10 yards of cloth exchange for 18 of
linen, England will gain an advantage of 3 yards on every 15, Germany
will save 2 out of every 20.
The problem is, what are the causes which determine the proportion in
which the cloth of England and the linen of Germany will exchange for
each other?
This, therefore, is a question concerning exchangeable value. There must
be something which determines how much of one commodity another
commodity will purchase; and there is no reason to suppose that the law
of exchangeable value is more difficult of ascertainment in this case
than in other cases.
The law, however, cannot be precisely the same as in the common cases.
When two articles are produced in the immediate vicinity of one another,
so that, without expatriating himself, or moving to a distance, a
capitalist has the choice of producing one or the other, the quantities
of the two articles which will exchange for each other will be, on the
average, those which are produced by equal quantities of labour. But
this cannot be applied to the case where the two articles are produced
in two different countries; because men do not usually leave their
country, or even send their capital abroad, for the sake of those small
differences of profit which are sufficient to determine their choice of
a business, or of an investment, in their own country and neighbourhood.
The principle, that value is proportional to cost of production, being
consequently inapplicable, we must revert to a principle anterior to
that of cost of production, and from which this last flows as a
consequence,--namely, the principle of demand and supply.
In order to apply this principle, with any advantage, to the solution of
the question which now occupies us, the principle itself, and the idea
attached to the term demand, must be conceived with a precision, which
the loose manner in which the words are used generally prevents.
It is well known that the quantity of any commodity which can be
disposed of, varies with the price. The higher the price, the fewer will
be the purchasers, and the smaller the quantity sold. The lower the
price, the greater will in general be the number of purchasers, and the
greater the quantity disposed of. This is true of almost all commodities
whatever: though of some commodities, to diminish the consumption in any
given degree would require a much greater rise of price than of others.
Whatever be the commodity--the supply in any market being given, there
is some price at which the whole of the supply exactly will find
purchasers, and no more. That, whatever it be, is the price at which, by
the effect of competition, the commodity will be sold. If the price be
higher, the whole of the supply will not be disposed of, and the
sellers, by their competition, will bring down the price. If the price
be lower, there will be found purchasers for a larger supply, and the
competition of these purchasers will raise the price.
This, then, is what we mean, when we say that price, or exchangeable
value, depends on demand and supply. We should express the principle
more accurately, if we were to say, the price so regulates itself that
the demand shall be exactly sufficient to carry off the supply.
Let us now apply the principle of demand and supply, thus understood, to
the interchange of broadcloth and linen between England and Germany.
As exchangeable value in this case, as in every other, is proverbially
fluctuating, it does not matter what we suppose it to be when we begin;
we shall soon see whether there be any fixed point about which it
oscillates--which it has a tendency always to approach to, and to remain
at.
Let us suppose, then, that by the effect of what Adam Smith calls the
higgling of the market, 10 yards of cloth, in both countries, exchange
for 17 yards of linen.
The demand for a commodity, that is, the quantity of it which can find a
purchaser, varies, as we have before remarked, according to the price.
In Germany, the price of 10 yards of cloth is now 17 yards of linen; or
whatever quantity of money is equivalent in Germany to 17 yards of
linen. Now, that being the price, there is some particular number of
yards of cloth, which will be in demand, or will find purchasers, at
that price. There is some given quantity of cloth, more than which could
not be disposed of at that price,--less than which, at that price, would
not fully satisfy the demand. Let us suppose this quantity to be, 1000
times 10 yards.
Let us now turn our attention to England. There, the price of 17 yards
of linen is 10 yards of cloth, or whatever quantity of money is
equivalent in England to 10 yards of cloth. There is some particular
number of yards of linen, which, at that price, will exactly satisfy the
demand, and no more. Let us suppose that this number is 1000 times 17
yards.
As 17 yards of linen are to 30 yards of cloth, so are 1000 times 17
yards to 1000 times 10 yards. At the existing exchangeable value, the
linen which England requires, will exactly pay for the quantity of cloth
which, on the same terms of interchange, Germany requires. The demand on
each side is precisely sufficient to carry off the supply on the other.
The conditions required by the principle of demand and supply are
fulfilled, and the two commodities will continue to be interchanged, as
we supposed them to be, in the ratio of 17 yards of linen for 10 yards
of cloth.
