OMMONWEAL [tudy of the federal system political economy A. P. HILLIER THE LIBRARY OF THE UNIVERSITY OF CALIFORNIA LOS ANGELES 10 THE COMMONWEAL THE COMMONWEAL A STUDY OF THE FEDERAL SYSTEM OF POLITICAL ECONOMY BY ALFEED P. HILLIEE, BA, M.D. " Hear, for thy children speak from the uttermost parts of the sea" —Kipling LONGMANS, GEEEN, AND CO. 39 PATERNOSTER ROW, LONDON NEW YORK, BOMBAY, AND CALCUTTA 1909 -yy PREFACE. At a time when the proper understanding of certain problems in Political Economy is of more profound moment to the British Empire than perhaps at any other juncture in its history, it is little short of a calamity that issues — the satisfactory determination of which depends upon an unimpassioned and rational study of this subject — should have been swept into the seething vortex of party political controversy. A further difficulty with which any writer is confronted to-day is the vast field over which the subject may be pursued, and the difficulty of de- ciding what portions of it to deal with, and what portions to avoid. For my own part I have attempted this formid- able task only after visiting the United States, Germany, and some of the Colonies chiefly con- cerned ; and, after endeavouring to study, so far as was practicable, the fiscal systems in vogue on the spot. I have endeavoured to write a book which practical men of affairs may find time to 4'^ (VV^^ vi PREFACE read, and which, therefore, has of necessity been a short rather than a long one. I have not attempted to traverse all the ground covered by writers on the " Principles of Politi- cal Economy," but merely to deal with certain of these " Princii^les " as enunciated by various writers of the British laissez-faire school, which have influenced for many years the judgment and administration of politicians in dealing with international trade. The endeavour to trace the effect of certain historic incidents and developments on the fiscal systems of different countries, has led me to the conclusion, that, to suppose the expediency of the fiscal policy of any country turns on an Academic controversy as to the abstract merits of Protec- tion and Free Trade, is misleading. To hold such a view is to misapprehend the nature both of politics and economics. Free Trade is, as a rule, a privilege to the consumer. Protection, on the other hand, has often been held to be a national necessity, and, though less attractive to that hypothetic entity, the con- sumer uninterested in the industries of his country, is, in certain cases, an advantage and a privilege to the producer. To balance conflicting interests, to determine equitably the allotment of these privileges, so as to obtain the maximum of advantage to the well-being of the State, should be one of the chief arts of Political Economv. PREFACE vii In the following pages the manner in which certain great federations have secured to their own citizens many of the advantages of Free Trade over large areas, more or less conserved by an outer wall of Tariffs, will be considered. The sub-title of the book has been chosen as one which appears to be fairly descriptive of a system already in vogue in certain countries, and a modification of which is now under con- sideration for the British Empire. Mabkyate Cell, Near Dunstable, Heetfoedshirb. CONTENTS. CHAPTER I. PAGE The Writers and Systems 1 Political Economy — Its definition and function — The views of John Stuart Mill, Adam Smith, List and others — The cosmo- politan ideal — Cosmopolitical Economy — Economic laws — Jevons — Copartnership. CHAPTER II. Laissez Faibe 11 Restraints on manufacture in 17th and 18th centuries — Corn Laws — Limits of the laissez-faire principle — Infringements of the principle — Its application in exchange alone absolute — Labour protected — Free importation of products of foreign sweated labour — Application of policy in India and Egypt — Modern departures from principle even with imports — Predictions of laissez-faire writers, Adam Smith, Mill and Cobden — Natural Protection— Effect of free imports on agri- culture — Contrast between the predictions of the laissez- faire schoolmen and of List. CHAPTER III. Some Economic Fallacies 27 Do imports balance exports? — The views of Mill, Farrer, the Fiscal Blue Book, and Lord Avebury — Sources of importing CONTENTS PAGE power otlier than exports — No necessary or constant relation between imports and exports of commodities — Character and extent of each must be studied separately — Efiect of the suggestio falsi is to stifle discussion and paralyse action — The degradation of industry — Instances of erroneous conclusions arrived at by Lord Farrer and Lord Avebury as to the effect of imports on our exports — Goods not necessarily paid for by goods — Foreign invest- ments — Their magnitude and influence on imports — Displacement of British labour — Professor Marshall and change of employment — Capital and labour — The inci- dence of the burden of import duties under different con- ditions — Mr. Deakin on import duties — Recapitulation — The alternatives before us. CHAPTER IV. America and Peotection 47 Alexander Hamilton— The problems before him— American in- fluence upon List — The fiscal system an instrument of Federation in the United States and Germany — The Con- stitution of the United States — Hamilton's Report on Manufactures — The attraction of foreign capital and labour — Symmetrical national development — Lord Avebury condemns Protection in America — His alternative con- sidered — Hamilton's condition for acceptance of Free Trade— Universal Free Trade— Mr. A. Mosely's Memoran- dum on American Tariffs — Remarkable progress in steel and cotton industries — Could better results have been ob- tained under policy of laissez faire ? CHAPTER V. Germany and Heb Customs Union 68 The Holy Roman Empire — Modern German Empire — Its Federal character — The wars of Prussia — The Zollverein an instrument of Federation — List's National System of Political Economy — His estimate of England's position in 1844 — Free Trade in Germany — The Continental blockade — The work of the Zollverein — Estimates of List and Mill CONTENTS xi PAGE on effects of Protection in America compared — Bismarck's Free Trade era — His return to Protection— State Workmen's Insurance — Emigration from Germany and Great Britain — Socialism — Universal military training. CHAPTER VI. Great Britain before Free Trade 86 The industrial development of England — Sheep-raising — Wool — Woollen manufactures — Early measures of Protection — The cotton industry— The Methuen Treaty, 1703 — The views of Adam Smith and List on the efiect of this Treaty — Ship- ping and Navigation Laws — If Protection be desirable for infant industries, may it not be so for injured industries ? CHAPTER VII. Great Britain's Free Trade Era 95 Free Trade policy of England defined — Its expediency — Cobden and Bright on the Corn Laws — First half of the Free Trade era — Foreign rivals in the forties — Second half of Free Trade era — Industrial position — Injured industries — Motor industry — Woollen manufactures — Shipbuilding — Cotton — The wealth of England not necessarily an index to success of manufactures — The attractions of England as a place of residence — Great value of British Home Market — British wealth and British industry are things apart — Investment abroad — The mazy abstractions of the President of the Board of Trade— Analysis of a foreign investment — Unsatis- factory nature of our trade with Germany — The calamity of unemployment - Producer must be considered with the consumer — Protected labour and free imports — Objections to a Tariff — Bismarck on the British Free Trade era. CHAPTER VIII. The Colonies and India 120 The alternatives — The fate of small States— The great Federal instrument— Preference — Free Trade and Disintegration— CONTENTS PAGE Universal Peace — The bygone forebodings of Lord Morley— Further miscalculations — March of events forward to Federation, not backward to separation— A Customs Union — Colonial fiscal systems vary, all have one feature in com- mon, the taxation of imports — Three sets of proposals on Preference —The fiscal system of India — British objections to Preference considered — Free Food fallacy — England an obstacle to Freer Trade — Most-favoured Nation treatment — Fiichs on the Trade Policy of Great Britain— Closer union essential to the Empire - Has Free Trade been carried too far ?