CHAPTER X. Free Trade

FREE TRADE

One of the least edifying features of modern controversy, and particularly of political and economic controversy, is the habit of appealing to precedents and authorities which, if honestly cited, would militate against the opinions of the controversialist. No great writer has suffered more of late years from this species of misrepresentation than Adam Smith; yet his contemporaries and immediate successors both in England and abroad perfectly understood his drift. When Pitt and Shelburne declared themselves disciples of Smith, they thereby declared themselves free traders, and Pitt’s commercial policy from 1784 to 1794 was simply an attempt to carry out Smith’s views. Resolute retrenchment, customs’ reform, the commercial treaty with France, reduction of debt, were all projected under the inspiration and countenance of Mr. Commissioner Smith.

Nor did the English economists, from Ricardo to Mill, ever suggest that Adam Smith had doubts about the main doctrine of his book. In France and Germany his opinions were eagerly embraced. To translate, interpret, and systematise the Wealth of Nations was the main function of continental economists in the early years of the nineteenth century; and its influence was seen in a rapid and radical modification of commercial policy. Internal barriers were swept away, feudal restrictions abolished, and tariffs reduced. When the waves of reaction—political rather than economic—began to roll in, and “national” economists tried to reconstruct the case for protection, they paid Smith the compliment of a violent onslaught. “Smithianismus” then became a term of abuse in protectionist circles, and so remained until it was superseded by the equally cacophonous “Manchesterthum.” It was in England that the idea was started of dressing up Adam Smith as a protectionist. While List was inveighing against “cosmopolitical economy,” our own free traders in their agitation against the corn laws found themselves confronted with a new interpretation of their prophet. At one of the League meetings (July 3, 1844) Cobden gave a humorous description of the way in which some protectionist pamphleteers tried to adapt Adam Smith’s opinions to their own views. “They have done it in this manner: they took a passage, and with the scissors snipped and cut away at it, until by paring off the ends of sentences and leaving out all the rest of the passage, they managed to make Adam Smith appear in some sense as a monopolist. When we referred to the volume itself, we found out their tricks, and exposed them. I tell you what their argument reminds me of. An anecdote is told of an atheist who once asserted that there was no God, and said he would prove it from Scripture. He selected that passage from the Psalms which says, ‘The fool hath said in his heart there is no God.’ He then cut out the whole passage, except the words, ‘there is no God,’ and brought it forward as proof of his statement.”

If these false notions about Adam Smith’s economic opinions had died with the pamphlets of obscure protectionists sixty years ago, no more need have been said. But as they have been revived again and again in England, Germany, and the United States, and solemnly adopted with all the plausibility of seemingly circumstantial moderation by persons of European repute, we shall examine the passages in the original, in order to settle the question whether Smith can be made to serve as “the spiritual father” of a commercial policy not essentially different from the one his criticism destroyed.

By a policy of free trade, which Adam Smith said was the best means a statesman could adopt of promoting national wealth and commerce, he meant a policy that would relieve commerce and industry from all internal dues and all external duties or prohibitions. Anything that would bring other nations into line commanded his warm sympathy and support. But what he desired as a patriot was a policy of free imports irrespective of what other countries might do. The object of a national, as of an individual policy in trade, should be to buy in the cheapest and sell in the dearest market. This will appear at once from the so-called exceptions or limitations by which Smith is supposed to have watered down what Cobden’s biographer has called “the pure milk of the Cobdenic word.”

The Act of Navigation is the first of “the two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.” But by “advantageous” Smith does not mean “likely to enrich.” It is a measure of defence, and is unfavourable to trade.

“The defence of Great Britain,” he says, “depends very much upon the number of its sailors and shipping. The Act of Navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country.” The Act is justified as a pure measure of defence, though it aims at monopoly, and offends against the principles of free trade. Lest, however, there should be any doubt upon the point, he goes on to make it quite clear that, while he praises the Act, as he might praise the building of a man-of-war, he condemns it as an economic measure. In the passage immediately following there are two sentences which exactly give the point of view, and should help to dissipate the false impression (accepted and circulated by authorities like Hasbach, who ought to know better) that Smith’s doctrines are very different from Cobden’s:—

“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.”