But our supposition might have been different. Suppose that, at the
assumed rate of interchange, England had been disposed to consume no
greater quantity of linen than 800 times 17 yards; it is evident that,
at the rate supposed, this would not have sufficed to pay for the 1000
times 10 yards of cloth, which we have supposed Germany to require at
the assumed value. Germany would be able to procure no more than 800
times 10 yards, at that price. To procure the remaining 200, which she
would have no means of doing but by bidding higher for them, she would
offer more than 17 yards of linen in exchange for 10 yards of cloth; let
us suppose her to offer 18. At that price, perhaps, England would be
inclined to purchase a greater quantity of linen. She could consume,
possibly, at that price, 900 times 18 yards. On the other hand, cloth
having risen in price, the demand of Germany for it would, probably,
have diminished. If, instead of 1000 times 10 yards, she is now
contented with 900 times ten yards, these will exactly pay for the 900
times 18 yards of linen which England is willing to take at the altered
price: the demand on each side will again exactly suffice to take off
the corresponding supply; and 10 yards for 18 will be the rate at which,
in both countries, cloth will exchange for linen.
The converse of all this would have happened if instead of 800 times 17
yards, we had supposed that England, at the rate of 10 for 17, would
have taken 1200 times 17 yards of linen. In this case, it is England
whose demand is not fully supplied; it is England who, by bidding for
more linen, will alter the rate of interchange to her own disadvantage;
and 10 yards of cloth will fall, in both countries, below the value of
17 yards of linen. By this fall of cloth, or what is the same thing,
this rise of linen, the demand of Germany for cloth will increase, and
the demand of England for linen will diminish, till the rate of
interchange has so adjusted itself that the cloth and the linen will
exactly pay for another; and when once this point is attained, values
will remain as they are.
It may be considered, therefore, as established, that when two countries
trade together in two commodities, the exchangeable value of these
commodities relatively to each other will adjust itself to the
inclinations and circumstances of the consumers on both sides, in such
manner that the quantities required by each country, of the article
which it imports from its neighbour, shall be exactly sufficient to pay
for one another. As the inclinations and circumstances of consumers
cannot be reduced to any rule, so neither can the proportions in which
the two commodities will be interchanged. We know that the limits within
which the variation is confined are the ratio between their costs of
production in the one country, and the ratio between their costs of
production in the other. Ten yards of cloth cannot exchange for more
than 20 yards of linen, nor for less than 15. But they may exchange for
any intermediate number. The ratios, therefore, in which the advantage
of the trade may be divided between the two nations, are various. The
circumstances on which the proportionate share of each country more
remotely depends, admit only of a very general indication.
It is even possible to conceive an extreme case, in which the whole of
the advantage resulting from the interchange would be reaped by one
party, the other country gaining nothing at all. There is no absurdity
in the hypothesis, that of some given commodity a certain quantity is
all that is wanted at any price, and that when that quantity is
obtained, no fall in the exchangeable value would induce other consumers
to come forward, or those who are already supplied to take more. Let us
suppose that this is the case in Germany with cloth. Before her trade
with England commenced, when 10 yards of cloth cost her as much labour
as 20 yards of linen, she nevertheless consumed as much cloth as she
wanted under any circumstances, and if she could obtain it at the rate
of 10 yards of cloth for 15 of linen, she would not consume more. Let
this fixed quantity be 1000 times 10 yards. At the rate, however, of 10
for 20, England would want more linen than would be equivalent to this
quantity of cloth. She would consequently offer a higher value for
linen; or, what is the same thing, she would offer her cloth at a
cheaper rate. But as by no lowering of the value could she prevail on
Germany to take a greater quantity of cloth, there would be no limit to
the rise of linen, or fall of cloth, until the demand of England for
linen was reduced by the rise of its value, to the quantity which one
thousand times ten yards of cloth would purchase. It might be, that to
produce this diminution of the demand, a less fall would not suffice,
than one which would make 10 yards of cloth exchange for 15 of linen.
Germany would then gain the whole of the advantage, and England would be
exactly as she was before the trade commenced. It would be for the
interest, however, of Germany herself, to keep her linen a little below
the value at which it could be produced in England, in order to keep
herself from being supplanted by the home producer. England, therefore,
would always benefit in some degree by the existence of the trade,
though it might be in a very trifling one.
But in general there will not be this extreme inequality in the degree
in which the demand in the two countries varies with variations in the
price. The advantage will probably be divided equally, oftener than in
any one unequal ratio that can be named; though the division will be
much oftener, on the whole, unequal than equal.
