country possesses mines of the precious metals, and numbers those metals
among its regular articles of export, it cannot go on, year after year,
parting with them, and never receiving them back. When a nation has
regular payments to make in a foreign country, for which it is not to
receive any return, its exports must annually exceed its imports by the
amount of the payments which it is bound so to make. In order to force a
demand for its exports greater than its imports will suffice to pay for,
it must offer them at a rate of interchange more favourable to the
foreign country, and less so to itself, than if it had no payments to
make beyond the value of its imports. It therefore carries on the trade
with less advantage, in consequence of the obligations to which it is
subject towards persons resident in foreign countries.
The steps of the process are these. The exports and imports being in
equilibrium, suppose a treaty to be concluded, by which the country
binds itself to pay in tribute to another country, a certain sum
annually. It makes, perhaps, the first payment by a remittance of money.
This lowers prices in the paying country, and raises them in the
receiving one: the exports of the tributary country increase, its
imports diminish. When the efflux of money has altered prices in the
requisite degree, the exports exceed the imports annually, by the amount
of the tribute; and the latter, being added to the sum of the payments
due, restores the balance of payments between the two countries. The
result to the tributary country is a diminution of her share in the
advantage of foreign trade. She pays dearer for her imports, in two
ways, because she pays more money, and because that money is of higher
value, the money incomes of her inhabitants being of smaller amount.
Thus the imposition of a tribute is a double burthen to the country
paying it, and a double gain to that which receives it. The tributary
country pays to the other, first, the tax, whatever be its amount, and
next, something more, which the one country loses in the increased cost
of its imports, the other gains in the diminished cost of its own.
Absenteeism, moreover, though not burthensome in the former of these
ways, since the money is paid whether the receiver be an absentee or
not, is yet disadvantageous in the second of the two modes which have
been mentioned. Ireland pays dearer for her imports in consequence of
her absentees; a circumstance which the assailants of Mr. M'Culloch,
whether political economists or not, have not, we believe, hitherto
thought of producing against him.
11. If the question be now asked, which of the countries of the world
gains most by foreign commerce, the following will be the answer.
If by gain be meant advantage, in the most enlarged sense, that country
will generally gain the most, which stands most in need of foreign
commodities.
But if by gain be meant saving of labour and capital in obtaining the
commodities which the country desires to have, whatever they may be; the
country will gain, not in proportion to its own need of foreign
articles, but to the need which foreigners have of the articles which
itself produces.
Let us take, as an illustration of our meaning, the case of France and
England. Those two nations, in consequence of the restrictions with
which they have loaded their commercial intercourse, carry on so little
trade with each other, as may almost, regard being had to the wealth and
population of the two countries, be called none at all. If these fetters
were at once taken off, which of the two countries would be the greatest
gainer? England without doubt. There would instantly arise in France an
immense demand for the cottons, woollens, and iron of England; while
wines, brandies, and silks, the staple articles of France, are less
likely to come into general demand here, nor would the consumption of
such productions, it is probable, be so rapidly increased by the fall of
price. The fall would probably be very great before France could obtain
a vent in England for so much of her exports as would suffice to pay for
the probable amount of her imports. There would be a considerable flow
of the precious metals out of France into England. The English consumer
of French wine would not merely save the amount of the duty which that
wine now pays, but would find the wine itself falling-in prime cost,
while his means of purchasing it would be increased by the augmentation
of his own money income. The French consumer of English cottons, on the
contrary, would not long continue to be able to purchase them at the
price they now sell for in England. He would gain less, as the English
would gain more, than might appear from a mere comparison between the
present prices of commodities in the two countries.
Various consequences would flow from opening the trade between France
and England, which are not expected, either by the friends or by the
opponents of the present restrictive system. The wine-growers of France,
who imagine that free trade would relieve their distress by raising the
price of their wine, might not improbably find that price actually
lowered. On the other hand, our silk manufacturers would be surprised if
they were told that the free admission of our cottons and hardware into
the French market, would endanger _their_ branch of manufacture: yet
such might very possibly be the effect. France, it is likely, could most
advantageously pay us in silks for a portion of the large amount of
cottons and hardware which we should sell to her; and though our silk
manufacturers may now be able to compete advantageously, in some
branches of the manufacture, with their French rivals, it by no means
follows that they could do so when the efflux of money from France, and
its influx into England, had lowered the price of silk goods in the
French market, and increased all the expenses of production here.
