Book IV, Chapter VII, 13

At first sight, no doubt, a monopoly of the vast commerce of America seems a prize of the highest value. To ambition’s dazzled and undiscerning eye, amid the turmoil of politics and war, it appears an especially brilliant prize to fight for. Yet the very brilliance of this prize—the immense scale of the commerce—is what makes its monopoly harmful: it causes an employment inherently less beneficial to the country than most others to absorb a far greater share of the country’s capital than it otherwise would.

As shown in the second book, the mercantile stock of every country naturally seeks, so to speak, the employment most beneficial to that country. If it is engaged in the carrying trade, its country becomes a marketplace for the goods of all the countries whose commerce that stock carries. But the owner of the stock necessarily wants to sell as much as he can of those goods at home. He thereby saves the trouble, risk, and expense of exporting them, and will accordingly be willing to sell them at home not only at a considerably lower price, but also for a somewhat smaller profit, than he could expect by sending them abroad. He therefore naturally tries wherever possible to turn his carrying trade into a foreign trade of consumption. If, in turn, his stock is employed in a foreign trade of consumption, for the same reason he will be glad to sell at home as much as possible of the domestic goods he has assembled for export to a foreign market. He will thus try wherever possible to turn his foreign trade of consumption into domestic trade. In this way the mercantile stock of every country naturally favors nearby employment and avoids distant employment; favors employment with frequent returns and avoids employment with distant, slow returns; favors employment that can sustain the greatest amount of productive labor in the country to which it belongs, or in which its owner lives, and avoids employment that sustains the least there. It naturally favors the employment ordinarily most beneficial to that country and avoids the one ordinarily least beneficial.

But if profit in one of those distant employments, ordinarily less beneficial to the country, happens to rise somewhat above what is needed to offset the natural preference for nearer employments, that excess profit will draw stock out of the nearer ones until profits everywhere return to their proper level. The excess profit, however, shows that under society’s present circumstances the distant employments are somewhat short of stock relative to others, and that the society’s stock has not been distributed among its different employments in the most suitable way. It shows that something is being bought too cheaply or sold too dearly, and that some particular class of citizens is being treated more or less unfairly, either paying more or receiving less than is consistent with the equality that ought to prevail, and naturally does prevail, among the various classes. Though the same capital will never sustain as much productive labor in a distant employment as in a nearby one, a distant employment may be just as necessary to society’s welfare: the goods it handles may be needed to carry on many nearby employments. But if the profits of the merchants dealing in those goods rise above their proper level, the goods will sell too dearly, somewhat above their natural price, and everyone engaged in the nearer employments will suffer to some extent from that high price. Their interest therefore requires the withdrawal of some stock from the nearer employments and its transfer to the distant one, to bring its profits back to their proper level and the prices of its goods back to their natural price. In this exceptional case, the public interest requires some stock to leave employments ordinarily more beneficial to the public and enter one ordinarily less beneficial. And in this exceptional case, people’s natural interests and inclinations coincide with the public interest as closely as they do in all ordinary cases, prompting them to withdraw stock from nearby employments and turn it toward the distant one.

In this way the private interests and passions of individuals naturally lead them to direct their stock toward employments that are ordinarily most beneficial to society. But if this natural preference leads them to direct too much of it there, falling profits in those employments and rising profits in all the others immediately induce them to correct the faulty distribution. Without any intervention by law, therefore, people’s private interests and passions naturally lead them to divide and distribute every society’s stock among its different employments as nearly as possible in the proportion most favorable to the interest of society as a whole.

All the various regulations of the mercantile system necessarily disturb this natural and most beneficial distribution of stock to some degree. Perhaps none disturb it more than those governing trade with America and the East Indies, since trade with these two great continents absorbs more stock than any other two branches of trade. The regulations that cause the disturbance in the two branches, however, are not quite the same. Monopoly is the chief instrument of both, but each uses a different kind of monopoly. Indeed, monopoly of one kind or another appears to be the mercantile system’s only instrument.

In trade with America, each nation tries to secure as much as possible of its own colonies’ entire market by completely excluding all other nations from direct trade with them. For most of the sixteenth century, the Portuguese tried to conduct trade with the East Indies in the same fashion, claiming the exclusive right to sail the Indian seas because they had been the first to discover the route. The Dutch still exclude every other European nation from direct trade with their spice islands. Monopolies of this kind are plainly directed against all other European nations. Those nations are not only excluded from a trade in which it might be convenient to employ some of their stock, but must also pay somewhat more for its goods than if they could import them directly from the countries where they are produced.

