Book II, Chapter V, 3

Whatever foreign commodity is used to buy foreign goods for domestic consumption, it makes no essential difference either to the nature of the trade or to the encouragement and support that trade can give to productive labor in the country conducting it. If they are bought with gold from Brazil, for example, or silver from Peru, that gold and silver, like tobacco from Virginia, must have been bought with something either produced by the country’s industry or bought with something so produced. As far as the country’s productive labor is concerned, therefore, the foreign trade of consumption conducted through gold and silver has all the advantages and disadvantages of any equally roundabout foreign trade of consumption. It will replace the capital immediately employed in maintaining that productive labor just as quickly or slowly. It even seems to have one advantage over any other equally roundabout foreign trade. Because these metals are compact and valuable, transporting them from one place to another costs less than transporting almost any other foreign goods of equal value. Their freight costs much less, their insurance costs no more, and no other goods are less likely to be damaged in transit. The same quantity of foreign goods may thus often be purchased, through gold and silver, with a smaller quantity of domestic produce than through any other foreign goods. The country’s demand may often be supplied more fully and at lower cost in this way than in any other. Whether the continual export of those metals in such a trade is likely to impoverish the country conducting it in some other way is a question I will examine at length later.

The part of a country’s capital employed in the carrying trade is wholly withdrawn from supporting productive labor in that country, and instead supports productive labor in foreign countries. Though each transaction may replace two distinct capitals, neither belongs to the country in question. The Dutch merchant’s capital that carries Poland’s corn to Portugal and brings Portugal’s fruits and wines back to Poland replaces two capitals in every transaction. Neither maintained productive labor in Holland: one maintained it in Poland, the other in Portugal. Only the profits regularly return to Holland, and they constitute the entire addition this trade necessarily makes to the annual produce of that country’s land and labor. When a country conducts its carrying trade with its own ships and sailors, however, the portion of capital devoted to paying freight is distributed among a number of that country’s productive laborers and sets them to work. Almost all nations with a considerable share of the carrying trade have in fact conducted it this way. The trade itself probably takes its name from this practice, since people from those countries act as carriers for other countries. This practice does not, however, seem essential to the trade. A Dutch merchant, for example, can use his capital to conduct trade between Poland and Portugal, carrying some of one country’s surplus produce to the other in British rather than Dutch ships. We may suppose that he does so on particular occasions. The use of domestic ships, however, has led people to regard the carrying trade as especially advantageous to a country like Great Britain, whose defense and security depend on the number of its sailors and ships. But the same capital can employ as many sailors and ships in the foreign trade of consumption, or even in home trade conducted by coastal vessels, as in the carrying trade. The number of sailors and ships any particular capital can employ depends not on the kind of trade, but partly on the bulk of the goods relative to their value, and partly on the distance between the ports to which they must be carried—chiefly on the former. The coal trade from Newcastle to London, for example, employs more shipping than all England’s carrying trade, though the ports are not far apart. Forcing an unusually large share of a country’s capital into the carrying trade through extraordinary inducements, beyond what would naturally enter it, will therefore not necessarily increase its shipping.

Capital employed in a country’s home trade will thus generally encourage and support more productive labor there, and increase the value of its annual produce more, than an equal capital employed in the foreign trade of consumption; capital employed in the latter trade has, in both respects, a still greater advantage over an equal capital employed in the carrying trade. Every country’s wealth, and its power insofar as power depends on wealth, must always be proportional to the value of its annual produce, the fund from which all taxes must ultimately be paid. Yet the principal aim of every country’s political economy is to increase that country’s wealth and power. It should therefore give neither preference nor greater encouragement to the foreign trade of consumption over the home trade, nor to the carrying trade over either of the other two. It should neither force nor entice into either of these two channels more of the country’s capital than would flow there naturally of its own accord.

Each of these branches of trade, however, is not merely advantageous but necessary and unavoidable when the natural course of events, free from constraint or coercion, brings it into being.

When the produce of a particular branch of industry exceeds domestic demand, the surplus must be sent abroad and exchanged for something demanded at home. Without such exports, some of the country’s productive labor must cease and the value of its annual produce diminish. Great Britain’s land and labor generally produce more corn, woolens, and hardware than the home market requires. The surplus must therefore be sent abroad and exchanged for something demanded at home. Only through such exports can this surplus acquire enough value to compensate the labor and expense of producing it. The seacoast and the banks of navigable rivers are advantageous places for industry only because they make it easier to export such surplus produce and exchange it for something in greater demand there.