On the whole, England probably, of all the countries of Europe, draws to
herself the largest share of the gains of international commerce:
because her exportable articles are in universal demand, and are of such
a kind that the demand increases rapidly as the price falls. Countries
which export food, have the former advantage, but not the latter. But
our own colonies, and the countries which supply us with the materials
of our manufactures, maintain a hard struggle with us for an equal share
of the advantages of their trade; for _their_ exports are also of a kind
for which there exists a most extensive demand here, and a demand
capable of almost indefinite extension by a fall of price. Contrary,
therefore, to common opinion, it is probable that our trade with the
colonies, and with the countries which send us the raw materials of our
national industry, is not more but less advantageous to us, in
proportion to its extent, than our trade with the continent of Europe.
We mean in respect to the mere amount of the return to the labour and
capital of the country; considered abstractedly from the usefulness or
agreeableness of the particular articles on which the receivers may
choose to expend it.
NOTES:
[1] _Elements of Political Economy_, by James Mill, Esq., 3rd
edit., pp. 120-1.
[2] The figures used are of course arbitrary, having no
reference to any existing prices.
[3] We have not deemed it necessary to enter minutely into all
the circumstances which might modify the results mentioned in the text.
For example, let us revert to the first case, that in which the demand
for cloth in Germany is so little affected by the rise of price in
consequence of the tax, that the quantity bought exceeds in pecuniary
value what it was before. As the German consumers lay out more money in
cloth, they have less to lay out in other things; other money prices
will fall; among the rest that of linen; and this may so increase the
demand for linen in England as to restore the equilibrium of exports and
imports without any passage of money. But England's treasury will still
gain from Germany the whole of the tax, and the English people will buy
their linen cheaper besides. Again, in the opposite case, where the tax
so diminishes the demand, that a smaller pecuniary value is required
than before. The German consumers have, therefore, more to expend in
other things; these, and among the rest linen, will rise; and this may
so diminish the demand for linen in England, as to restore the
equilibrium without the transmission of money. But the effect, as
respects the division of the advantage, is still as stated in the text.
[4] The world at large, sellers and buyers taken together, is
always a gainer by underselling. If, in the case supposed, England were
compelled by a commercial treaty to exclude the linen of Flanders from
her market, the total wealth of the world, if affected at all, would be
diminished.
For, what is the cause which enables Flanders to undersell Germany? That
Flanders, if she had the trade, would exchange linen for cloth at a rate
of interchange more advantageous to England. And why can Flanders do so?
It must be either because Flanders can produce the article with a less
comparative quantity of labour than Germany, and therefore the total
advantage to be divided between the two countries is greater in the case
of Flanders than of Germany; or else because, though the total advantage
is not greater, Flanders obtains a less share of it, her demand for
cloth being greater, at the same rate of interchange, than that of
Germany. In the former case, to exclude Flemish linen from England would
be to prevent the world at large from making a greater saving of labour
instead of a less. In the latter, the exclusion would be inefficacious
for the only end it could be intended for, viz., the benefit of Germany,
unless Flemish money were excluded from England as well as Flemish
linen. For Flanders would buy English cloth, paying for it in money,
until the fall of her prices enabled her to pay for it with something
else: and the ultimate result would be that, by the rise of prices in
England, Germany must pay a higher price for her cloth, and so lose a
part of the advantage in spite of the treaty; while England would pay
for German linen the same price indeed, but as the money incomes of her
own people would be increased, the same money price would imply a
smaller sacrifice.
[5] This last possible effect of a sudden introduction of free
trade, was pointed out in an able article on the Silk question, in a
work of too short duration, the _Parliamentary Review_.
ESSAY II.
OF THE INFLUENCE OF CONSUMPTION ON PRODUCTION.
Before the appearance of those great writers whose discoveries have
given to political economy its present comparatively scientific
character, the ideas universally entertained both by theorists and by
practical men, on the causes of national wealth, were grounded upon
certain general views, which almost all who have given any considerable
attention to the subject now justly hold to be completely erroneous.
Among the mistakes which were most pernicious in their direct
consequences, and tended in the greatest degree to prevent a just
conception of the objects of the science, or of the test to be applied
to the solution of the questions which it presents, was the immense
importance attached to consumption. The great end of legislation in
matters of national wealth, according to the prevalent opinion, was to
create consumers. A great and rapid consumption was what the producers,
of all classes and denominations, wanted, to enrich themselves and the
country. This object, under the varying names of an extensive demand, a
brisk circulation, a great expenditure of money, and sometimes _totidem
verbis_ a large consumption, was conceived to be the great condition of
prosperity.