How completely the Navigation Act failed as a commercial measure appears from a number of passages in the Wealth of Nations which together completely refute the fallacy, so generally adopted by English historians, that it ruined the Dutch, enriched England, and gave her a commercial and naval supremacy which she could not otherwise have achieved. Holland, he says, is richer than England; she gained the whole carrying trade of France during the late war; she still remains “the great emporium of European goods,” and so forth. All that Smith claims for the Act is that it helped to secure the country a sufficient supply of seamen for the navy in time of war.

Further, as there are two cases (the necessity of defence and the propriety of countervailing an excise duty) “in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry, so,” continues Smith, “there are two others in which it may sometimes be a matter of deliberation”: in the one, how far it is proper to continue the free importation of goods from a particular foreign country; in the other, how, and how far, free importation, after it has been interrupted for some time, should be restored. The first case of doubt is that of doing evil by retaliation in order that good, in the shape of freer trade, may come. Occasionally, he writes, it may be wise to retaliate, “when some nation restrains by high duties or prohibitions” the importations of our manufactures. After giving some examples of commercial retaliation, one of which ended in war, Adam Smith lays down the cautious rule that there may be good policy in retaliations of this kind, but only where there is a probability that retaliatory duties will procure the repeal of the high duties or prohibitions complained of. “The recovery of a great foreign market will generally more than compensate the transitory inconvenience of paying dearer during a short time for some sorts of things.” He leans strongly against the policy, partly because he is unwilling to trust “that insidious and crafty animal vulgarly called a statesman” to use such a weapon wisely; partly because you rarely benefit the sufferers and always injure other classes of your own citizens, than those whom you are trying to assist.

The second case of doubt was merely one of expediency—whether free trade should be introduced quickly or slowly. “In what manner the natural system of perfect liberty and justice ought gradually to be restored” Smith left to the wisdom of future statesmen and legislators to determine. But he maintained that the evils attending the remedy were usually exaggerated, and this view proved to be correct when Sir Robert Peel and Mr. Gladstone effected the transformation by five mighty strokes of the fiscal axe.

We have now examined all the passages which could give colour to the impression that Smith was only a free trader—on conditions. That part of the task is easy enough. The difficulty begins when we seek positive arguments against protective or differential taxation. The woodman of Mount Ida was not more embarrassed in choosing a tree to fell. The Wealth of Nations is a forest of full-grown arguments for free trade. The more one reads it, the more irresistibly is one driven to the conclusion that the science of political economy, as established in this masterpiece, is inextricably bound up with the doctrine of free trade. Every assumption and conclusion, his criticisms of previous and existing theories, laws, customs, and opinions, his surveys of the commercial and colonial policy of Europe, all bear us directly or indirectly to the same goal. Yet there is one principle which seems to take precedence in the argument. In the division of labour, Smith found a key to the growth of wealth and to the enlargement of the material comforts that are necessary to the progress of refinement and civilisation. The division of labour is therefore his starting-point, and instead of leaving it where Plato and Aristotle let it rest—a barren formula of economic society—he sets it vigorously in motion, and converts it, as it were, from a slumbering lake into a vast reservoir that irrigates and fertilises the whole plain of inquiry. And had he been confined to one argument for free trade, this is probably the one he would have adopted.

If we were asked to select that passage in the Wealth of Nations which gives most succinctly the broad objections to a protective policy, we should turn to the second chapter of the fourth book, “Of restraints upon the importation from foreign countries of such goods as can be produced at home.” He begins by admitting that high duties or prohibitions can secure to home producers a monopoly of the home market. At that time British graziers enjoyed the monopoly of providing the home market with butcher-meat. The manufacturers of wool and silk were equally favoured, and the duties on foreign linen, for which Hume had pleaded in one of his commercial essays, had lately been raised.