When the foreign goods purchased with the surplus produce of domestic industry exceed demand in the home market, their surplus must be sent abroad again and exchanged for something in greater demand at home. About 96,000 hogsheads of tobacco are bought annually in Virginia and Maryland with part of the surplus produce of British industry. Great Britain, however, may require no more than 14,000. If the remaining 82,000 could not be sent abroad and exchanged for something in greater demand at home, imports of those hogsheads would cease at once, and with them the productive labor of all those inhabitants of Great Britain now engaged in preparing the goods that buy these 82,000 hogsheads annually. These goods, part of the produce of Great Britain’s land and labor, would have no market at home and would lose their market abroad; they would cease to be produced. Thus even the most roundabout foreign trade of consumption may sometimes be as necessary to maintain the country’s productive labor and the value of its annual produce as the most direct.

When a country’s capital stock has grown so large that it cannot all be employed in supplying its own consumption and maintaining its own productive labor, the surplus naturally spills into the carrying trade, performing the same services for other countries. The carrying trade is the natural effect and sign of great national wealth, but does not seem to be its natural cause. Statesmen inclined to give it special encouragement seem to have mistaken the effect and sign for the cause. Accordingly, Holland, by far the richest European country relative to its area and population, has the greatest share of Europe’s carrying trade. England, perhaps Europe’s second-richest country, is also thought to have a considerable share, though much of what is commonly called its carrying trade will often, perhaps, prove to be merely a roundabout foreign trade of consumption. This is largely true of trades that carry goods from the East and West Indies and America to various European markets. Those goods are generally bought either directly with the products of British industry or with something bought with those products, and the final returns from these trades are generally used or consumed in Great Britain. Trade conducted in British ships among Mediterranean ports, and some similar trade conducted by British merchants among the ports of India, perhaps constitute the chief branches of Great Britain’s carrying trade properly so called.

The extent of the home trade, and of the capital that can be employed in it, is necessarily limited by the value of the surplus produce of all the distant places within the country that need to exchange their respective products with one another. The foreign trade of consumption is limited by the value of the whole country’s surplus produce and of what can be bought with it. The carrying trade is limited by the value of the surplus produce of all the different countries in the world. Its possible extent, therefore, is virtually infinite beside that of the other two, and it can absorb the largest capitals.

The prospect of his own private profit is the sole motive that determines whether the owner of capital employs it in agriculture, manufacturing, or a particular branch of wholesale or retail trade. The different quantities of productive labor it may set in motion, and the different values it may add to society’s annual produce of land and labor when employed in one or another of these ways, never enter his mind. In countries where agriculture is the most profitable employment, and farming and improvement are the most direct roads to a splendid fortune, individuals’ capitals will naturally be employed in the manner most advantageous to society as a whole. The profits of agriculture, however, appear no higher than those of other employments anywhere in Europe. Speculative promoters in every corner of Europe have entertained the public in recent years with magnificent accounts of the profits to be made from cultivating and improving land. Without examining their calculations in detail, a simple observation may convince us that their conclusions must be false. Every day we see magnificent fortunes made through trade and manufacturing in a single lifetime, often from very little capital and sometimes from none. Perhaps not one such fortune has been made through agriculture in the same time and from such capital anywhere in Europe during the present century. Yet in all Europe’s great countries much good land remains uncultivated, and most cultivated land has not been improved nearly as much as it could be. Agriculture can therefore absorb far more capital almost everywhere than has yet been employed in it. I shall explain at length in the next two books what circumstances of European policy have given trades pursued in towns such a great advantage over the trade pursued in the countryside that private individuals often find it more profitable to employ their capitals in the most distant carrying trades of Asia and America than in improving and cultivating the most fertile fields in their own neighborhood.

The type of foreign goods used to buy imports for consumption at home makes no essential difference to this trade or to its support for productive labor in the country conducting it. Suppose imports are bought with gold from Brazil or silver from Peru. Like Virginia tobacco, that gold and silver must have been bought with goods made by the country’s workers, or with other goods bought with what those workers made. As far as the country’s productive labor is concerned, foreign trade for home consumption using gold and silver has all the benefits and drawbacks of any equally indirect foreign trade of that kind. It repays the capital directly supporting productive labor just as quickly or slowly. It even seems to have an advantage over other equally indirect foreign trades. Because gold and silver have great value for their small size, they cost less to transport than almost any other foreign goods of equal value. Shipping costs much less, insurance costs no more, and few other goods are less likely to be damaged in transport. Using gold and silver may therefore often allow a country to buy the same amount of foreign goods with fewer of its domestically produced goods than using other foreign goods would. It can often meet its needs more fully and at lower cost this way. I will examine at length later whether continually exporting these metals in such trade might impoverish the country in some other way.