It is not necessary, in the present state of the science, to contest
this doctrine in the most flagrantly absurd of its forms or of its
applications. The utility of a large government expenditure, for the
purpose of encouraging industry, is no longer maintained. Taxes are not
now esteemed to be "like the dews of heaven, which return again in
prolific showers." It is no longer supposed that you benefit the
producer by taking his money, provided you give it to him again in
exchange for his goods. There is nothing which impresses a person of
reflection with a stronger sense of the shallowness of the political
reasonings of the last two centuries, than the general reception so long
given to a doctrine which, if it proves anything, proves that the more
you take from the pockets of the people to spend on your own pleasures,
the richer they grow; that the man who steals money out of a shop,
provided he expends it all again at the same shop, is a benefactor to
the tradesman whom he robs, and that the same operation, repeated
sufficiently often, would make the tradesman's fortune.
In opposition to these palpable absurdities, it was triumphantly
established by political economists, that consumption never needs
encouragement. All which is produced is already consumed, either for the
purpose of reproduction or of enjoyment. The person who saves his income
is no less a consumer than he who spends it: he consumes it in a
different way; it supplies food and clothing to be consumed, tools and
materials to be used, by productive labourers. Consumption, therefore,
already takes place to the greatest extent which the amount of
production admits of; but, of the two kinds of consumption, reproductive
and unproductive, the former alone adds to the national wealth, the
latter impairs it. What is consumed for mere enjoyment, is gone; what is
consumed for reproduction, leaves commodities of equal value, commonly
with the addition of a profit. The usual effect of the attempts of
government to encourage consumption, is merely to prevent saving; that
is, to promote unproductive consumption at the expense of reproductive,
and diminish the national wealth by the very means which were intended
to increase it.
What a country wants to make it richer, is never consumption, but
production. Where there is the latter, we may be sure that there is no
want of the former. To produce, implies that the producer desires to
consume; why else should he give himself useless labour? He may not wish
to consume what he himself produces, but his motive for producing and
selling is the desire to buy. Therefore, if the producers generally
produce and sell more and more, they certainly also buy more and more.
Each may not want more of what he himself produces, but each wants more
of what some other produces; and, by producing what the other wants,
hopes to obtain what the other produces. There will never, therefore, be
a greater quantity produced, of commodities in general, than there are
consumers for. But there may be, and always are, abundance of persons
who have the inclination to become consumers of some commodity, but are
unable to satisfy their wish, because they have not the means of
producing either that, or anything to give in exchange for it. The
legislator, therefore, needs not give himself any concern about
consumption. There will always be consumption for everything which can
be produced, until the wants of all who possess the means of producing
are completely satisfied, and then production will not increase any
farther. The legislator has to look solely to two points: that no
obstacle shall exist to prevent those who have the means of producing,
from employing those means as they find most for their interest; and
that those who have not at present the means of producing, to the extent
of their desire to consume, shall have every facility afforded to their
acquiring the means, that, becoming producers, they may be enabled to
consume.
These general principles are now well understood by almost all who
profess to have studied the subject, and are disputed by few except
those who ostentatiously proclaim their contempt for such studies. We
touch upon the question, not in the hope of rendering these fundamental
truths clearer than they already are, but to perform a task, so useful
and needful, that it is to be wished it were oftener deemed part of the
business of those who direct their assaults against ancient prejudices,
--that of seeing that no scattered particles of important truth are
buried and lost in the ruins of exploded error. Every prejudice, which
has long and extensively prevailed among the educated and intelligent,
must certainly be borne out by some strong appearance of evidence; and
when it is found that the evidence does not prove the received
conclusion, it is of the highest importance to see what it does prove.
If this be thought not worth inquiring into, an error conformable to
appearances is often merely exchanged for an error contrary to
appearances; while, even if the result be truth, it is paradoxical
truth, and will have difficulty in obtaining credence while the false
appearances remain.
Let us therefore inquire into the nature of the appearances, which gave
rise to the belief that a great demand, a brisk circulation, a rapid
consumption (three equivalent expressions), are a cause of national
prosperity.