— Change must come " soon, or for ever too late " — Fiichs' warning to Germany— The advantages of Prefer- ence — The goal a federated world State. CHAPTEK IX. Democracy and Empire 145 The Federal Movement — Colonial Nationalism — The French Canadians and Dutch South Africans — The spirit of local patriotism a strength, not a weakness — Empire and Liberty — The Dual Empire — Self-governing and governed — One democracy cannot dictate to another — Flammantia mcenia Mundi. APPENDICES. I. State Insurance for Workmen in Gebmany . . , 151 11. The Navigation Act 157 CHAPTEE I. THE WRITERS AND SYSTEMS. Political Economy — Its definition and function — The views of John Stuart Mill, Adam Smith, List, and others — The cosmopolitan ideal — Cosmopolitical Economy — Economic laws — Jevons. There is an Eastern proverb which says, " The altar- cloth of one seon is the doormat of the next". The significance of this utterance will appeal to the student of history and theology. It contains also a warning to the student of the exact sciences ; but for workers in those branches of research and endeavour on the path of knowledge which by common consent are de- scribed as being within the category of science, but to which the epithet " exact " is not usually permitted, this cynical observation will appear to have a special meaning. Pohtical Economy has been called the Dismal Science, and doubtless not without cause. And yet, however abstruse, and even obscure, writings on this subject may sometimes be, and however imperfect as science, there can be no doubt that Political Economy does at least endeavour to deal in a rational spirit of inquiry with the material and practical interests of mankind. In the words of John Stuart Mill, a gifted and at- tractive author, " Writers on Political Economy profess ^ ^ John Stuart Mill, Principles of Political Economy. 1 2 THE COMMONWEAL to teach, or to investigate, the nature of Wealth and the laws of its production and distribution, including, directly or remotely, the operation of all the causes by which the condition of mankind, or of any society of human beings, in respect to this universal object of human desire, is made prosperous or the reverse. Not that any treatise on Political Economy can discuss or even enumerate all these causes ; but it undertakes to set forth as much as is known of the laws and principles according to which they operate." In this definition of the aspirations of Political Econo- mists, the claims of Political Economy to be regarded as a science — as distinguished from other branches of political literature — are suggested in sufficiently modest terms, while Wealth as the main object of its teaching is avowed in words which are brief and unmistakable. But a perusal of some of the older writers on the subject, especially of the two great classics Adam Smith and List, does raise the question whether this conception of Political Economy is not somewhat narrow. In the minds of both of them, as evidenced in their writings, there were undoubtedly bound up with the subject the ideas of national stability and of power, developing simultaneously and as it were co-ordinately with Wealth. It is in this sense that Adam Smith in his Wealth of Nations addressed himself to a consideration of the Navi- gation Act. After recapitulating the principal disposi- tions of this Act (see Appendix) he adds, "The Act of Navigation is not favourable to foreign commerce or to the growth of that opulence which can arise from it." . . . " 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." The counsel here given recalls in a forcible manner the ob- THE WRITERS AND SYSTEMS 3 servation addressed by Solon to Croesus: "If a man with better iron than you should meet you, he will be master of all this gold ". In List's great work, A National System of PolitiGol Economy, the national spirit predominates in a still greater measure. List wrote with an avowed purpose and that purpose a political one. And he enjoys the distinction of having advocated a commercial and im- perial policy which has been adopted, developed, and maintained by his country with the greatest success. List was the intellectual founder of the German Zoll- verein, and an able and consistent advocate of that consolidation of Imperial Germany which grew out of the Zollverein policy. In dealing with the more purely theoretical aspects of Political Economy about which not only are opponents not agreed, but with regard to which, if we may cite so high a modern authority as Professor W. J. Ashley, they frequently fail to under- stand each other. List displays as acute, practical and lucid an insight as any of his more subtle doctrinaire rivals. The different points of view from which these two great economists regarded their subject is fairly well expressed in the titles chosen for their books. To Adam Smith, Wealth appeared an object in whose train most other desirable national objects would naturally follow ; to List national productive power of an abiding character was the essential complement of Wealth, a complement for the attainment of which special national efforts must be directed, and without which Wealth might be only an illusory and temporary form of national well-being. Adam Smith was in many respects under the in- fluence of his immediate predecessors in the field of Political Economy — the French Economists. Of these 1* 4 THE COMMONWEAL Quesnay and Dnpont de Nemours were the authors of a work entitled : Physiocratie, ou die Gouverncment le i^lus avantageux au Genre Humain. In spite of the rivalries and wars around them, these authors refused to recognise that the human race was still unfortunately not united into one happy family, and that until that moment arrived public economy must continue to be for every separate nation a national and not a cosmopolitan economy. Another French writer of this period, Gour- nay, addressed himself to the task of vindicating the freedom of industries and commerce from any form of restriction or restraint. And he it was who first intro- duced into the literature of Economics that expression fraught with so much both of good and of evil — laissez faire. It is in conformity with the teachings of this French school that Adam Smith urges that all restrictions on imports, imposed on behalf of the internal industries of a country, are necessarily impolitic ; and that to attain the maximum of national prosperity we simply have to follow the maxim of letting things alone {laissez aller and laisser faire). It is true Adam Smith subordinated the academician to the patriot as in his attitude on the Navigation Act already referred to. But his main object was, as List very ably points out, to prove, as Quesnay endeavoured to prove before him, that "pohtical or national econ- omy must be replaced by cosmopolitical or world-wide economy ". Such a scheme involves the assumption of a world permanently at peace, practically in accord on all the great questions affecting the material welfare of different nations and finally following a system of universal Free Trade. In fact it would almost appear to assume in the nations of the world an entire absence of THE WRITERS AND SYSTEMS 5 that profound selfishness which Adam Smith himself regarded as the main motive power in the individual whenever his material welfare was concerned. Cosmopolitanism, which is to find expression in some vague form of international unity, has been the dream ahke of the conquerors, from Coesar to Napoleon, and of the laissez-faire schoolmen. It has never yet been realised. The one class has approached no nearer to its attainment than the other. No conqueror will ever enforce it. No economic theory is likely to ac- complish it. But in the course of political evolution it is conceivable that the gradual aggregation into larger groups of the various states of the world will, under the influence of federalism and negotiation, dictated in the interest of that security so essential to industrial and commercial development, bring us nearer to the hitherto ever apparently receding goal. If this state be ever reached, Cosmopolitical Economy will doubtless have its value. Until then Political Economy must be made to serve us, and in the interests of intellectual honesty let us endeavour to distinguish between the two. After these preliminary observations it need hardly be said that in the writer's opinion the definition given in more or less general terms by the writers of the laissez- faire school of Political Economy is scarcely adequate. Questions of pure economics, regardless of all political considerations, should be frankly and dispassionately discussed and described as such ; but where the term " political " is used, some national or political significance should also be implied. Political Economy should deal with the relation of the State, the community, and the individual to production, distribution, and exchange, with a view to ascertaining 6 THE COMMONWEAL the principles which promote stability, wealth, and pro- ductive power in the State, and the material welfare of all its citizens. Wealth without some guarantee of the permanence of productive power is a danger rather than an advantage to a State, and to promote the former, entirely regardless of the latter, is bad politics and worse economy. To any inquiring student on the history and literature of Political Economy since the days of Adam Smith, the mass of matter by different authors, in different coun- tries, more