2. We shall now examine whether the same law of interchange, which we
have shown to apply upon the supposition of barter, holds good after the
introduction of money. Mr. Ricardo found that his more general
proposition stood this test; and as the proposition which we have just
demonstrated is only a further developement of his principle, we shall
probably find that it suffers a little, by a mere change in the mode
(for it is no more) in which one commodity is exchanged against another.
We may at first make whatever supposition we will with respect to the
value of money. Let us suppose, therefore, that before the opening of
the trade, the price of cloth is the same in both countries, namely, six
shillings per yard [2]. As 10 yards of cloth were supposed to exchange in
England for 5 yards of linen, in Germany for 20, we must suppose that
linen is sold in England at four shillings per yard, in Germany at
three. Cost of carriage and importer's profit are left as before, out of
consideration.
In this state of prices, cloth, it is evident, cannot yet be exported
from England into Germany. But linen can be imported from Germany into
England. It will be so, and, in the first instance, the linen will be
paid for in money.
The efflux of money from England, and its influx into Germany, will
raise money prices in the latter country, and lower them in the former.
Linen will rise in Germany above three shillings per yard, and cloth
above six shillings. Linen in England being imported from Germany, will
(since cost of carriage is not reckoned) sink to the same price as in
that country, while cloth will fall below six shillings. As soon as the
price of cloth is lower in England than in Germany, it will begin to be
exported, and the price of cloth in Germany will fall to what it is in
England. As long As the cloth exported does not suffice to pay for the
linen imported, money will continue to flow from England into Germany,
and prices generally will continue to fall in England, and rise in
Germany. By the fall, however, of cloth in England, cloth will fall in
Germany also, and the demand for it will increase. By the rise of linen
in Germany, linen must rise in England also, and the demand for it will
diminish. Although the increased exportation of cloth takes place at a
lower price, and the diminished importation of linen at a higher, yet
the total money value of the exportation would probably increase, that
of the importation diminish. As cloth fell in price and linen rose,
there would be some particular price of both articles at-which the cloth
exported, and the linen imported, would exactly pay for each other. At
this point prices would remain, because money would then cease to move
out of England into Germany. What this point might be, would entirely
depend upon the circumstances and inclinations of the purchasers on both
sides. If the fall of cloth did not much increase the demand for it in
Germany, and the rise of linen did not diminish very rapidly the demand
for it in England, much money must pass before the equilibrium is
restored; cloth would fall very much, and linen would rise, until
England, perhaps, had to pay nearly as much for it as when she produced
it for herself. But if, on the contrary, the fall of cloth caused a very
rapid increase of the demand for it in Germany, and the rise of linen in
Germany reduced very rapidly the demand in England from what it was
under the influence of the first cheapness produced by the opening of
the trade; the cloth would very soon suffice to pay for the linen,
little money would pass between the two countries, and England would
derive a large portion of the benefit of the trade. We have thus arrived
at precisely the same conclusion, in supposing the employment of money,
which we found to hold under the supposition of barter.
In what shape the benefit accrues to the two nations from the trade, is
clear enough. Germany, before the commencement of the trade, paid six
shillings per yard for broad-cloth. She now obtains it at a lower price.
This, however, is not the whole of her advantage. As the money prices of
all her other commodities have risen, the money incomes of all her
producers have increased. This is no advantage to them in buying from
each other; because the price of what they buy has risen in the same
ratio with their means of paying for it: but it is an advantage to them
in buying any thing which has not risen; and still more, any thing which
has fallen. They therefore benefit as consumers of cloth, not merely to
the extent to which cloth has fallen, but also to the extent to which
other prices have risen. Suppose that this is one-tenth. The same
proportion of their money incomes as before, will suffice to supply
their other wants, and the remainder, being increased one-tenth in
amount, will enable them to purchase one-tenth more cloth than before,
even though cloth had not fallen. But it has fallen: so that they are
doubly gainers. If they do not choose to increase their consumption of
cloth, this does not prevent them from being gainers. They purchase the
same quantity with less money, and have more to expend upon their other
wants.
In England, on the contrary, general money-prices have fallen. Linen,
however, has fallen more than the rest; having been lowered in price, by
importation from a country where it was cheaper, whereas the others have
fallen only from the consequent efflux of money. Notwithstanding,
therefore, the general fall of money-prices, the English producers will
be exactly as they were in all other respects, while they will gain as
purchasers of linen.