Smith thereupon asks whether these protective measures, by giving an artificial direction to industry, are likely to be of general benefit to society. The first answer is that in business every man seeks his own advantage, that every man knows his own business best, and that “the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society.” Though intending only his own gain, he is “led by an invisible hand to promote an end which was no part of his intention.” Indeed the selfish trader—the economic man, if you like—promotes the interest of society far more effectually than those who affect to trade for the public good. Is it not evident that the individual himself, though he may make mistakes, can judge best how and where to employ his own labour or capital? The statesman or lawgiver who attempted to direct private people how to manage their business and spend their money would not only be overloaded with work, but would be assuming an authority “which could safely be trusted, not only to no single person, but to no council or senate whatever.” From this consideration we pass almost insensibly into the argument from the division of labour.

“It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The taylor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a taylor. The farmer attempts to make neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or what is the same thing, with the price of a part of it, whatever else they have occasion for.

“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.”

Capital and industry are certainly not employed to the greatest advantage when they are directed to objects which under natural conditions could be bought cheaper than they could be made. It is true, he adds, anticipating the infant industry argument of Alexander Hamilton, List, and Mill, that “by means of such regulations a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country.” But cui bono? Even in this case “it will by no means follow that the sum total either of its industry or of its revenue can ever be augmented by any such regulation.” One immediate effect of such regulations must be to diminish the revenue of the society, “and what diminishes its revenue is certainly not very likely to augment its capital faster than it would have augmented of its own accord had both capital and industry been left to find out their natural employments.”

But though reason led him by every road to a complete system of liberty as the true end of commercial policy, he despaired of its adoption. “To expect indeed that 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.” Even if public prejudice were overcome, the resistance of private interests would be unconquerable. The landlords indeed had not yet acquired a strong interest in protection. At that time the home supply of wheat and oats in ordinary years was sufficient, or nearly so, for the requirements of the population, and prices were much about the same in England as in other European countries. The moving spirits of protection were master manufacturers, who, “like an overgrown standing army,” had begun to intimidate the legislature.

“The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more, if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.”

Under these circumstances it is very surprising that Adam Smith should have chosen to submit the corn laws to so long and destructive an analysis. He seems to have foreseen that the great battle for which he was sounding the advance would ultimately rage round a question then almost academic, and that cheap food would be the keystone of the free trade argument.

After several years’ experience as a customs official, Adam Smith took the opportunity in his third edition (1784) of considerably enlarging the Wealth of Nations; and, among other important additions, he inserted at the end of Book IV. a new chapter, entitled “Conclusion of the Mercantile System.” It is a deeply instructive recital of the extremities of absurdity into which the British legislature had suffered itself to be led blindfold by a false theory and powerful interests. The encouragement of exportation, and the discouragement of importation, were the two great engines by which the mercantile system proposed to enrich every country; but with regard to some particular commodities, it followed an opposite plan: discouraging exports, and encouraging imports. Thus it penalised or prohibited the exportation of machinery, wool, and coal; nor was the living instrument, the artificer, allowed to go free. Two statutes had been passed in the reigns of George I. and II. to prevent any British artificer going abroad under penalty of being declared an alien, and forfeiting all his goods and chattels. “It is unnecessary, I imagine, to observe how contrary such regulations are to the boasted liberty of the subject, of which we affect to be so very jealous; but which, in this case, is so plainly sacrificed to the futile interests of our merchants and manufacturers.” Smith is very sarcastic about regulations whose “laudable motive” was to extend British manufactures, not by improving them, but by depressing those of our neighbours, and by putting an end as much as possible to the troublesome competition of such odious rivals. He then lays down a maxim “so perfectly self-evident, that it would be absurd to attempt to prove it”:—

“Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”

This golden rule was everywhere violated by the mercantile system, which seemed to consider production the ultimate object of all industry. But the worst of all its inventions was the colonial monopoly. “In the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations.” If there was anything more odious to Adam Smith than a protective duty, it was the discriminating or preferential duty which had been invented for the purpose of tying up the trade between Great Britain and her colonies. Both his “Utopias” were projected for the express purpose of putting an end to a colonial system which he regarded as a dead weight upon both the mother country and her dependencies.