particularly in England and Germany, will be found to be embarrassingly great. To review it at any adequate length would be beyond the scope of a work of this nature, but it is only fair to say that the extremely controversial character of a great deal of this literature is sufficient evidence of the necessity for re- garding many propositions, not infrequently described by their authors as " economic laws," with very considerable caution. In the realm of physics certain laws have been enunciated, such as the law of gravity, which have stood the test of time, but in the realms of metaphysics or sociology it is hard to find their parallel. At the same time there is an undoubted bias, deep- rooted in the human mmd, in favour of formulae, and such formulae the various writers on Political Economy have readily supplied. But the doctrines expressed by such formulae once embraced and assimilated, have a marked influence on the estimate, by those holding them, not only of the conclusions to be drawn from the results of any historical investigation, but also on the view taken of contemporary social or political pheno- mena. Should any of these doctrines be in their essence fallacious, the influence they exercise will be obviously misleading. THE WRITERS AND SYSTEMS 7 Keference has already been made to the conception of the meaning and objects of Political Economy held by that most distinguished of the laissez-faire school of writers, John Stuart Mill. That both Mill and Eicardo have contributed much of permanent value and interest to the elucidation of many economic problems, no im- partial reader will deny. Yet we find no less an authority than Jevons, in his preface to the second edition of his work on the Theory of Political Economy, announcing as his conclusion: " That the only hope of attaining a true system of economics is to fling aside, once and for ever, the mazy and preposterous assumptions of the Eicardo school". He subsequently speaks of the doctrines of this school as " Eicardo-Mill Economics," explaining how '' that able but wrong-headed man, David Eicardo, shunted the car of economic science on a wrong line, a line, however, on which it was further urged towards confusion by his equally able and wrong-headed admirer, John Stuart Mill." But whatever measure of this severe criticism may be merited by the two writers referred to, who in their over-zealous desire to formulate a new science have in- curred such a sweeping condemnation from Jevons, they have at least been surpassed in this direction by a German writer, Von Thiinen, who in his day was re- garded as a great authority on the Political Economy of agriculture. He came to the conclusion, through a process of abstract mathematical reasoning, that the amount of " natural wages " should equal J'^ a being taken as the necessary expenditure of the labourer for subsistence (a somewhat uncertain quantity) and^ as the product of his labom\ Von Thiinen attached so much importance to his formula that he left instructions to have it engraved on his tomb. But to the impartial 8 THE COMMONWEAL reader this formula, like others of a similar kind ex- pressed in less mathematical but none the less positive terms, savours more of a political or sociological opinion than of an economic law. For the view, which this formula is intended in some- what too exact terms to express, that the labourer should be encouraged to acquire some share in the profit of an industry, there is a good deal to be said.^ Certain large industrial corporations both in England and America are already, and very wisely, giving effect to such a view. The co-partnership system, in so far as it meets the natural desire of the workman for some relative participation in the wealth which, by his labour, he is partly instrumental in creating, is the best practical answer to the demands of Socialism which organised industry has yet made. But while the adoption of a principle of this sort may or may not, on ethical, social, and political, grounds be wise and expedient and even economically sound, it by no means follows that it is the expression of some nebulous academic abstraction de- scribed as an "economic law," much less that such a law can be expressed in the terms of a mathematical or any other formula. It is largely such a mistaking of opinion for axiom, on the part of Kicardo and Mill, which has evoked the scathing denunciation of Jevons. And it is this same mental attitude and method which has filled the shelves of reference libraries with tomes which are seldom read, or, if read, seldom remembered. If Political Economy be regarded in any sense as a 1 The United States Steel Trust and certain large companies in England allow their workmen to obtain their shares in small quantities and on favourable terms. Sir Christopher Furness has recently negotiated an arrangement whereby his workmen may acquire a participation in the profits of his business. THE WRITERS AND SYSTEMS 9 science, and not as a branch of political literature, it must be frankly recognised that that science will vary from age to age in many vital and essential points. It will vary as the values set upon wealth, productive power, individual rights, the prerogatives of the State, and even such qualities as altruism and patriotism, vary. In fact, if it is to be described in scientific language at all, it can only be described as a " complex variable ". One of the soundest writers on Political Economy in the first half of the nineteenth century, and a very trenchant critic of some of the Kicardian doctrines, was Eichard Jones — Professor at Haileybury — of whose work John Stuart Mill made considerable use. In regard to the procedure to be followed in studying Political Eco- nomy, Jones writes: "If we wish to make ourselves acquainted with the economy and arrangements by which the different nations of the earth produce and distribute their revenues, I really know but of one way to attain our object, and that is, to look and see. We must get comprehensive views of facts that we may arrive at principles that are truly comprehensive. If we take a different method, if we snatch at general principles and content ourselves with confined observations, two things will happen to us. First, what we call general principles will often be found to have no generality — we shall set out with declaring propositions to be universally true which, at every step of our further progress, we shall be obliged to confess are frequently false; and, secondly, we shall miss a great mass of useful knowledge which those who advance to principles by a comprehensive ex- amination of facts necessarily meet with on their road." He strongly objected to looking upon the world as being composed of theoretic "economic men," and in- sisted on the importance of studying the real world in 10 THE COMMONWEAL its varying conditions, and different stages of industrial and general development. The view enunciated by this distinguished, though but little known writer, is one which was strongly held and acted upon by List. The advice is so eminently suited to the present stage of transition in economic thought and practice that it indicates the method which it is the writer's object to endeavour to follow. CHAPTEK II. LAISSEZ FAIRS Restraints on manufacture in seventeenth and eighteenth centuries — Corn Laws — Limits of the laissez-faire principle — Infringe- ments of the principle — Its application in exchange alone ab- solute — Labour protected — Free importation of products of foreign sweated labour — Application of policy in India — Modern departures from principle even with imports — Pre- dictions' of laissez-faire writers, Adam Smith, Mill, and Cobden — Natural Protection — Eflfect of free imports on agri- culture — Contrast between the predictions of the laissez-faire schoolmen and of List. It is now necessary to examine some of the leading principles and doctrines propounded by the school of laissez-faire writers and politicians, which have largely dominated the economic thought of Britain for so many years, and also to consider the less widely known ob- jections to many of these propositions which have been advanced by List and other writers. We may begin by considering the doctrine of laissez faire itself. The origin of the expression in the writings of the French economist Gournay has already been referred to. The doctrine it expresses was not only adopted and expounded by Adam Smith in his Inquiry into the Natwre and Causes of the Wealth of Nations, but was also incorporated in the utilitarian philosophy of Bentham and his followers, and in the teachings of 11 12 THE COMMONWEAL Eicardo and Mill and their political exponents of the Manchester school. Coming as it did, when first introduced, as a protest of rationalism and individual liberty against restraints on the operations of manufacturers and trade which ex- isted throughout Europe m the seventeenth and eight- eenth centuries, it