§ 1. The values of imported commodities depend on the Terms of
international interchange.
The values of commodities produced at the same place, or in places
sufficiently adjacent for capital to move freely between them—let us say,
for simplicity, of commodities produced in the same country—depend
(temporary fluctuations apart) upon their cost of production. But the
value of a commodity brought from a distant place, especially from a
foreign country, does not depend on its cost of production in the place
from whence it comes. On what, then, does it depend? The value of a thing
in any place depends on the cost of its acquisition in that place; which,
in the case of an imported article, means the cost of production of the
thing which is exported to pay for it.
If, then, the United States imports wine from Spain, giving for every pipe
of wine a bale of cloth, the exchange value of a pipe of wine in the
United States will not depend upon what the production of the wine may
have cost in Spain, but upon what the production of the cloth has cost in
the United States. Though the wine may have cost in Spain the equivalent
of only ten days’ labor, yet, if the cloth costs in the United States
twenty days’ labor, the wine, when brought to the United States, will
exchange for the produce of twenty days’ American labor, _plus_ the cost
of carriage, including the usual profit on the importer’s capital during
the time it is locked up and withheld from other employment.(268)
The value, then, in any country, of a foreign commodity, depends on the
quantity of home produce which must be given to the foreign country in
exchange for it. In other words, the values of foreign commodities depend
on the terms of international exchange. What, then, do these depend upon?
What is it which, in the case supposed, causes a pipe of wine from Spain
to be exchanged with the United States for exactly that quantity of cloth?
We have seen that it is not their cost of production. If the cloth and the
wine were both made in Spain, they would exchange at their cost of
production in Spain; if they were both made in the United States, they
would [possibly] exchange at their cost of production in the United
States: but all the cloth being made in the United States, and all the
wine in Spain, they are in circumstances to which we have already
determined that the law of cost of production is not applicable. We must
accordingly, as we have done before in a similar embarrassment, fall back
upon an antecedent law, that of supply and demand; and in this we shall
again find the solution of our difficulty.
§ 2. The values of foreign commodities depend, not upon Cost of
Production, but upon Reciprocal Demand and Supply.
It has been previously explained that the conditions called.
“international” are those, either within a nation, or those
existing between two separate nations, which are such as to
prevent the free movement of labor and capital from one group of
industries to another, or from one locality to another distant
one. Even if woolen cloth could be made cheaper in England than in
the United States, we know that neither capital nor labor would
easily leave the United States for England, although it might go
from Rhode Island to Massachusetts under similar inducements. If
shoes can be made with less advantage in Providence than in Lynn,
the shoe industry will come to Lynn; but it does not follow that
the English shoe industry would come to Lynn, even if the
advantages of the latter were greater than those in England. If
there be no obstacle to the free movement of labor and capital
between places or occupations, and if some place or occupation can
produce at a less cost than another place or occupation, then
there will be a migration of the instruments of production. Since
there is no free movement of labor and capital between one country
and another, then two countries stand in the same relation as that
of two “non-competing groups” within the same country, as before
explained. When this fact is once fully grasped, the subject of
international values becomes very simple. It does not differ from
the question of those domestic values for which we found(269) that
the dependence on cost of production would not hold, but that
their values were governed by reciprocal demand and supply.
Attention should be drawn to the real nature of the present
inquiry. It is not here a question as to what causes international
_trade_ between two countries: that has been treated in the
preceding chapter, and has been found to be a difference in the
comparative cost. The question now is one of _exchange value_,
that is, for how much of other commodities a given commodity will
exchange. The reasons for the trade are supposed to exist; but we
now want to know what the law is which determines the proportions
of the exchange. Why does one article exchange for more or less of
another? Not, as we have seen, because one costs more or less to
produce than the other.
In the trade between the United States and England in iron and
corn, formerly referred to (p. 383), it was seen that a 100 days’
labor of corn buys from England iron which would have cost the
United States 125 days’ labor. England sends 150 days’ labor of
iron and buys from the United States corn which would have cost
her 200 days’ labor. But what rule fixes the proportions between
100 and 125 for the United States, and between 150 and 200 for
England, at which the exchanges will take place? The trade
increases the productiveness of both countries, but in what ratio
will the two countries share this gain? The answer is, briefly, in
_the ratio set by reciprocal demand and supply_, that is, the
relative strength, as compared with each other, of the demands of
the two countries respectively for iron and corn. This, however,
may be capable of explanation in a simple form.