Since the decline of Portuguese power, however, no European nation has claimed the exclusive right to sail the Indian seas, whose principal ports are now open to the ships of all European nations. Yet except in Portugal and, in recent years, France, every European country has entrusted East India trade to an exclusive company. Monopolies of this kind are directed against the very nation that creates them. Most of its people are not only excluded from a trade in which it might be convenient to employ part of their stock, but must also pay somewhat more for the goods traded than they would if the trade were open and free to all their countrymen. Since the establishment of the English East India company, for example, the other inhabitants of England, besides being excluded from the trade, must have paid in the price of the East India goods they consumed not merely for any extraordinary profits the company earned on those goods through its monopoly, but also for all the extraordinary waste inevitably produced by the fraud and abuse inseparable from the administration of so large a company. The absurdity of this second kind of monopoly is therefore much more obvious than that of the first.

Both kinds of monopoly disturb the natural distribution of society’s stock to some degree, but they do not always disturb it in the same way.

Monopolies of the first kind always draw into the particular trade they govern a larger share of society’s stock than would enter it of its own accord.

Monopolies of the second kind may sometimes draw stock into the particular trade they govern and sometimes drive it away, according to circumstances. In poor countries they naturally draw more stock into that trade than would otherwise enter it; in rich countries they naturally drive away a good deal of stock that would otherwise enter.

Poor countries such as Sweden and Denmark, for example, would probably never have sent a single ship to the East Indies if trade had not been placed in the hands of an exclusive company. Establishing such a company necessarily encourages adventurers. Its monopoly protects them from all competitors in the domestic market, while in foreign markets they have the same opportunities as traders from other nations. The monopoly promises them a large profit on a considerable quantity of goods and the chance of a considerable profit on a large quantity. Without this extraordinary encouragement, the merchants of such poor countries would probably never have contemplated risking their small capitals on an enterprise as distant and uncertain as East India trade must naturally have seemed to them.

A rich country such as Holland, by contrast, would probably send many more ships to the East Indies under free trade than it actually does. The Dutch East India company’s limited stock probably keeps out many large mercantile capitals that would otherwise enter that trade. Holland’s mercantile capital is so vast that it seems continually to overflow, sometimes into the public funds of foreign countries, sometimes into loans to foreign merchants and adventurers, sometimes into the most circuitous foreign trades of consumption, and sometimes into the carrying trade. All nearby employments are completely filled, with all the capital they can accommodate at any tolerable profit already invested in them, so Dutch capital necessarily flows toward the most distant employments. If East India trade were entirely free, it would probably absorb most of this surplus capital. The East Indies offer a market for European manufactures, for American gold and silver, and for America’s other products, larger and more extensive than Europe and America together.

Every disturbance of the natural distribution of stock necessarily harms the society in which it occurs, whether it drives stock away from a trade to which it would otherwise go or draws stock into one it would otherwise avoid. If Holland’s trade with the East Indies would be greater without an exclusive company than it actually is, that country must suffer a considerable loss because some of its capital is barred from the employment best suited to that port. Likewise, if Sweden’s and Denmark’s East India trade would be smaller without an exclusive company—or, more probably, would not exist at all—those two countries must suffer a considerable loss because some of their capital is drawn into an employment more or less unsuited to their present circumstances. Perhaps in those circumstances it would be better for them to buy East India goods from other nations, even at a somewhat higher price, than to devote so large a share of their small capital to so distant a trade, where returns are so slow and that capital sustains so little productive labor at home, where productive labor is greatly needed, where so little has been done, and where so much remains to do.

Even if a particular country could conduct no direct trade with the East Indies without an exclusive company, it would not follow that such a company ought to be established there. It would follow only that, in those circumstances, the country ought not to trade directly with the East Indies. That such companies are not generally necessary for East India trade is sufficiently demonstrated by the Portuguese, who enjoyed almost all of that trade for more than a century without any exclusive company.

It has been said that no private merchant could readily have enough capital to maintain factors and agents in the various ports of the East Indies to procure goods for ships he might occasionally send there. Yet without them, the difficulty of finding a cargo might often cause his ships to miss the season for returning, and the cost of so long a delay would not merely consume the entire profit of the venture but often cause a very substantial loss. If this argument proved anything at all, however, it would prove that no major branch of trade could operate without an exclusive company, contrary to the experience of every nation. In no major branch of trade does any single private merchant have enough capital to carry on all the subordinate branches needed to carry on the principal branch. But when a nation is ready for a major branch of trade, some merchants naturally direct their capitals to its principal branch and others to its subordinate branches. All its branches are thus carried on, though very seldom all by the capital of a single private merchant. If a nation is ready for East India trade, therefore, a portion of its capital will naturally divide among that trade’s various branches. Some merchants will find it in their interest to live in the East Indies and use their capitals there to procure goods for ships sent by other merchants living in Europe. If the settlements established by various European nations in the East Indies were taken from the exclusive companies that now hold them and placed under the sovereign’s immediate protection, they would make such residence both safe and easy, at least for merchants of the particular nations that own the settlements. If, at a particular time, the portion of a country’s capital naturally inclined toward East India trade was insufficient to carry on all its different branches, that would show that the country was not yet ready for that trade. It would do better, for a time, to buy the East India goods it needed from other European nations, even at a higher price, than to import them directly from the East Indies. What it might lose through the higher price of those goods could seldom equal the loss it would incur by diverting a large share of its capital from other employments more necessary, more useful, or better suited to its circumstances and situation than direct trade with the East Indies.