excited the eager attention of many writers, continental as well as English. The extent to which these restraints existed in such a country as France, even down to the Eevolution, would be almost incredible if authentic records of them were not still in existence. One quotation from Roland, the Girondist Minister, cited by John Stuart Mill, will illustrate this point. Referring to certain minute tyrannical Govern- ment restrictions regulating the course of different in- dustries, he writes: "I have frequently seen manu- facturers visited by a band of satellites who put all in confusion in their establishments, spread terror in their families, cut the stuffs from the frames, tore off the warp from the looms, and carried them away as proofs of in- fringement ; the manufacturers were summoned, tried and condemned ; their goods confiscated ; copies of their judgment of confiscation posted up in every public place ; fortune, reputation, credit, all was lost and destroyed ". When we further bear in mind that even in England as late as 1835, under a continually fluctuating scale of charges, the duty on corn stood as high as 34s. 8d. a quarter, we shall realise the almost prohibitive measure of protection accorded to the staple article of food in this country. In the Free Trade agitation between the years 1839-47, principally directed in the first instance against the inordinately high corn duties, the arguments used were largely drawn from the teachings of Adam Smith. The expression laissez /aire was practically inter- • LAISSEZ FAIBE 13 preted in the domains of British industry and commerce by the term Free Trade — trade free, that is, from Government duties of any sort or kind. When the ex- treme measure of protection afforded to agriculture by the old Corn Laws is considered, it is easy to understand the cordial welcome accorded by the masses to an al- ternative policy. And although that policy may have been carried too far and its advantages over-stated and over-estimated, it at least swept away the excessively heavy duties imposed by the Corn Laws.^ That a policy which promised so much should be hailed as the outcome of a new gospel, the discovery of a new " economic law," is perhaps not unnatural. But the high hopes and aspirations founded on this policy of laissez faire set too high a demand and value upon its potentiaHties. It accomplished much — it has contributed much to human thought and human action which will remain for ever a valuable inheritance. But that it cannot be regarded as the one final, deter- mining and guiding law on the problems of international exchange and industry, history, since the policy was first introduced, has rendered abundantly apparent. Trades Unions, Factory Laws, Unemployment Bills — even the Poor Law, are all in the strictly economic sense inter- ference with the laws of supply and demand, the free- dom of contracts, the freedom of trade, and therefore infringements of the principle of laissez faire. In his Principles of Political Economy John Stuart Mill has a chapter entitled " Of the grounds and limits of the Laissez Faire or Non-interference Principle ".^ And in this chapter he indicates many directions in which a limit has to be set to the applications of such a principle. ^ The Corn Laws are dealt with in chap. vii. ^Book v., chap. xl. 14 THE COMMONWEAL Thus while eulogising the superior efficiency of private agency owing to the close and strong interest ensured in the work, the importance of cultivating habits of collec- tive action in the people, and the desirability of making laissez faire the general rule, he points out that this rule is Hable to large exceptions. He cites cases in which the consumer is an incompetent judge of the commodity. " The uncultivated cannot be judges of cultivation. Those who most need to be made wiser and better usually desire it least, and if they desired it they would be incapable of finding their own way to it by their own lights". . . . "Education, therefore, is one of those things which it is admirable in principle that a Govern- ment should provide for the people. The case is one to which the non-interference principle does not necessarily extend." In the same way protection of children and young persons is provided for. Instances of this sort may be multiplied indefinitely. Of the limitations placed on the application of the laissez-faire principle by Governments of all parties in England since Mill wrote we have innumerable instances. In fact the principle for all practical purposes has merely come to be regarded — outside the field of trade and industry — as an amiable expression of the natural desire of all free people to accord to individuals and groups of individuals alike as much liberty as may be consistent with, and expedient for, the general welfare of society. Even in the field of trade and industry itself it is only in the portion dealing with exchange — the imports and exports of a country — that the principle is still held to have a certain sacro-sanct character, the least infringe- ment of which would be attended bv at least economic LAISSEZ FAIRS 15 disadvantage. In dealing with the labour supply — the most important of the essential factors of industry — measures have continually been carried in direct conflict with the principle of laissez /aire and also in diametric opposition to the teachings of Cobden and the Man- chester school. Labour is protected by a long series of ParHamentary Acts. Thus in the ten years from 1896 to 1905 alone there were put in force a number of Acts of this nature, of which the following were the most important : — The Foreign Prison-made Goods Act. To prohibit the importation of foreign-made goods. The Mines Act for the Prohibition of Child Labour underground. The Factory and Workshops Act. A comprehensive measure bringing within one statute nearly a dozen previous Acts regulating and controlHng the conditions of labour. Further Acts on similar lines deal with labour in coal mines, the employment of children, shop hours, restric- tions on the importation of, aliens and unemployed workmen. The Unemployed Workmen Act constitutes an entirely new departure in English legislation, under which an organisation with a view to the provision of employment for workmen in proper cases was perma- nently instituted. In every direction, then, it is evident measures have been taken to restrict labour conditions in accordance with requirements and considerations other than those of the laws of supply and demand. Labour has, and rightly has, by modern legislation certain privileges accorded it quite irrespective of purely economic value. It is protected in a measure from the unrestricted com- petition of labour at home, and through the Aliens Act to 16 THE COMMONWEAL some extent from the unrestricted importation of aliens. But if we turn from labour to the principal products of labour, those manufactured goods which it is one of the chief objects of industry to produce, we find the doctrine of laissez /aire still reigns almost supreme. It is true the importation of prison-made goods is prohibited, but the importation of goods the product of sweated labour in foreign countries goes on un- checked by legislation or import duty. In this manner British labour is directly encroached upon, in its own field, by the competition of cheap and unrestricted labour. The principles of Free Trade, in the opinion of the Cobdenite school and British Governments for over half a century, demand that, no matter what their origin or conditions of production, manufactured goods, with the foregoing exceptions of prison-made goods, should be admitted free of any duty ; or if, as in the case with wines and spirits, duties be imposed, the same articles, if manufactured at home, shall be subjected to a corre- sponding excise. This policy is not only adhered to in Great Britain but has been enforced in a remarkable way in India, where the native-made cotton and fabrics are subjected to an excise equivalent to the import duty on these articles, which for revenue purposes is levied on all imported goods in that country. But in recent years there has been more than one instance in which a British Government has departed from the strict letter and spirit of this policy. Thus there is a duty on cocoa which is higher in the case of the manufactured powder than in that of the raw bean, and in 1907 the Liberal Prime Minister remarked in his Budget Speech: " I think there is a good deal of the flavour of Protection about the present scale of our LAISSEZ FAIRE 17 cocoa duty. I should not defend it myself from the point of view of the free trader." In the same way a differentiation in the duties on stripped and unstripped tobacco, the Sugar Convention, the Patents Act, the Merchant Shipping Act, and other similar measures all indicate a relaxation in the strict application of the principle of laissez /aire even in dealing with industry and trade. Change