The greater the efflux of money required to restore the equilibrium, the
greater will be the gain of Germany; both by the fall of cloth, and by
the rise of her general prices. The less the efflux of money requisite,
the greater will be the gain of England; because the price of linen will
continue lower, and her general prices will not be reduced so much. It
must not, however, be imagined that high money-prices are a good, and
low money-prices an evil, in themselves. But the higher the general
money-prices in any country, the greater will be that country's means
of purchasing those commodities which, being imported from abroad, are
independent of the causes which keep prices high at home.
3. We have hitherto supposed the carriage to be performed without labour
or expense. If we abandon this supposition, we must correct the
statement of the case in a slight degree. The prices of the two articles
will no longer, when the trade is opened, be the same in both countries,
nor will the articles exchange for one another at the same rate in both.
Ten yards of cloth will purchase in Germany a quantity of linen greater
than in England by a per-centage equal to the entire cost of conveyance
both of the cloth to Germany and of the linen to England. The
money-price of linen will be higher in England than in Germany, by the
cost of carriage of the linen. The money-price of cloth will be higher
in Germany than in England, by the cost of carriage of the cloth.
The expense of the carriage is evidently a deduction _pro tanto_ from
the saving of labour produced by the establishment of the trade. The two
countries together, therefore, have their gains by the trade diminished,
by the amount of the cost of carriage of both commodities. But here the
question arises, which of the two countries bears this deduction, or in
what proportion it is divided between them.
At the first inspection it would appear that each country bears its own
cost of carriage, that is, that each country pays the carriage of the
commodity which it imports. Upon this supposition, each country would
gain whatever share of the joint saving of labour would otherwise fall
to its lot, _minus_ the cost of bringing from the other country the
commodity which it imports. This solution is rendered plausible by the
circumstance just now mentioned, that the price of the commodity will be
higher in the country which imports it, than in the country which
exports it, by the amount of the cost of carriage. If linen is sold in
England at a higher price than in Germany, by a per-centage equal to the
cost of carriage of the linen, it appears obvious that England pays for
the carriage of the linen, and Germany, by parity of reason, for that of
the cloth.
But if we apply to these questions the principles already explained, we
shall see that this is not by any means a universal law: the fact may
correspond with it, or it may not.
For suppose that the prices have adjusted themselves, no matter how, and
that the imports and exports balance one another, each commodity, of
course, being dearer by the cost of carriage, in the country which
imports than in that which exports it: and suppose now that the cost of
carriage, both of the one and of the other, were suddenly and
miraculously annihilated, and that the commodities could pass from
country to country without expense. If each country bore its own cost of
carriage before, each country will save its own cost of carriage now.
Cloth, in Germany, will in that case fall exactly to what it is in
England; linen in England, to what it is in Germany.
Now this fall of price, supposing it to happen, will probably affect the
demand on both sides; and it will either affect it alike in both
countries, or it will affect it unequally. It will affect it alike, if
the fall of price does not affect the demand at all, or if it affects it
equally in both countries. If either of these results should take place,
the cloth and the linen would continue to balance each other as before:
no money would pass from one country to the other; prices in both would
continue at the point to which they had fallen, and each country would
exactly save the cost of carriage on the commodity which it imports from
the other.
But the result might be, that the fall of price might not have an effect
exactly equal, on the demand in the two countries. Suppose, for
instance, that the fall of cloth in Germany owing to the saving of the
cost of carriage, did not increase the demand for cloth in Germany; but
that the fall of linen in England from a like cause, did increase the
demand for linen in England. The linen imported would be more than could
be paid for by the cloth exported: the difference must be paid in money:
the change in the distribution of the precious metals between the two
countries would lower the price of cloth in England, (and consequently
in Germany), while it would raise the price of linen in Germany, (and
consequently in England). Germany, therefore, by the annihilation of
cost of carriage, would save in price more than the cost of carriage of
the cloth; England would save less in price than the cost of carriage of
the linen. But if by the miraculous annihilation of cost of carriage,
England would not _save_ the whole of the carriage of her imports, it
follows that England did not previously _pay_ the whole of that cost of
carriage.