At first glance, a monopoly over the vast trade with America seems extremely valuable. In the confusion of politics and war, people driven by reckless ambition see it as a dazzling prize worth fighting for. But what makes it so dazzling—the enormous size of the trade—is exactly what makes the monopoly harmful. It causes this kind of business, which by its nature benefits the country less than most others, to absorb much more of the country's capital than it otherwise would.

As shown in the second book, the mercantile stock of a country naturally seeks the use most beneficial to that country. When merchants put their stock into the carrying trade, their country becomes a trading center for goods from all the countries they trade between. But a merchant who owns that stock naturally wants to sell as much of those goods as he can at home. This saves the trouble, risk, and cost of exporting them. He is therefore willing to sell them at home for a much lower price, and even at a somewhat lower profit, than he could expect by shipping them abroad. So he tries as far as possible to turn his carrying trade into foreign trade for domestic consumption. If instead he uses his stock to trade with other countries for domestic consumption, he will likewise want to sell as many as possible of the domestic goods he has gathered for export at home. In this way, he will try as far as possible to turn that foreign trade into home trade. The mercantile stock of every country naturally favors nearby uses and avoids distant ones. It favors trade that pays back frequently and avoids trade whose returns are far away and slow. It favors work that supports the most productive labor in the country where the stock belongs, or where its owner lives, and avoids work that supports the least there. In ordinary circumstances, it seeks the use that benefits its country most and avoids the one that benefits it least.

Suppose that in one of these distant kinds of business, normally less beneficial to the country, profits rise enough to outweigh the natural preference for nearer business. Higher profits will draw stock away from nearby work until profits in all kinds of work return to their proper level. But these higher profits show that, under society's present conditions, too little stock is going into distant work compared with other work. The society's stock is not divided among its various uses in the best way. Something is being bought too cheaply or sold too dearly. Some group of citizens is being treated unfairly, either paying more or receiving less than the fair balance that should, and ordinarily does, exist between different groups. The same amount of capital can never support as much productive labor in distant work as in nearby work. Still, distant work may be just as necessary to society's welfare because it may supply goods needed for many kinds of nearby work. If the profits on those goods are above their proper level, however, they will be sold too dearly, at more than their natural price. Everyone working in the nearer businesses will suffer to some degree from that high price. Their own interest therefore calls for some stock to move out of nearby work and into the distant business. This will lower its profits to their proper level and bring the goods it handles down to their natural price. In this unusual case, the public interest calls for stock to move away from work that is ordinarily more beneficial and toward work that is ordinarily less beneficial. Here too, people's natural interests and inclinations agree exactly with the public interest, just as they do in ordinary cases. They lead people to move stock from nearby work into distant work.

In this way, individuals' own interests and desires naturally lead them to put their stock into kinds of work that usually benefit society most. If that preference draws too much stock into such work, its profits fall while profits elsewhere rise. People then have a reason to correct the imbalance at once. Without any law intervening, people's own interests and desires therefore lead them to divide society's stock among all its different uses in proportions as close as possible to what benefits the whole society most.

All the various rules of the mercantile system upset this natural and most beneficial distribution of stock to some extent. The rules governing trade with America and the East Indies perhaps upset it more than any others, because trade with those two great continents absorbs more stock than any other two branches of trade. Yet the rules that cause the disruption differ between these two branches. Both rely mainly on monopoly, but on different kinds of monopoly. Indeed, one kind of monopoly or another seems to be the mercantile system's only tool.

In trade with America, each nation tries to reserve as much of its colonial market as possible for itself by completely barring all other nations from trading directly with its colonies. During most of the sixteenth century, the Portuguese tried to handle trade with the East Indies in the same way. Because they had been the first to discover the route, they claimed the sole right to sail in the Indian seas. The Dutch still bar all other European nations from trading directly with their spice islands. These monopolies are plainly directed against other European nations. Those nations are denied trade that might have made good use of some of their stock. They must also pay somewhat more for its goods than they would if they could import them directly from the countries producing them.

Since Portuguese power declined, however, no European nation has claimed an exclusive right to sail in the Indian seas. Their main ports are now open to ships from every European nation. But in every European country except Portugal and, in recent years, France, trade with the East Indies has been reserved for an exclusive company. This kind of monopoly is actually directed against the nation that grants it. Most of that nation's people are shut out of a trade that might make good use of some of their stock. They also have to pay somewhat more for the goods it trades in than they would if the trade were open to all their fellow citizens. Since the English East India company was established, for example, other people in England have not only been excluded from the trade. Through the price of East Indian goods they buy, they have also had to pay for any unusually high profits the company made because of its monopoly. They have had to pay for all the extraordinary waste inevitably caused by the fraud and abuse involved in managing such a large company as well. The foolishness of this second kind of monopoly is therefore much more obvious than that of the first.