A has spades, and B has oats, to dispose of; and each wishes to
get the article belonging to the other. Will A give one spade for
one bushel of oats, or for two? Will B give two bushels of oats
for one spade? That depends upon how strong a desire A has for
oats; the intensity of his demand may induce him to give two
spades for one bushel. But the exchange also depends upon B. If he
has no great need for spades, and A has a strong desire for oats,
B will get more spades for oats than otherwise, possibly two
spades for one bushel of oats; that is, oats will have a larger
exchange value. If, on the other hand, A cares less for oats than
B does for spades, then the exchange will result in an increased
value of spades relatively to oats. When two commodities exchange
against each other, their exchange values will depend entirely
upon the relative intensity of the demand on each side for the
other commodity. And this simple form of the statement of
reciprocal demand and supply is also the law of international
values.
If instead of spades and oats we substitute iron and corn, and let
the trade be between England and the United States, the quantity
of corn required to buy a given quantity of iron will depend upon
the relative demands of England for corn and of the United States
for iron. Something may cut off England’s demand for our
breadstuffs, and they will then have a less exchange value
relatively to iron (if we keep up our demand), and their prices
will fall. But if, on the other hand, England has poor harvests,
and consequently a great demand for corn, and if our demand for
iron is not excessive at the same time, then our breadstuffs will
rise in value. And this was precisely what happened from 1877 to
1879. Now, in the above illustration of corn and iron, how can we
know whether or not _x_ bushels of corn (the produce of 100 days’
labor in the United States) will exchange for exactly _y_ tons of
English iron? That, again, will depend upon the reciprocal demands
of the two countries for corn and iron respectively. Moreover, it
will have been already observed that the ratio of exchange is not
capable of being ascertained exactly, since it varies with
changing conditions, namely, the desires of the people of the two
countries, together with their means of purchase.
But yet these variations are capable of ascertainment as regards
their extreme limits. The reciprocal demand can not carry the
exchange value in either country beyond the line set by the cost
of production of the article. For instance, an urgent need in
England for corn (if the United States has a light demand for
English iron) can not carry the ratio of exchange to a point such
that England will offer so much more than 150 days’ labor in iron
for _x_ bushels of American corn that it will go beyond 200 days’
labor in iron. It will be seen at once, then, if that were the
case, that England would produce the corn herself; and that she
would then have no gain whatever from the trade. The ratio of
exchange will thus be limited by the reciprocal demand on one side
to the cost of production (200 days’ labor) of English corn. On
the other hand, if the supposition were reversed, and the United
States had a great demand for iron, but England had little need
for our corn, then we would not offer more than 125 days’ labor of
corn for _y_ tons of iron, because for that expenditure of labor
we could produce the iron ourselves.
In the above examples we have considered the case of a trade in
corn and iron only. If corn were to typify all our goods wanted by
England, and iron all English goods wanted by the United States,
the conclusions would be exactly the same. The ratios of a myriad
of things, each governed by its particular reciprocal demand,
exchanging against each other, give a general result by which the
goods sent out exchange against the goods brought back at such
rates as are fixed by the reciprocal demands acting on all the
goods. Goods are payments for goods; the ratio of exchange depends
on reciprocal demand and supply. If we now add more countries to
the example, we simply increase the number of persons (although in
different countries) wanting our goods, as set off against our
demands for the goods of this greater number of persons. If
France, Germany, and England all want our corn, we must have some
demand for the goods of France, Germany, and England also; and the
same law of reciprocal demand gives the ratio of interchange. That
this explanation is consistent with the facts is to be seen when
we notice how eagerly the exporters of American staples watch the
conditions which increase or diminish the foreign demand for these
commodities, looking at them as the causes which directly affect
their exchange value, or price.
When cost of carriage is added, it will increase the price of corn to
England and of iron to the United States. But, as every one knows, an
increase of price affects the demand; and, as the demand on each side is
affected, a new ratio of exchange will finally be reached consistent with
the strength of desires on each side. Who, therefore, will pay the most of
the cost of carriage England or the United States? That will, again,
depend on whether England has the greatest relative demand for American
goods, as compared with the demand of the United States for English goods.
No absolute rule, therefore, can be laid down for the division of the
cost, no more than for the division of the advantage; and it does not
follow that, in whatever ratio the one is divided, the other will be
divided in the same. It is impossible to say, if the cost of carriage
could be annihilated, whether the producing or the importing country would
be most benefited. This would depend on the play of international demand.