in such a complex organisation as the fiscal system of a constitutionally governed country, dependent as it must be upon the gradual trend of opinion in the electorate, usually takes place at a rate which is by no means satisfactory to its more ardent advocates. The changes referred to may not amount to very much, and most of them have been, with not very successful in- genuity, defended even on Free Trade grounds. But they do appear to indicate a departure from the extreme rigidity of the laissez-faire school of statesmanship in the provinces of industry and trade, not unhke those already referred to in the province of labour. Never- theless, in spite of these deviations from the straight and narrow way of economic infallibility, the doctrine and policy of Free Trade, or more accurately free manufac- tured imports, still has advocates of distinguished abihty and sincerity, and still dominates, though in a slightly lesser degree, the fiscal policy of Great Britain. In these circumstances it will be of interest to examine some of the arguments on which the founders of the Free Imports school based their views of Political Economy, and committed themselves to certain predic- tions the majority of which have remained unfulfilled. One thing on which both Adam Smith and Cobden insisted, was that the free importation of foreign corn " could very little affect the interest of the farmers of 2 18 THE COMMONWEAL Great Britain ". Thus in his Wealth of Nations Adam Smith says : — ^ " Even the free importation of foreign corn could very little affect the interest of the farmers of Great Britain. Corn is a much more bulky commodity than butcher meat. . . . The small quantity of corn im- ported even in times of the greatest scarcity may satisfy our farmers that they can have nothing to fear from the freest importation." The speeches and predictions of Cobden on this same subject have proved, as the following quotations v^ill show, disastrously erroneous: "I have never been one who believed that the repeal of the Corn Laws would throw an acre of land out of cultivation. . . . Our object is not to diminish the demand for labour in the agricul- tural districts, but I verily believe, if the principles of Free Trade were fairly carried out, they would give just as much stimulus to the demand for labour in the agri- cultural as in the manufacturing districts " (Speech in Manchester, 19th October, 1843). " So far from throwing land out of use or injuring the cultivation of poorer soils. Free Trade in corn is the very way to increase the production at home, and stimulate the cultivation of its poorer soils by compel- ling the application of more capital and labour to them. We do not contemplate deriving one-quarter less corn from the soil of this country ; we do not anticipate hav- ing one pound less of butter or cheese, or one head less of cattle or sheep ! "We expect to have a great increase in production and consumption at home " (Speech in London, 8th February, 1844). " As far as lean obtain information from the books of merchants, the cost of transit from Dantzig, during an ^ Wealth of Nations, Book iv., chap. ii. LAISSEZ FAIRE 19 average of ten years, may be put down at 10s. 6d. a quarter, including in this freight, landing, loading, in- surance, and other items of every kind. This is the nakiral jjrotection enjoyed by the farmers of this country" (Speech in House of Commons, 12th March, 1844). "I speak my unfeigned conviction, when I say I be- lieve there is no interest in this country that would re- ceive so much benefit from the repeal of the Corn Laws as the farmer-tenant interest in this country. And, I believe, when the future historian comes to write the history of agriculture, he will have to state : ' In such a year there was a stringent Corn Law passed for the protection of agriculture. From that time agriculture slumbered in England, and it was not until by the aid of the Anti-Corn Law League, the Corn Law was utterly abolished, that agriculture sprang up to the full vigour of existence in England, to become what it now is, like her manufactures, unrivalled in the world' " (Speech at Manchester, 24th October, 1844). There are other fallacious views held and taught by Cobden, which will be referred to in a subsequent chapter, but an examination of the foregoing statements will show how great was his miscalculation in this most vital matter. With regard to the " natural protection " afforded the British grain-growers by freight, this charge, which was in Cobden's time undoubtedly a substantial protection to the home producer, in the case of all bulky produce, has been reduced to-day to a small fraction of what it was, and will become even smaller in the future. Kailways and steamships have transformed the world. Thus freight from Chicago to Liverpool, which in 1866-70 stood at 15s. lid. per quarter, had fallen by 1901-4 to only 3s. lid. a quarter. Under these condi- tions it is perhaps not surprising, to find that the 2* 20 THE COMMONWEAL sanguine anticipations of the laissez-faire school with regard to the effect of free imports on agriculture have not been fulfilled. Judged by any fair test that may be applied, there is no doubt that no industry has suffered more by the policy of unrestricted imports, or been more absolutely the victim of political miscalculation, than agriculture in Great Britain and Ireland. Thus statistics show (see table in footnote^) : " (1) That the average area under corn crops in this country has declined since 1871-75 by over 3,000,000 acres, or by 28 per cent. (2) That the decline has been specially marked in the case of ivheat, the average area under which has fallen by 2,060,000 acres, or by 55 per cent. Thus the land which has passed out of wheat cultivation is considerably greater than the present wheat area of the United Kingdom. (3) That the decline has affected all the crops dealt with in the table, even oats showing a decrease." If we turn to live stock, things are not quite so bad. Freight and sanitary precautions under various cattle diseases Acts, gladly enforced with the utmost vigour of 1 ACEEAGE UNDEE CeOPS IN THE UnITEI) KiNGDOM. Decline in Average Average 1907 since 1871-75. 1901-5. 1907. 1871-75. Acres. Acres. Acres. Per cent. Wheat . 3,737,000 1,677,000 1,665,000 56 Barley 2,599,000 2,024,000 1,885,000 27 Oats . 4,233,000 4,203,000 4,219,000 3 Beans and peas 907,000 425,000 478,000 47 Flax . 136,000 49,000 60,000 56 Hops 64,000 49,000 45,000 30 All corn crops 11,544,000 8,299,000 8,317,000 28 All green crops 5,074,000 4,174,000 3,901,000 23 This and the following table have been compiled from Board of Trade Returns and other official documents for the Tai-iflf Commis- LAISSEZ FAIRE 21 the law by the agricultural authorities under successive governments, have provided a certain measure of that "natural protection " which Cobden so confidently re- lied upon in the case of cereals. There has been a faUing off ^ during the last thirty years in the number of sheep reared in the country, but there is an increase in the number of pigs and cattle, although this increase has not kept pace with the increase in the population. But the worst feature of all with regard to agriculture is the great falling o& in the number of people employed on the land. Fifty years ago it is estimated that 2,000,000 people were engaged in agriculture in England and Wales, whereas to-day less than 1,000,000 are so engaged. It is therefore evident that however plausibly Free Trade advocates to-day may endeavour to explain the advantages of urban over rural occupations, the improve- ments in labour-saving machinery and other collateral developments, the original case as made by Adam Smith and Cobden for unrestricted imports, so far as agriculture and those interested in it are concerned, falls hopelessly to the ground. "Natural protection" has practically disappeared. Agriculture has gone back rather than forward. So far from farmers having had nothing to fear from unrestricted imports, the truth is that unrestricted imports have wrought havoc both in Great Britain and Ireland with farmers and agri- cultural landowners. No one who really has witnessed ^ Number of Live Stock in United Kingdom. Increase + or Decrease - in 1871-75. 1901-5. 1907. 1907 as compared with 1871-75. Sheep . .33,192,000 29,746,000 30,011,000 - 9i per cent. Pigs . 3,782,000 3,786,000 3,967,000 + 5' „ Cattle . 