Part 34

To engender dearness, the restrictionists have obtained protective duties, and a cheapness, which is to them inexplicable, has come to deceive their hopes.

To create cheapness, the free-traders have occasionally succeeded in securing liberty, and, to their astonishment, an elevation of prices has been the consequence.

For example, in France, in order to favour agriculture, a duty of 22 per cent has been imposed on foreign wool, and it has turned out that French wool has been sold at a lower price after the measure than before it.

In England, to satisfy the consumer, they lowered, and ultimately removed, the duty on foreign wool; and it has come to pass that in that country the price of wool is higher than ever.

And these are not isolated facts; for the price of wool is governed by precisely the same laws which govern the price of everything else. The same result is produced in all analogous cases. Contrary to expectation, protection has, to some extent, brought about a fall, and competition, to some extent, a rise of prices.

When the confusion of ideas thence arising had reached its height, the protectionists began saying to their adversaries, "It is our system which brings about the cheapness of which you boast so much." To which the reply was, "It is liberty which has induced the dearness which you find so useful."*

At this rate, would it not be amusing to see cheapness become the watch-word of the Rue Hauteville, and dearness the watchword of the Rue Choiseul?

Evidently there is in all this a misconception, an illusion, which it is necessary to clear up; and this is what I shall now endeavour to do.

Put the case of two isolated nations, each composed of a million of inhabitants. Grant that, coteris paribus, the one possesses double the quantity of everything,--corn, meat, iron, furniture, fuel, books, clothing, etc.,--which the other possesses.

It will be granted that the one is twice as rich as the other.

And yet there is no reason to affirm that a difference in actual money prices** exists in the two countries. Nominal prices may perhaps be higher in the richer country. It may be that in the United States everything is nominally dearer than in Poland, and that the population of the former country should, nevertheless, be better provided with all that they need; whence we infer that it is not the nominal price of products, but their comparative abundance, which constitutes wealth. When, then, we desire to pronounce an opinion on the comparative merits of restriction and free-trade, we should not inquire which of the two systems engenders dearness or cheapness, but which of the two brings abundance or scarcity.

* Recently, M. Duchâtel, who had formerly advocated free trade, with a view to low prices, said to the Chamber: It would not be difficult for me to prove that protection leads to cheapness.

**The expression, prix absolus (absolute prices), which the author employs here and in chap. xi. of the First Series (ante), is not, I think, used by English economists, and from the context in both instances I take it to mean actual money prices; or what Adam Smith terms nominal prices,-- Translator.

For, observe this, that products being exchanged for each other, a relative scarcity of all, and a relative abundance of all, leave the nominal prices of commodities in general at the same point; but this cannot be affirmed of the relative condition of the inhabitants of the two countries.

Let us dip a little deeper still into this subject.

When we see an increase and a reduction of duties produce effects so different from what we had expected, depreciation often following taxation, and enhancement following free trade, it becomes the imperative duty of political economy to seek an explanation of phenomena so much opposed to received ideas; for it is needless to say that a science, if it is worthy of the name, is nothing else than a faithful statement and a sound explanation of facts.

Now the phenomenon we are here examining is explained very satisfactorily by a circumstance of which we must never lose sight.

Dearness is due to two causes, and not to one only.

The same thing holds of cheapness.

It is one of the least disputed points in political economy that price is determined by the relative state of supply and demand.

There are then two terms which affect price--supply and demand. These terms are essentially variable. They may be combined in the same direction, in contrary directions, and in infinitely varied proportions. Hence the combinations of which price is the result are inexhaustible.

High price may be the result, either of diminished supply, or of increased demand.

Low price may be the result of increased supply, or of diminished demand.

Hence there are two kinds of dearness, and two kinds of cheapness.

There is a dearness of an injurious kind, that which proceeds from a diminution of supply, for that implies scarcity, privation (such as has been felt this year* from the scarcity of corn); and there is a dearness of a beneficial kind, that which results from an increase of demand, for the latter presupposes the development of general wealth.

* This was written in 1847.--Translator.

In the same way, there is a cheapness which is desirable, that which has its source in abundance; and an injurious cheapness, that has for its cause the failure of demand, and the impoverishment of consumers.

Now, be pleased to remark this; that restriction tends to induce, at the same time, both the injurious cause of dearness, and the injurious cause of cheapness: injurious dearness, by diminishing the supply, for this is the avowed object of restriction; and injurious cheapness, by diminishing also the demand; seeing that it gives a false direction to labour and capital, and fetters consumers with taxes and trammels.