Cost of carriage has one effect more. But for it, every commodity would
(if trade be supposed free) be either regularly imported or regularly
exported. A country would make nothing for itself which it did not also
make for other countries. But in consequence of cost of carriage there are
many things, especially bulky articles, which every, or almost every,
country produces within itself. After exporting the things in which it can
employ itself most advantageously, and importing those in which it is
under the greatest disadvantage, there are many lying between, of which
the relative cost of production in that and in other countries differs so
little that the cost of carriage would absorb more than the whole saving
in cost of production which would be obtained by importing one and
exporting another. This is the case with numerous commodities of common
consumption, including the coarser qualities of many articles of food and
manufacture, of which the finer kinds are the subject of extensive
international traffic.
§ 3. —As illustrated by trade in cloth and linen between England and
Germany.
Mr. Mill still further illustrates the operation of the law of
reciprocal demand by the case of a trade between England and
Germany in cloth and linen, as follows:
“Suppose that ten yards of broadcloth cost in England as much labor as
fifteen yards of linen, and in Germany as much as twenty.” This
supposition then being made, it would be the interest of England to import
linen from Germany, and of Germany to import cloth from England. “When
each country produced both commodities for itself, ten yards of cloth
exchanged for fifteen yards of linen in England, and for twenty in
Germany. They will now exchange for the same number of yards of linen in
both. For what number? If for fifteen yards, England will be just as she
was, and Germany will gain all. If for twenty yards, Germany will be as
before, and England will derive the whole of the benefit. If for any
number intermediate between fifteen and twenty, the advantage will be
shared between the two countries. If, for example, ten yards of cloth
exchange for eighteen of linen, England will gain an advantage of three
yards on every fifteen, Germany will save two out of every twenty. 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? Let us suppose, then, that by the effect of what Adam Smith calls
the higgling of the market, ten yards of cloth, in both countries,
exchange for seventeen 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 ten yards of cloth is now seventeen yards of linen,
or whatever quantity of money is equivalent in Germany to seventeen 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 1,000 times ten
yards.
“Let us now turn our attention to England. There the price of seventeen
yards of linen is ten yards of cloth, or whatever quantity of money is
equivalent in England to ten 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 1,000 times
seventeen yards.
“As seventeen yards of linen are to ten yards of cloth, so are 1,000 times
seventeen yards to 1,000 times ten yards. At the existing exchange 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 seventeen yards of linen for ten
yards of cloth.
“But our suppositions 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 seventeen yards; it is evident
that, at the rate supposed, this would not have sufficed to pay for the
1,000 times ten 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 ten 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 seventeen yards of linen in exchange for ten yards of
cloth; let us suppose her to offer eighteen. At this price, perhaps,
England would be inclined to purchase a greater quantity of linen. She
would consume, possibly, at that price, 900 times eighteen yards. On the
other hand, cloth having risen in price, the demand of Germany for it
would probably have diminished. If, instead of 1,000 times ten yards, she
is now contented with 900 times ten yards, these will exactly pay for the
900 times eighteen 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 ten yards for eighteen 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
seventeen yards, we had supposed that England, at the rate of ten for
seventeen, would have taken 1,200 times seventeen 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 ten yards of cloth will fall, in both countries, below
the value of seventeen 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 one another; and, when once this point is attained, values
will remain without further alteration.”
§ 4. The conclusion states in the Equation of International Demand.
“It may be considered, therefore, as established, that when two countries
trade together in two commodities, the exchange 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 articles which it imports from
its neighbor, shall be exactly sufficient to pay for one another. As the
inclinations and circumstances of consumers can not 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 can not exchange for more than twenty yards of linen, nor
for less than fifteen. 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.”
If, therefore, it be asked what country draws to itself the greatest share
of the advantage of any trade it carries on, the answer is, the country
for whose productions there is in other countries the greatest demand, and
a demand the most susceptible of increase from additional cheapness. In so
far as the productions of any country possess this property, the country
obtains all foreign commodities at less cost. It gets its imports cheaper,
the greater the intensity of the demand in foreign countries for its
exports. It also gets its imports cheaper, the less the extent and
intensity of its own demand for them. The market is cheapest to those
whose demand is small. A country which desires few foreign productions,
and only a limited quantity of them, while its own commodities are in
great request in foreign countries, will obtain its limited imports at
extremely small cost, that is, in exchange for the produce of a very small
quantity of its labor and capital.
The law which we have now illustrated may be appropriately named the
Equation of International Demand. It may be concisely stated as follows:
The produce of a country exchanges for the produce of other countries at
such values as are required in order that the whole of her exports may
exactly pay for the whole of her imports. This law of International Values
is but an extension of the more general law of Value, which we called the
Equation of Supply and Demand.(270) We have seen that the value of a
commodity always so adjusts itself as to bring the demand to the exact
level of the supply. But all trade, either between nations or individuals,
is an interchange of commodities, in which the things that they
respectively have to sell constitute also their means of purchase: the
supply brought by the one constitutes his demand for what is brought by
the other. So that supply and demand are but another expression for
reciprocal demand; and to say that value will adjust itself so as to
equalize demand with supply, is, in fact, to say that it will adjust
itself so as to equalize the demand on one side with the demand on the
other.