Thus, the division of the cost of trade, and the division of the
advantage of trade, are governed by precisely the same principles; and
the only general proposition which can be affirmed respecting the cost
is, that it is _pro tanto_ a deduction from the advantage. It cannot
even be maintained that the cost is shared in the same proportion as the
advantage is; because the increase of the demand for a commodity as its
price falls, is not governed by any fixed law. Suppose, for instance,
that the advantage happened to be divided equally: this must be because
the greater cheapness arising from the establishment of the trade,
either did not affect the demand at all, or affected it in an equal
proportion on both sides. Now, because such is the effect of the degree
of increased cheapness resulting from importation burthened with cost of
carriage, it would not follow that the still greater degree of
cheapness, produced by the additional saving of the cost of carriage
itself, would also affect the demand of both countries in precisely an
equal degree. But we cannot be said to bear an expense, which, if saved,
would be saved to somebody else, and not to us. Two countries may have
equal shares of the clear benefit of the trade, while, if the cost of
carriage were saved, they would divide that saving unequally. If so,
they divide the gross gain in one unequal ratio, the cost in another
unequal ratio, though their shares of the cost being deducted from their
shares of the gain leave equal remainders.
4. The question naturally suggests itself, whether any country, by its
own legislative policy, can engross to itself a larger share of the
benefits of foreign commerce, than would fall to it in the natural or
spontaneous course of trade.
The answer is, it can. By taxing exports, for instance, we may, under
certain circumstances, produce a division of the advantage of the trade
more favourable to ourselves. In some cases, we may draw into our
coffers, at the expense of foreigners, not only the whole tax, but more
than the tax: in other cases, we should gain exactly the tax,--in
others, less than the tax. In this last case, a part of the tax is borne
by ourselves: possibly the whole, possibly even, as we shall show, more
than the whole.
Suppose that England taxes her export of cloth: the tax not being
supposed high enough to induce Germany to produce cloth for herself. The
price at which cloth can be sold in Germany is augmented by the tax.
This will probably diminish the quantity consumed. It may diminish it so
much, that even at the increased price, there will not be required so
great a money value as before. It may diminish it in such a ratio, that
the money value of the quantity consumed will be exactly the same as
before. Or it may not diminish it at all, or so little, that, in
consequence of the higher price, a greater money value will be purchased
than before. In this last case, England will gain, at the expense of
Germany, not only the whole amount of the duty, but more. For the money
value of her exports to Germany being increased, while her imports
remain the same, money will flow into England from Germany. The price of
cloth will rise in England, and consequently in Germany; but the price
of linen will fall in Germany, and consequently in England, We shall
export less cloth, and import more linen, till the equilibrium is
restored. It thus appears, what is at first sight somewhat remarkable,
that, by taxing her exports, England would, under some conceivable
circumstances, not only gain from her foreign customers the whole amount
of the tax, but would also get her imports cheaper. She would get them
cheaper in two ways,--for she would obtain them for less money, and
would have more money to purchase them with. Germany, on the other hand,
would suffer doubly: she would have to pay for her cloth a price
increased not only by the duty, but by the influx of money into England,
while the same change in the distribution of the circulating medium
would leave her less money to purchase it with.
This, however, is only one of three possible cases. If, after the
imposition of the duty, Germany requires so diminished a quantity of
cloth, that its total money value is exactly the same as before, the
balance of trade will be undisturbed; England will gain the duty,
Germany will lose it, and nothing more. If, again, the imposition of the
duty occasions such a falling off in the demand, that Germany requires a
less pecuniary value than before, our exports will no longer pay for our
imports, money must pass from England into Germany, and Germany's share
of the advantage of the trade will be increased. By the change in the
distribution of money, cloth will fall in England; and therefore it
will, of course, fall in Germany. Thus Germany will not pay the whole of
the tax. From the same cause, linen will rise in Germany, and
consequently in England. When this alteration of prices has so adjusted
the demand, that the cloth and the linen again pay for one another, the
result is, that Germany has paid only a part of the tax, and the
remainder of what has been received into our treasury has come
indirectly out of the pockets of our own consumers of linen, who pay a
higher price for that imported commodity, in consequence of the tax on
our exports, which at the same time they, in consequence of the efflux
of money and consequent fall of prices, have smaller money incomes
wherewith to pay for the linen at that advanced price.
