But the argument is inconclusive, for capital and labour do not circulate from one nation to another in the same way as they do within a country. The distribution of industry among the various nations is regulated, not by absolute cost of production, but by relative cost of production. The credit of having shown this belongs to Ricardo.
Smith’s demonstration of the inconveniences of Protection is incomplete, and we feel the incompleteness all the more when he attempts to prove the advantages of international trade.
The real and decisive argument in favour of free exchange turns upon a consideration of the consumer’s interests. Increased utilities placed at his disposal mark the superiority of free exchange, or as John Stuart Mill puts it, “the only direct advantage of foreign commerce consists in the imports.”[234] With Smith this is the point of view developed least of all. True, he wrote that “consumption is the sole end and purpose of all production. But, in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer.”[235] This criticism, however, was placed at the end of his examination of the Mercantilist system in chap. 8 of Book IV. It is not found in the first edition of the work, and was only added in the third.[236]
It is the point of view of the producer that Smith invariably adopts when attempting to illustrate the advantages of international trade.[237]
Just now foreign trade seemed to afford a means of disposing of a country’s surplus products, and this extension of the market, it was argued, would lead to further division of labour and increased productivity.[238] But one is led to ask why, instead of producing the superfluous goods which it must export, it does not produce those things which it is obliged to import.
Smith, being now desirous of showing that international trade necessarily benefits both countries, bases his argument upon the fact that the merchants in both countries must make a profit—i.e. get an additional exchange value, which must be added to the others. To this Ricardo justly replied that the profits of a merchant do not necessarily increase the sum of utilities possessed by any country.
Here again, in striking contrast with the attitude of the Physiocrats, Smith, despite himself, has championed his own adversaries. As yet he is not sufficiently rid of Mercantilist prejudice not to be concerned with the welfare of the producer, and in his great work we find excellent argument and debatable points of view placed side by side. It does not appear that he himself realised this incompatibility. An irresistible tide was sweeping everybody before it in the direction of a more liberal policy. It proved too powerful for his contemporaries, who were not concerned to give a careful consideration to every part of his thesis. Enough that they found in him an ardent champion of an attractive cause.
We have already noticed more than once the hesitation which Smith displays when he comes to apply his principle, and we must again refer to it in this connection.
Theoretically a champion of absolutely free exchange, he mitigates his belief in practice, and mentions an exception to his policy which seemed to him a mere matter of common sense. “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals, irresistibly oppose it.”[239] Facts have belied this prophecy, like many others. England of the nineteenth century succeeded in realising this Utopia of free exchange—almost to perfection.
Without any illusion as to the future, his condemnation of the past was not altogether unqualified. He justified some of the acts that were inspired by Mercantilism. “The act of navigation[240] is not favourable to foreign commerce,” said he; “as defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”[241] In another instance he justifies an import duty where a tax is levied upon goods similar to those imported. Here an import duty merely restores that normal state of competition which was upset by the imposition of the Excise. Retaliation as a means of securing the abolition of foreign duties is not altogether under his ban.[242] And he finally admits that liberty is best introduced gradually into those countries in which industry has long enjoyed Protection or where a great number of men are employed.[243]
His practical conclusion is somewhat as follows: Instead of innumerable taxes which hinder importation and hamper production, England ought to content herself with the establishment of a certain number of taxes of a purely fiscal character, placed upon commodities such as wine, alcohol, sugar, tobacco, cocoa. Such a system, though perfectly consonant with a great deal of free exchange, would yield abundant revenue to the Treasury, and would afford ample compensation for the losses resulting from the introduction of Free Trade.[244]
England has followed his advice, and her financial system is to-day founded on these bases. Few economists can boast of such a complete realisation of their projects.
IV: THE INFLUENCE OF SMITH’S THOUGHT AND ITS DIFFUSION. J. B. SAY
The eighteenth century was essentially a century of levelling down. In Smith’s conception of the economic world we have an excellent example of this. Its chief charm lies in the simplicity of its outlines, and this doubtless accounted for his influence among his contemporaries. The system of natural liberty towards which both their political and philosophical aspirations seemed to point were here deduced from, and supported by, evidence taken direct from a study of human nature—evidence, moreover, that seemed to tally so well with known facts that doubt was out of the question. Smith’s work still retains its irresistible charm. Even if his ideas are some day shown to be untenable—a contingency we cannot well imagine—his book will remain as a permanent monument of one of the most important epochs in economic thought. It must still be considered the most successful attempt made at embracing within a single purview the infinite diversity of the economic world.
But its simplicity also constituted its weakness. To attain this simplicity more than one important fact that refused to fit in with the system had to remain in the background. The evidence employed was also frequently incomplete. None of the special themes—price, wages, profits, and rent, the theory of international trade or of capital—which occupy the greater portion of the work, but has been in some way corrected, disputed, or replaced. But the structure loses stability if some of the corner-stones are removed. And new points of view have appeared of which Smith did not take sufficient account. Instead of the pleasant impression of simplicity and security which a perusal of Smith’s work gave to the economists of the early nineteenth century, there has been gradually substituted by his successors a conviction of the growing complexity of economic phenomena.
To pass a criticism on the labours of Adam Smith would be to review the economic doctrines of the nineteenth century. That is the best eulogy one can bestow upon his work. The economic ideas of a whole century were, so to speak, in solution in his writings. Friends and foes have alike taken him as their starting-point. The former have developed, extended, and corrected his work. The latter have subjected his principal theories to harsh criticism at every point. All with tacit accord admit that political economy commenced with him. As Garnier, his French translator, put it, “he wrought a complete revolution in the science.”[245]