The theory that Smith grew more protectionist as he grew older might be dismissed now that we have considered the lectures, and compared the first and third editions of the finished work. But it is possible that a very desperate casuist might still find one more plea to urge. He might say: granted that Smith remained to the last a theoretical free trader, yet he frankly admitted it to be a Utopian project, and he would not, as a responsible official, have advised its adoption. Did he not accept a Crown appointment under Lord North’s protectionist administration, and did he not spend the last years of his life as a principal instrument in collecting the proceeds of a highly protectionist tariff? Nay, further, did he not take a carnal satisfaction in the leaps and bounds by which the revenue under his charge was at that time advancing? In December 1785 he wrote to William Eden:—

“It may perhaps give that gentleman [Mr. Rose of the Treasury] pleasure to be informed that the net revenue arising from the customs in Scotland is at least four times greater than it was seven or eight years ago. It has been increasing rapidly these four or five years past, and the revenue of this year has over-leaped by at least one half the revenue of the greatest former year. I flatter myself it is likely to increase still further.”

Whatever force the argumentum ad officium might have in a country (if such there be) where customs officials are sworn supporters of the commercial policy of the Government, it has none in reference to Great Britain, and less than none if regard be had to the circumstances of Smith’s appointment. There is no reason for supposing that Lord North had any particular liking for protection, though as the instrument of the king’s war policy he had an insatiable craving for revenue, and in pursuit thereof adopted, as we shall see, several taxes of a non-protective character suggested by Smith in the first edition of his treatise. Further, when the above letter was written Pitt was already, under the inspiration of this very customs official, initiating a free trade policy, and was actually preparing the great commercial treaty with France which he was to carry into effect a few months later. A patriotic Scotsman might well delight in his country’s rapid recovery from the disastrous effects of the war, and the author of Pitt’s policy would naturally anticipate an increase of prosperity with an expansion of imports and a growth of the revenues under his charge.

Moreover, there is happily extant a relic of the correspondence which Smith carried on as financial adviser to ministers. In the year 1778 Ireland was in a terrible plight. In addition to all the evils of a minority rule, she suffered as a whole from a commercial persecution by the predominant partner. Her trade had been deliberately and malevolently throttled by the superior legislature of Great Britain. At that time Irish wool could be exported to no country save Great Britain. Irish woollens could only be exported from specified ports in Ireland to specified ports in Great Britain. All export of Irish glass was absolutely prohibited. Worst of all, she was not allowed to send her staple article—cattle—or even salt provisions to the English market. And she was excluded from the colonial trade.

Even so cool a political hand as Henry Dundas (then Lord Advocate), writing to Smith at the end of October 1779, confessed that he has been shocked at the tone and temper of the House of Commons in its dealings with Ireland’s prayers for elementary justice. But the Irish Parliament was now demanding free trade in tones too peremptory to be ignored, for they were backed by a threatening display of armed force. Dundas saw little objection to acceding to some of the requisitions; but he had no very clear grasp of the economics of the situation, and being in correspondence with Eden, the Secretary of the Board of Trade, he wanted an expert opinion from the Seer of Edinburgh. Smith replies that the Irish demand should be satisfied, first, because it is just; second, because it will be for the benefit of English consumers; and lastly, because English manufacturers will suffer so much less than the nation, and the national revenue, will gain. Dundas had seemed to be rather afraid that with cheaper labour and lower taxes the Irish manufacturers might be able to undersell their British competitors. Smith pointed out that they had neither the skill nor the stock [capital] to enable them to do so; “and though both may be acquired in time, to acquire them completely will require more than a century.” Besides, Ireland had neither coal nor wood; “and though her soil and climate are perfectly suited for raising the latter, yet to raise it to the same degree as in England will require more than a century.”