The _tendency_ of imports to balance exports may be seen from
Chart No. XIII, on the next page, which shows the relation between
the exports and imports solely of merchandise, and exclusive of
specie, to and from the United States. From 1850 to 1860, after
the discoveries of the precious metals in this country, we sent
great quantities of gold and silver out of the country, purely as
merchandise, so that, if we should include the precious metals
among the exports in those years, the total exports would more
nearly equal the total imports. The transmission of gold at that
time was effected exactly as that of other merchandise; so that to
the date of the civil war there was a very evident equilibrium
between exports and imports. Then came the war, with the period of
extravagance and speculation following, which led to great
purchases abroad, and which was closed only by the panic of 1873.
Since then more exports than imports were needed to pay for the
great purchases of the former period; and the epoch of great
exports, from 1875 to 1883, balanced the opposite conditions in
the period preceding. It would seem, therefore, that we had
reached a normal period about the year 1882.(271) A fuller
statement as to the fluctuations of exports and imports about the
equilibrium will be given when the introduction of money in
international trade is made. The full statement must also include
the financial account.
[Illustration: Chart XIII.]
Chart XIII. _Value of Merchandise_ IMPORTED _into (dotted line) and_
EXPORTED _from (black line) the United States from 1835 to 1883_.
§ 5. The cost to a country of its imports depends not only on the ratio of
exchange, but on the efficiency of its labor.
We now pass to another essential part of the theory of the subject. There
are two senses in which a country obtains commodities cheaper by foreign
trade: in the sense of value and in the sense of cost: (1.) It gets them
cheaper in the first sense, by their falling in value relatively to other
things; the same quantity of them exchanging, in the country, for a
smaller quantity than before of the other produce of the country. To
revert to our original figures [of the trade with Germany in cloth and
linen]: in England, all consumers of linen obtained, after the trade was
opened, seventeen or some greater number of yards for the same quantity of
all other things for which they before obtained only fifteen. The degree
of cheapness, in this sense of the term, depends on the laws of
International Demand, so copiously illustrated in the preceding sections.
(2.) But, in the other sense, that of cost, a country gets a commodity
cheaper when it obtains a greater quantity of the commodity with the same
expenditure of labor and capital. In this sense of the term, cheapness in
a great measure depends upon a cause of a different nature: a country gets
its imports cheaper, in proportion to the general productiveness of its
domestic industry; to the general efficiency of its labor. The labor of
one country may be, as a whole, much more efficient than that of another:
all or most of the commodities capable of being produced in both may be
produced in one at less absolute cost than in the other; which, as we have
seen, will not necessarily prevent the two countries from exchanging
commodities. The things which the more favored country will import from
others are, of course, those in which it is least superior; but, by
importing them, it acquires, even in those commodities, the same advantage
which it possesses in the articles it gives in exchange for them. What her
imports cost to her is a function of two variables: (1) the quantity of
her own commodities which she gives for them, and (2) the cost of those
commodities. Of these, the last alone depends on the efficiency of her
labor; the first depends on the law of international values; that is, on
the intensity and extensibility of the foreign demand for her commodities,
compared with her demand for foreign commodities.
The great productiveness of any industry in our country has thus
two results: (1) it gives a larger total out of which labor and
capital at home can receive greater rewards; and (2) the
commodities being cheaper in comparison than other commodities not
so easily produced, furnish the very articles which are most
likely to be sent abroad, in accordance with the doctrine of
comparative cost. In the United States, those things in the
production of which labor and capital are most efficient, and so
earn the largest rewards, are precisely the articles entering most
largely into our foreign trade. That is, we get foreign articles
cheaper precisely because these exports cost us less in labor and
capital. These, of course, since we inhabit a country whose
natural resources are not yet fully worked, are largely the
products of the extractive industries, as may be seen by the
following table of the value of goods entering to the greatest
extent into our foreign export trade in 1883:
Raw cotton $247,328,721
Breadstuffs 208,040,850
Provisions and animals 118,177,555
Mineral oils 40,555,492
Wood 26,793,708
Tobacco 22,095,229
These six classes of commodities are arranged in the order in
which they enter into our export trade, and are the six which come
first and highest in the list.