9,932,000 11,504,000 11,628,000 + 17 „ 22 THE COMMONWEAL the country life of England during the past sixty years and has seen the depopulation of so many of our country villages, can doubt that in this direction at least a real national loss has been incurred, and one that, could Cobden witness it to-day, he would be the first to de- plore. That the retention of a small tariff — something at least sufficient to partially compensate for the dis- appearance of the "natural protection" — would have been expedient, both on national and economic grounds, is highly probable. But whether this change, so injurious to agriculture with its depopulation of our country villages, was or was not economically avoidable, the broad fact remains that it is the direct opposite of what Adam Smith and Cobden foretold. And it is perhaps as well that those who still believe, follow and advocate implicitly, and in their entirety, the economic teaching of these Free Trade leaders, should realise that one of the arguments — that of " natural protection" — though potent sixty years ago is eliminated to-day. Another belief, held with all the fervour with which a man who thinks himself the apostle of a new gospel to mankind is capable, was Cobden' s conviction that if his country once introduced Free Trade her example would speedily be followed by all the rest of the world. Thus, speaking at Manchester on 15th January, 1846, he said : — "I believe that if you abolish the Corn Law honestly and adopt Free Trade in its simplicity, there will not be a tariff in Europe that will not be changed in less than five years to follow your example ". And even John Stuart Mill, a less impassioned orator, but a more scientific student of economics, was evidently, LAISSEZ FAIBE 23 when writing his Principles of Political Economy, of the same opinion. Thus he writes : ^ — "In countries in which the system of Protection is dechning, bid not yet ivholly given up, such as the United States, a doctrine has come into notice which is a sort of compromise between Free Trade and restriction, namely, that Protection for protection's sake is improper, but that there is nothing objectionable in having as much Protection as may incidentally result from a tariff framed solely for revenue ". That was John Stuart Mill's conception of how things were trending in the United States in 1848. Yet since then, although there have been from time to time re- adjustments of the tariff in the direction of freer trade, the manufacturing industries of the States have grown up under a protective tariff, and in 1899, after a period of prosperity following on the famous McKinley tariff — one of the highest the world has seen — Mr. McKinley said at Chicago : — "I have come ... to congratulate you and your fellow-workmen everywhere upon the improved con- dition of the country and upon our general prosperity ". Earlier in the same campaign he said : — " We want no Free Trade in the United States. . . . The capitalist can wait on his dividends, but the working- man cannot wait on his dinner." If, therefore, the imposition of a tariff for protective as well as revenue purposes be, as Mill and his followers held, improper, it must be conceded that not only the United States but all other civilised countries, including our own self-governing colonies, have, since the days of Cobden and Mill, launched upon careers of the most ^J. S. Mill, Principles of Political Economy, vol. ii., p. 487. 24 THE COMMONWEAL flagrant economic "impropriety". So far indeed from following England's example in adopting free imports, they have gone in precisely the opposite direction and have imposed tariffs not merely for revenue purposes but also with avowedly protective intention and effect. The failure of the world to follow, as was anticipated, the Cobdenite Free Trade lead, must, therefore, be ac- counted as one more of those miscalculations for which the laissez-faire school were responsible. And, as a perusal in later pages of List's forecast will show, these miscalcu- lations offer but a sorry contrast to the predictions made by List as to the effects of the policy he advocated. The idea that natural conditions of production were to be allowed free play all the world over was a fascinat- ing idea with a fine cosmopolitan air which thoroughly commended itself to Mill the philosopher and Cobden the cosmopolitan visionary of his age. Moreover, it had this further advantage, which no doubt both Mill and Cobden viewed with adequate complacency, namely, that, if carried out, we should remain and become still further the workshop of the world, receiving the comparatively immense revenues of industry, while the United States, our own colonies, and many other countries would re- main content to recognise our unique natural advantages, and to supply us with raw materials and food-stuffs in return for our manufactured goods. In other words, manufacturing industry with all its wealth and ap- pendages were to be ours ; pastoral simplicity to be theirs. The scheme from our point of view was admir- able. But other countries saw it in a different light. In fact, List, Fiichs, and other German writers have not hesitated to assert that there was a certain unctuousness in our economic rectitude. List had indeed, as already pointed out, gone so far LAISSEZ FAIRS 25 as to challenge the very meaning of the word Wealth as conceived and defined by the British economists. He contended, and with a considerable degree of justice, that Wealth is not merely the amount of exchange values in a State at any given time, but that it also includes productive power. Wealth without the assured poten- tiality of continuing to produce it within the State is, from a national point of view, but a precarious asset. Nevertheless if the world at large rejected the scheme of universal Free Trade, Great Britain at least has put it, so far as she was able, in force. We have had free manufactured imports. We have had the chief articles of food as cheaply as the world could supply them. But we have seen the United States and Germany scout- ing the dreamer's cosmopolitan paradise and deliberately building up industries under protective tariffs, not only rival but surpass us in several directions.^ The subjoined ^ Comparative Steel Production. Annual average in 1876-80. 1907. Increase. Million tons. United Kingdom . 1"0 France . . -3 Germany . . -5 United States . -8 Million tons. 6 3 12 23 Million tons. 5-0 2-7 11-5 22-2 Per ceat. 500 900 2,300 2,776 Comparative Consumption of Raw Cotton. Annual a i^erage in Incre; 1883-87. Million lb. mil j^444 . 418 (years June) 3 999 1903-7. Million lb. 1,786 1,000 2,312 United Kingd( Germany ^ United States ending 30th Million lb. 342 582 1,313 Per cent. 24 139 131 1 Net imports, i.e., total imports less re-exports. * Imports for home consumption according to German official returns. ^ Total estimated consumption of cotton of domestic and foreign origin according to United States official returns. 26 THE COMMONWEAL tables will show the relative progress of the steel and raw cotton industries in the three countries. Thus if free production and exchange under natural conditions the world over have not come about, certain unforeseen conditions have. We are by no means to- day the workshop of the world. There are many other workshops. Moreover, our dependence upon other countries for food-stuffs, particularly for wheat, exists to an extent unknown in any other country. In fact it may fairly be stated that the policy of laissez /aire or Free Trade, carried out in the midst of a protectionist world, has really produced a more un- natural and unsymmetrical state of things in England than any scientific tariff has produced anywhere else. This condition at home, with hostile tariffs every- where abroad, is very far removed from being a fulfil- ment of the predictions of Cobden or the anticipation of Mill. Time has thus disposed of the value set on " natural protection," and also of the sanguine Free Trade forecast as to the economic salvation of mankind at large on cosmopolitan Free Trade lines. CHAPTEE III. SOME ECONOMIC FALLACIES. Do imports balance exports ? — The views of Mill, Farrer, the Fiscal Blue Book, and Lord Avebury — Sources of importing power other than exports — No necessary or constant relation between imports and exports of commodities — Character and extent of each must be studied separately — Effect of the suggestio falsi is to stifle discussion and paralyse action — The degradation of industry — Instances of erroneous conclusions arrived at by Lord Farrer and Lord Avebury as to the effect of imports on our exports — Goods not necessarily paid for by goods — Foreign investments — Their magnitude and influence on imports — Displacement of British labour — Professor Mar- shall and change of employment — Capital and labour — The incidence of the burden of import duties under dift'erent con- ' ditions — Mr. Deakin on import duties — Recapitulation — The alternatives before us. There is a doctrine propounded by John Stuart Mill, and reiterated by such authorities as Lord Farrer and Lord Avebury, which carries great weight and which calls for careful analysis and impartial examination. This doctrine is that imports always balance them- selves by exports, and vice versa ; and it is of such a subtle and complex character that it has given rise to a greater amount of misapprehension than probably any other tenet in the whole gamut of the laissez-faire writers. Moreover, it