Before he can say precisely what the Irish Parliament means by a free trade, he must see the heads of the proposed bill. If it is only freedom to export, nothing could be more just and reasonable. If it is freedom to import, subject only to their own customs’ duties, that again is perfectly reasonable, though it would “interfere a little with some of our paltry monopolies.” If they wish to be allowed to trade freely with the American and African plantations, that also should be conceded. It would interfere with some monopolies, but would do no harm to Great Britain. Lastly, they might mean to demand a free trade with Great Britain. “Nothing, in my opinion, would be more highly advantageous to both countries than this mutual freedom of trade. It would help to break down that absurd monopoly which we have most absurdly established against ourselves in favour of almost all the different classes of our own manufacturers.” Dundas had hinted that the two Parliaments might be reconciled by a proper distribution of loaves and fishes. Smith did not shrink at all from promoting a good policy by what was then the ordinary method of promoting a bad policy:—

“Whatever the Irish mean to demand in this way, in the present situation of our affairs I should think it madness not to grant it. Whatever they may demand, our manufacturers, unless the leading and principal men among them are properly dealt with beforehand, will probably oppose it. That they may be so dealt with I know from experience, and that it may be done at little expense and with no great trouble. I could even point to some persons who, I think, are fit and likely to deal with them successfully for this purpose. I shall not say more upon this till I see you, which I shall do the first moment I can get out of this Town.”

A week later Smith repeated his argument with some additions and modifications in a letter of November 8th to Lord Carlisle, who then presided over the Board of Trade. He maintains that “a very slender interest of our own manufacturers is the foundation of all these unjust and oppressive restraints,” and ridicules “the watchful jealousy of the monopolists, alarmed lest the Irish, who have never been able to supply completely even their own market with glass or woollen manufactures, should be able to rival them in foreign markets.”

When he passes from commercial considerations to the larger aspects of freedom and good government, his wisdom is no less manifest. What Ireland most wants, he writes, are order, police, and a regular administration of justice, both to protect and to restrain the inferior ranks of people: “articles more essential to the progress of industry than both coal and wood put together, and which Ireland must continue to want as long as it continues to be divided between two hostile nations, the oppressors and the oppressed, the Protestants and the Papists.” He then points out that what the monopolists dread (the prosperity of another country) is not an evil but a good:—“Should the industry of Ireland, in consequence of freedom and good government, ever equal that of England, so much the better would it be not only for the whole British Empire, but for the particular province of England. As the wealth and industry of Lancashire does not obstruct but promote that of Yorkshire, so the wealth and industry of Ireland would not obstruct but promote that of England.” For exactly the same reasons he wanted free trade with France, and with the whole world. If it is good for one man to trade freely with another, for a town with a town, and for a county with a county, how can it be otherwise than good for countries to trade freely together? An economist who strikes at the last proposition should hail Smith’s humorous project of a tariff which would secure Scotland a vintage as well as a harvest.

Much more might be said upon a subject that enters into the politics of every State, and vitally affects the welfare of every struggling toiler in the universe. But the purpose of this chapter will be fulfilled if it restores to Adam Smith his identity as the protagonist in a great contest, as the champion of the right to trade with all the world, against those who stand for privileges, monopolies, and tariffs. According to Bagehot, Smith’s name can no more be dissociated from free trade than Homer’s from the siege of Troy. “So long as the doctrines of protection exist—and they seem likely to do so, as human interests are what they are, and human nature is what it is—Adam Smith will always be quoted as the great authority on Anti-Protectionism, as the man who first told the world the truth, so that the world could learn and believe it.”