It is not an impossible supposition that, by taxing our exports, we
might not only gain nothing from the foreigner, the tax being paid out
of our own pockets, but might even compel our own people to pay a second
tax to the foreigner. Suppose, as before, that the demand of Germany for
cloth falls off so much on the imposition of the duty, that she requires
a smaller money value than before, but that the case is so different
with linen in England, that when the price rises the demand either does
not fall off at all, or so little that the money value required is
greater than before. The first effect of laying on the duty is, as
before, that the cloth exported will no longer pay for the linen
imported. Money will, therefore, flow out of England into Germany. One
effect is to raise the price of linen in Germany, and, consequently, in
England. But this, by the supposition, instead of stopping the efflux of
money, only makes it greater, because the higher the price, the greater
the money value of the linen consumed. The balance, therefore, can only
be restored by the other effect, which is going on at the same time,
namely, the fall of cloth in the English, and, consequently, in the
German market. Even when cloth has fallen so low that its price with the
duty is only equal to what its price without the duty was at first, it
is not a necessary consequence that the fall will stop; for the same
amount of exportation as before will not now suffice to pay the
increased money value of the imports; and although the German consumers
have now not only cloth at the old price, but likewise increased money
incomes, it is not certain that they will be inclined to employ the
increase of their incomes in increasing their purchases of cloth. The
price of cloth, therefore, must perhaps fall, to restore the
equilibrium, more than the whole amount of the duty; Germany may be
enabled to import cloth at a lower price when it is taxed, than when it
was untaxed: and this gain she will acquire at the expense of the
English consumers of linen, who, in addition, will be the real payers of
the whole of what is received at their own custom-house under the name
of duties on the export of cloth.
Such are the extremely various effects which may result to ourselves,
and to our customers, from the imposition of taxes on our exports [3]:
and the determining circumstances are of a nature so imperfectly
ascertainable, that it must be almost impossible to decide with any
certainty, even after the tax has been imposed, whether we have been
gainers by it or losers. It is certain, however, that whatever we gain,
is lost by somebody else, and there is the expense of the collection
besides: if international morality, therefore, were rightly understood
and acted upon, such taxes, as being contrary to the universal weal,
would not exist. Moreover, the imposition of such a tax frequently will,
and always may, expose a country to lose this branch of its trade
altogether, or to carry it on with diminished advantage, in consequence
of the competition of untaxed exporters from other countries, or of the
domestic producers in the country to which it exports. Even on the most
selfish principles, therefore, the benefit of such a tax is always
extremely precarious.
5. We have had an example of a tax on exports, that is, on foreigners,
falling in part on ourselves. We shall, therefore, not be surprised if
we find a tax on imports, that is, on ourselves, partly falling upon
foreigners.
Instead of taxing the cloth which we export, suppose that we tax the
linen which we import. The duty which we are now supposing must not be
what is termed a protecting duty, that is, a duty sufficiently high to
induce us to produce the article at home. If it had this effect, it
would destroy entirely the trade both in cloth and in linen, and both
countries would lose the whole of the advantage which they previously
gained by exchanging those commodities with one another. We suppose a
duty which might diminish the consumption of the article, but which
would not prevent us from continuing to import, as before, whatever
linen we did consume.
The equilibrium of trade would be disturbed if the imposition of the tax
diminished in the slightest degree the quantity of linen consumed. For,
as the tax is levied at our own custom-house, the German exporter only
receives the same price as formerly, though the English consumer pays a
higher one. If, therefore, there be any diminution of the quantity
bought, although a larger sum of money may be actually laid out in the
article, a smaller one will be due from England to Germany: this sum
will no longer be an equivalent for the sum due from Germany to England
for cloth, the balance therefore must be paid in money. Prices will fall
in Germany, and rise in England; linen will fall in the German market;
cloth will rise in the English. The Germans will pay higher price for
cloth, and will have smaller money incomes to buy it with; while the
English will obtain linen cheaper, that is, its price will exceed what
it previously was by less than the amount of the duty, while their means
of purchasing it will be increased by the increase of their money
incomes.
If the imposition of the tax does not diminish the demand, it will leave
the trade exactly as it was before. We shall import as much, and export
as much; the whole of the tax will be paid out of our own pockets.
But the imposition of a tax on a commodity, almost always diminishes the
demand more or less; and it can never, or scarcely ever increase the
demand. It may, therefore, be laid down as a principle, that a tax on
imported commodities, when it really operates as a tax, and not as a
prohibition, either total or partial, almost always falls in part upon
the foreigners who consume our goods: and that this is a mode in which a
nation may be almost sure of appropriating to itself, at the expense of
foreigners, a larger share than would otherwise belong to it of the
increase in the general productiveness of the labour and capital of the
world, which results from the interchange of commodities among nations.