is generally accepted by Free Trade writers, politicians, and speakers as an established " economic 27 28 THE COMMONWEAL law," and is continually appealed to as an argument in itself sufficient to meet any question which may be raised as to the quantity and quality of imports and their pos- sible influence on British industries. At the outset it is interesting to note that this doc- trine in all its modern extravagance was certainly never propounded by Adam Smith. Thus he writes : — ^ " A nation may import to a greater value than it ex- ports for half a century, perhaps, together." This is a plain statement of fact which it requires no great effort of the intelligence to understand, when the profits of foreign, investments, shipping, and all other sources of importing power besides that of manufac- turing industry, are borne in mind. The squaring of the circle was left to later and less lucid writers, and John Stuart MilP appropriately introduces what he has to say on the subject as follows : — "I must give notice that we are now in the region of the most comphcated questions which Political Economy affords ; that the subject is one which cannot possibly be made elementary ; and that a more continu- ous effort of attention than has yet been required, will be necessary to follow the series of deductions. The thread, however, which we are about to take in hand, is in itself very simple and manageable ; the only diffi- culty is in following it through the windings and en- tanglements of complex international transactions." The writer then proceeds to consider a number of hypothetic cases which lead him, as I venture to think, quite erroneously to the following conclusion : — ^ " The law which we have now illustrated may be i Wealth of Nations, p. 389. 2 J, S. Mill, Principles of Political Economy, vol. ii., p. 122. "Jtid., p. 133. SOME ECONOMIC FALLACIES 29 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." A proposition in such precise terms as this, described as a law, and coming from such an authority as Mill, has carried great weight, and it will be interesting to trace its history in later literature on economics. In 1887 Lord Farrer, in discussing the balance of ex- ports and imports, realised that he would have to give to the term exports a much wider significance than was given it by Mill in his Prmciples of Political Eoonoviy. Thus referring to imports he says : " They are not given to us. How then are they paid for? . . . they can only be paid and accounted for in two ways. First, by the goods which we now export to pay for them; or, secondly, as a means of receiving and setthng the interest due to us on foreign debts. But how were these foreign debts incurred ? By the export of British goods or services in past years and in no other way." To come to still more recent times it is interesting to note the language used in the "Fiscal Blue Book " ^ prepared in the Board of Trade in 1903. In a " Memo- randum on the Excess of Imports into the United King- dom," the author says : — " Of the whole of the commercial and financial trans- actions between any country and the outside world, which over a period of years, though not necessarily within the limits of any single year, must balance one another, only a portion are embodied in the commodities 1 Cd. 1,761, p. 99. 30 THE COMMONWEAL which pass outward and inward as exports and imports. There is thus no necessary equaUty between the values of imports and exports of commodities. As a matter of fact, for many years imports into the United Kingdom have always exceeded exports. An inquiry into the causes of this excess of imports is, therefore, an inquiry into the nature and value of the unrecorded transactions and services rendered and received which, one year with another, will balance the account." We seem to be travelling somewhat away from "the law," as defined by Mill, when we arrive at the statement that " there is no necessary equality between the values of imports and exports of commodities ". The excess "for many years" of imports into the United Kingdom over exports, calls for something more than the export of mere visible commodities if the balance is to be maintained. Against the vast excess of imports over exports, amounting in 1902 to £184,000,000, as the report goes on to point out, there must be added in addition to the visible exports such invisible contributions to the export side of the account as the earnings of the carrying trade both home and foreign, and the interest on foreign investments. How these important items of revenue can by the most liberal and elastic application of the term be ac- curately described as exports it is a little difficult to understand, except on the assumption that there is a prejudiced desire to preserve the formula that, " exports balance imports " at all costs ! Foreign investments are sources of importing power, but to speak of them as exports is merely to create confusion of thought. But there are other sources of payment for imports which surely even the most extreme Cobdenite must hesitate to describe as " exports". Take, for instance, SOME ECONOMIC FALLACIES 31 the case of a wealthy American or other foreigner who, coming to reside in this country, purchases motor cars, Parisian dresses, jewellery and other commodities which enter this country as imports and are paid for either by foreign cash or drafts on foreign banks. In what way are such imports to Great Britain paid for by British exports ? Can it be alleged that the money paid in this case, say from America to France, by cash, notes or bills of exchange, gives France an additional buying power which must necessarily be exercised in England, or to use the favourite method of Cobdenite economists, be exercised in some third country which in its turn will buy from England ? If so, the answer is that such a course of events is dependent on conditions entirely independent of the original purchase, conditions of supply and de- mand, import duties, and a dozen other factors. The fact is — quite apart from such exceptional cases as the foregoing — " the law " that exports pay for imports can no longer be maintained, except by extending to the term exports a meaning which it cannot fairly be held to convey. This is practically admitted by Lord Farrer and the authors of the " Fiscal Blue Book ". And when the latter authorities stated as their conclusion that there is "no necessary equality between the values of imports and exports of commodities," they might equally well have stated on the strength of the evidence they them- selves adduce in their report, that there is no necessary or constant relation between the imports and exports of commodities. This being so the constant appeal to the exploded "law" that "exports pay for imports," for the purpose of stifling all discussion on the character and significance of such imports, is fallacious and misleading in the last 32 THE COMMONWEAL degree. It is perfectly obvious from the foregoing con- siderations that as no necessary or constant relationship exists between imports and exports of commodities, it is essential that the character and extent of each must for practical commercial purposes be studied separately. It is also obvious that imports of commodities may under certain conditions increase, not only without any neces- sary corresponding increase in the export of commodities but even coincidently with an actual decrease in such exports. When this is borne in mind it will be seen how entirely erroneous is the suggestion that an increased import of manufactured goods must necessarily be paid for by an increased export of manufactured goods. It is a " suggestio falsi ". Yet this suggestion is continually made, as will be gathered in the following pages. Free Trade writers appear to beHeve that it matters not what the excess of imports over visible exports may be, nor what is of even more importance, what the character of either may be. Let us, they urge, import as much as we please, free of any duty, the most highly manufactured goods, raw produce, food supplies, anything, everything without let or hindrance, saving only such articles as tea, coffee, sugar and tobacco — articles which we must have and cannot produce, and on which every penny of tax goes into the public revenue. From the consumer's point of view there is no gain- saying that at the first blush this is an attractive picture. So long as he derives an assured and fixed income from somewhere he has little to complain of. To a consumer so situated, the character and extent of such exchange as exists between the whole of the imports and the whole of the exports may appear unimportant. But let that consumer be dependent, as the vast majority SOME ECONOMIC FALLACIES 33 of consumers eventually must be dependent, on the prosperity of some industry or industries in this country, let him once realise that the national wealth and wel- fare are bound to