Both kinds of monopoly disrupt the natural distribution of society's stock to some degree. But they do not always disrupt it in the same way.

The first kind of monopoly always draws more of society's stock into the trade it controls than would go there on its own.

The second kind may either draw stock into the trade it controls or keep stock out of it, depending on the circumstances. In poor countries, it naturally draws more stock into that trade than would otherwise go there. In rich countries, it naturally keeps out a great deal of stock that would otherwise go there.

Poor countries such as Sweden and Denmark, for example, probably would never have sent a single ship to the East Indies without an exclusive company controlling the trade. Setting up such a company necessarily encourages people to take the risk. Its monopoly protects them against all rivals in their home market. They have the same chance as traders from other nations in foreign markets. Their monopoly promises a large profit on a substantial quantity of goods and offers a chance of a substantial profit on a large quantity. Without this unusual encouragement, traders with little capital in such poor countries probably would never have risked their small stocks on trade with the East Indies. It must naturally have seemed a distant and uncertain undertaking to them.

A rich country such as Holland, by contrast, would probably send many more ships to the East Indies if trade were free than it actually sends. The Dutch East India company's limited stock probably keeps much large-scale mercantile capital out of that trade. Holland has so much mercantile capital that it continually overflows, so to speak. Some goes into other countries' public funds, some into loans to private merchants and risk-taking traders abroad, some into the most roundabout foreign trade for consumption, and some into the carrying trade. Every nearby use is already filled with all the capital that can earn a reasonable profit there. Dutch capital must therefore flow into the most distant uses. If East Indian trade were completely free, it would probably absorb most of this extra capital. The East Indies offer a market for European manufactures, and for American gold, silver, and other products, that is larger and more extensive than Europe and America together.

Any disruption of the natural distribution of stock necessarily harms the society where it occurs. This is true whether it keeps stock out of a trade it would otherwise enter or draws stock into one it would otherwise avoid. If Holland would trade more with the East Indies without an exclusive company than it currently does, it suffers a considerable loss when part of its capital is kept out of the business best suited to that place. Likewise, if Sweden and Denmark would trade less with the East Indies without an exclusive company than they currently do, or, more likely, not trade with them at all, they too suffer a considerable loss. Part of their capital has been drawn into a business poorly suited, to some degree, to their present conditions. For now, they might do better to buy East Indian goods from other nations, even at somewhat higher prices. Otherwise, they send so much of their limited capital into a distant trade that pays back so slowly and supports so little productive labor at home. At home, productive labor is badly needed: so little has been done and so much remains to do.

Even if a country could not trade directly with the East Indies without an exclusive company, this would not mean that it should establish such a company. It would only mean that, under those conditions, it should not trade directly with the East Indies. The Portuguese show clearly that such companies are not generally needed for East Indian trade. For more than a century, they conducted almost all of that trade without an exclusive company.

It has been said that no private merchant could easily have enough capital to keep agents and representatives in various East Indian ports. He would need them to buy goods for the ships he might send there from time to time. Without them, the difficulty of finding a cargo might often make his ships miss the season for sailing home. The cost of such a long delay would use up all the profit from the venture and often cause a considerable loss. But if this argument proved anything, it would prove that no major branch of trade could operate without an exclusive company. That contradicts the experience of every nation. No single private merchant has enough capital in any major branch of trade to run all the smaller branches needed to support its main branch. But when a nation is ready for a major branch of trade, some merchants naturally put their capital into the main business and others into its smaller supporting branches. All its branches can operate in this way, though a single private merchant very rarely provides the capital for them all. So if a nation is ready for East Indian trade, some of its capital will naturally spread across all its branches. Some merchants will find it profitable to live in the East Indies and use their capital there to buy goods for ships sent by other merchants living in Europe. The settlements various European nations have gained in the East Indies could make it safe and easy for their merchants to live there. To do so, those settlements would need to be taken from the exclusive companies that now hold them and placed directly under the protection of each nation's sovereign. At least this would work for merchants from the nations that own the settlements. Suppose that at a particular time a country's capital, left to itself, does not send enough into East Indian trade to run all its branches. That would show that the country is not yet ready for the trade. For the time being, it would do better to buy the East Indian goods it needs from other European nations, even at higher prices, than to import them directly from the East Indies. What it loses through those high prices would rarely equal what it would lose by diverting a large share of its capital from other work that is more necessary, more useful, or better suited to its circumstances and position than direct trade with the East Indies.