If every man produced for himself, or with his capital employed others
to produce, everything which he required, customers and their wants
would be a matter of profound indifference to him. He would be rich, if
he had produced and stored up a large supply of the articles which he
was likely to require; and poor, if he had stored up none at all, or not
enough to last until he could produce more.
The case, however, is different after the separation of employments. In
civilized society, a single producer confines himself to the production
of one commodity, or a small number of commodities; and his affluence
depends, not solely upon the quantity of his commodity which he has
produced and laid in store, but upon his success in finding purchasers
for that commodity.
It is true, therefore, of every particular producer or dealer, that
a great demand, a brisk circulation, a rapid consumption, of the
commodities which he sells at his shop or produces in his manufactory,
is important to him. The dealer whose shop is crowded with customers,
who can dispose of a product almost the very moment it is completed,
makes large profits, while his next neighbour, with an equal capital
but fewer customers, gains comparatively little.
It was natural that, in this case, as in a hundred others, the analogy
of an individual should be unduly applied to a nation: as it has been
concluded that a nation generally gains in wealth by the conquest of a
province, because an individual frequently does so by the acquisition of
an estate; and as, because an individual estimates his riches by the
quantity of money which he can command, it was long deemed an excellent
contrivance for enriching a country, to heap up artificially the
greatest possible quantity of the precious metals within it.
Let us examine, then, more closely than has usually been done, the case
from which the misleading analogy is drawn. Let us ascertain to what
extent the two cases actually resemble; what is the explanation of the
false appearance, and the real nature of the phenomenon which, being
seen indistinctly, has led to a false conclusion.
* * * * *
We shall propose for examination a very simple case, but the explanation
of which will suffice to clear up all other cases which fall within the
same principle. Suppose that a number of foreigners with large incomes
arrive in a country, and there expend those incomes: will this operation
be beneficial, as respects the national wealth, to the country which
receives these immigrants? Yes, say many political economists, if they
save any part of their incomes, and employ them reproductively; because
then an addition is made to the national capital, and the produce is a
clear increase of the national wealth. But if the foreigner expends all
his income unproductively, it is no benefit to the country, say they,
and for the following reason.
If the foreigner had his income remitted to him in bread and beef, coats
and shoes, and all the other articles which he was desirous to consume,
it would not be pretended that his eating, drinking, and wearing them,
on our shores rather than on his own, could be of any advantage to us in
point of wealth. Now, the case is not different if his income is
remitted to him in some one commodity, as, for instance, in money. For
whatever takes place afterwards, with a view to the supply of his wants,
is a mere exchange of equivalents; and it is impossible that a person
should ever be enriched by merely receiving an equal value in exchange
for an equal value.
When it is said that the purchases of the foreign consumer give
employment to capital which would otherwise yield no profit to its
owner, the same political economists reject this proposition as
involving the fallacy of what has been called a "general glut." They
say, that the capital, which any person has chosen to produce and to
accumulate, can always find employment, since the fact that he has
accumulated it proves that he had an unsatisfied desire; and if he
cannot find anything to produce for the wants of other consumers, he can
for his own.
It is impossible to contest these propositions as thus stated. But there
is one consideration which clearly shews, that there is something more
in the matter than is here taken into the account; and this is, that the
above reasoning tends distinctly to prove, that it does a tradesman no
good to go into his shop and buy his goods. How can he be enriched? it
might be asked. He merely receives a certain value in money, for an
equivalent value in goods. Neither does this give employment to his
capital; for there never exists more capital than can find employment,
and if one person does not buy his goods another will; or if nobody
does, there is over-production in that business, he can remove his
capital, and find employment for it in another trade.
Every one sees the fallacy of this reasoning as applied to individual
producers. Every one knows that as applied to them it has not even the
semblance of plausibility; that the wealth of a producer does in a great
measure depend upon the number of his customers, and that in general
every additional purchaser does really add to his profits. If the
reasoning, which would be so absurd if applied to individuals, be
applicable to nations, the principle on which it rests must require much
explanation and elucidation.
Let us endeavour to analyse with precision the real nature of the
advantage which a producer derives from an addition to the number of his
customers.
For this purpose, it is necessary that we should premise a single
observation on the meaning of the word capital. It is usually defined,
the food, clothing, and other articles set aside for the consumption of
the labourer, together with the materials and instruments of production.
This definition appears to us peculiarly liable to misapprehension; and
much vagueness and some narrow views have, we conceive, occasionally
resulted from its being interpreted with too mechanical an adherence to
the literal meaning of the words.