influence his life history, and how completely is the problem changed. The character and the extent of the exchange of the exports and imports of commodities then becomes to him of the most vital importance. If, for instance, as in the woollen trade, he finds that foreign manufactured articles are underselling his product in the home market, and that foreign tariffs prevent his selling to any certain extent his products abroad, he may well complain of an exchange in which he individually is hit both ways. It is true an ardent free trader would perhaps endeavour to explain to him that the increased export of combed and scoured wool and of coal was an adequate compen- sation for the trade lost, but to him the difference might mean unemployment and misery. Moreover, to the country the change would be equally disastrous, because the latter commodities being semi-raw and raw material, they require for their production considerably less in- dustry than the former. Such changes constitute a degradation of the industry so affected. And as Napoleon long ago foresaw, after the world had once been mapped out and occupied, the prize for which nations would compete would be industry, and especially those forms of industry largely employing labour. Again, to take an extreme case, it is obvious that if every furnace in Great Britain were extinguished, and every factory closed, there would still be exports and imports, and that so long as interest on foreign invest- ment is accounted an export they would, to some extent, balance, but half the population of England would be starving. To the Free Trade optimist (of the Pangloss 3 34 THE COMMONWEAL type) this may appear an untenable proposition. If it is so let him consider what the facts of such a situation would be. The man with foreign investments, repre- senting as he does a large and wealthy class in England to-day, would still have his dividends and he would still require many imported articles. For these articles a large portion of his dividends would be exchanged. In addition to Mill and Lord Farrer,^ Lord Avebury ^ has held and enunciated in uncompromising terms the view that imports from abroad are paid for by manufac- tured exports from this country. Thus Lord Avebury says, " The products of one country are exchanged for those of another. Goods are paid for in goods.'' Such a statement as this, which takes no account of other sources of importing power already referred to, is most misleading. The followers of these writers, accepting statements of this character without qualification, con- tinually assert that as imports must be paid for by ex- ports, they must in some mysterious way create a demand for a corresponding export of commodities. That ** goods paid for goods " sixty years ago is largely true, but it is not true to anything like the same extent to-day. In the era before Free Trade the English formula was to pay for the imports of raw materials by the export of manufactured goods. Cobden, the apostle of Free Trade, based himself on the proposition that England should be the workshop of the world, and that other nations should exchange their raw material for England's manufactured goods. How far are free traders driven from this position — common to both the pre-Free Trade protectionists and to the early Free Trade protagonists — when they are content to advance fallacious arguments ^ Farrer, Free Trade v. Fair Trade, p. 120. ^ Rt. Hon. Lord Avebury, Free Trade Address in Dundee, p. 4. SOME ECONOMIC FALLACIES 36 about exports balancing imports, and are profoundly careless whether they import manufactured goods or raw materials, or whether they pay for what they import by means of foreign investments, raw material, or partly manufactured goods ? Is it not time that the British producer took steps to secure his only means of livelihood, and to conserve that "productive power" which is more important than mere wealth ? As the interest on foreign investments is such a grow- ing factor in importing power, it will be interesting at this point to consider the subject. The amount of British capital invested abroad is enormous. " The Fifteenth Keport (dated August, 1907) of the Commis- sioners of H.M. Inland Kevenue " for the year ending 31st March, 1907, gives figures of "identified" income from foreign investments assessed for income tax, the increase of which in the preceding fiscal year it describes as " remarkable ". Sir Joseph Lawrence estimates from the official returns that in twenty years over £500,000,000 have been invested abroad in securities, whose interest is paid and the income tax collected in bulk. The " identi- fied " income received in this country is rapidly increas- ing, and in the year 1905-6 amounted to £73,899,265. Imports are largely paid for by the interest of these foreign investments, and these figures are in themselves sufficient to show how impossible it is to argue from the amount of our imports with regard to the success of our manufacturing industries. Yet in the address delivered by Lord Avebury in 1908,^ already referred to, in dealing with a suggestion for a tariff on manu- factured goods, he says, taking silk, which is chiefly imported for the use of the wealthier classes, as an instance : " How do we pay for the silk ? By an export ^ Avebury, Free Trade Address in Dundee, 1908. 3* 36 THE COMMONWEAL of equivalent value, say of cotton goods or iron." The silk v^ill be paid for, no doubt — but to suggest that it will necessarily be paid for by goods of cotton or iron is really to beg the v^hole question. It may be so paid for, but on the other hand, it may equally well be paid for by the interest on foreign investments. The figures already quoted will suffice to show the amount of these foreign investments. And in the face of them it is no longer possible to argue that say £1,000 worth of imports must necessarily be paid for by £1,000 of goods manufactured in England. It is true of course that much of this wealth invested abroad is the product of profit made in British indus- tries in the past. But even granting this, it is but a slender consolation to the unemployed workmen of to- day to be assured that the imports of perhaps the very article he used to manufacture — but manufactures no longer — are being paid for by the profits of home industry employing thousands of his predecessors many years ago. Moreover, if this capital invested abroad be largely the accumulation of profits made in the past, it is not by any means entirely so. It is often largely increased by the success of the foreign enterprise in which the capital is invested, not infrequently a protected industry, the pro- ducts of which compete with British industries, such as the United States Steel Trust. It may at any time be increased, and to-day is continually being increased, by capital withdrawn from unprofitable home industries. And herein lies one of the most important of all the modern conditions introduced into the problem. Lord Farrer, ^ in his interesting book, writing with some impatience of those who deplore the decHne of any particular British industry, says : — 1 Farrer, Free Trade v. Fair Trade, pp. 119-120. SOME ECONOMIC FALLACIES 37 " For instance, I find in one of the Fair Trade tracts a long and graphic description of the roaking of a plough in England, and of all the EngHsh people employed in preparing the materials and putting them together. The whole culminates in the sale of the English-made plough to a farmer for £12, whilst a similar article might be imported from abroad for £11 10s. All this is for the sake of the following precious piece of political wis- dom: — "I must deal with the question in its practical bear- ing, and tell you that the dogma, " Buy in the cheapest market," is a great delusion, for, in the case of the plough which produced £12 to the whole nation, if it could be bought from the foreigner for £11 10s. the whole nation would certainly gain 10s., hut loould lose the £12 hj the coUajJse of that special industry, the nation, from the Government down to the candlestick-maker, being poorer by £11 10s. in distributive wealth." " Astounding conclusion ! How do the fair traders think the imported foreign plough is to be paid for ? With nothing? If so, then the nation will be richer not by 10s., but by £12. If with something, then with what ? Why, of course, ivith something tohich English tvorkmen can make better and cheaper than they can make ploughs, ami which will have to be sent abroad, and there sold to pay for the 2)lough." How misleading is the last sentence in this paragraph has already been demonstrated. But Lord Farrer's statement has this further point of interest, it is an indirect way of stating another funda- mental doctrine of the Free Trade school which is con- tinually reiterated in one form or another by Cobdenite speakers and writers. Perhaps the latest and most re- markable enunciation of this doctrine comes from Pro- 4::l(l3