Any part of a country’s capital invested in carrying trade is taken entirely away from supporting that country’s productive labor and instead supports labor in foreign countries. Each transaction may repay two separate capitals, but neither belongs to that country. Consider a Dutch merchant whose capital carries corn from Poland to Portugal and brings fruit and wine from Portugal back to Poland. Each transaction repays two capitals, one that supported productive labor in Poland and the other in Portugal. Neither supported it in Holland. Only the profits regularly return to Holland. They are the entire addition this trade necessarily makes to Holland’s annual output from land and labor. When a country’s merchants use its own ships and sailors in carrying trade, however, the part of their capital that pays shipping charges goes to productive workers in that country and employs some of them. Nearly every nation with a substantial carrying trade has conducted it this way. Indeed, the trade probably got its name because people in such countries carried goods for other countries. But using their own ships is not an essential feature of the trade. A Dutch merchant can, for example, use his capital to trade between Poland and Portugal, carrying part of one country’s surplus to the other in British ships rather than Dutch ones. We can assume this happens sometimes. The use of local ships and sailors is why carrying trade has been seen as especially beneficial to Great Britain, whose defense and security depend on its number of sailors and ships. But the same capital can employ just as many sailors and ships in foreign trade supplying home consumption, or even in domestic coastal trade, as it can in carrying trade. The number a given capital can employ does not depend on the type of trade. It depends partly on the goods’ bulk relative to their value, and partly on the distance between the ports, but chiefly on the goods’ bulk. For example, carrying coal from Newcastle to London employs more ships than all of England’s carrying trade, though the ports are not far apart. Giving exceptional incentives to steer more of a country’s capital into carrying trade than would naturally enter it will therefore not necessarily increase its shipping.

Capital in a country’s domestic trade will thus generally support and encourage more productive labor there, and add more to the value of its annual output, than an equal amount in foreign trade supplying home consumption. Capital in that foreign trade in turn does more in both respects than an equal amount in carrying trade. A country’s wealth, and the power that depends on wealth, must reflect the value of its annual output. That output is the fund from which all taxes must ultimately be paid. Since the central aim of every country’s political economy is to increase its wealth and power, it should not favor foreign trade supplying home consumption over domestic trade, or carrying trade over either of the other two. It should neither force nor entice more of the country’s capital into either of those two foreign trades than would naturally go there on its own.

Still, every one of these kinds of trade is beneficial, necessary, and unavoidable when it arises naturally, without pressure or force.

When any branch of industry produces more than people at home want, its surplus must be exported and exchanged for something they do want. Otherwise some of the country’s productive labor must stop, and its annual output will lose value. Great Britain’s land and labor generally produce more corn, woolens, and hardware than its home market wants. The surplus must be exported in exchange for things wanted at home. Only through those exports can the surplus gain enough value to cover the labor and expense of producing it. Coastal locations and the banks of navigable rivers are good places for industry only because they make it easier to export surplus goods and exchange them for others in greater demand there.

When the foreign goods bought with surplus domestic output exceed demand at home, the extra goods must be exported again and exchanged for something more in demand at home. About 96,000 hogsheads of tobacco are bought annually in Virginia and Maryland with some of the surplus output of British industry. But Great Britain perhaps wants no more than 14,000. If the remaining 82,000 could not be exported in exchange for something more wanted at home, imports of that tobacco would have to stop at once. So would the productive labor of all the people in Great Britain who make the goods used each year to buy those 82,000 hogsheads. Those goods form part of the output of Great Britain’s land and labor. They have no market at home; without their market abroad, they would no longer be produced. Thus even the most indirect foreign trade supplying home consumption can sometimes be as necessary to support a country’s productive labor and the value of its annual output as the most direct.

When a country’s capital stock grows so large that it cannot all be used to supply domestic consumption and support domestic productive labor, the surplus naturally flows into carrying trade and performs the same services for other countries. Carrying trade is a natural result and sign of great national wealth, but it does not appear to be a natural cause of it. Statesmen who have wanted to give it special support seem to have confused the result and sign with the cause. In proportion to its land area and population, Holland is by far Europe’s richest country. It also has the greatest share of Europe’s carrying trade. England is perhaps Europe’s second-richest country and is also thought to have a substantial share. But much of what is called England’s carrying trade may actually be indirect foreign trade supplying home consumption. That largely describes the trade carrying goods from the East and West Indies and America to various European markets. Those goods are generally bought directly with British products or with goods bought using British products. The goods eventually received in return are generally used or consumed in Great Britain. British ships trading between Mediterranean ports, and similar trade by British merchants between ports in India, are perhaps the main branches of Great Britain’s true carrying trade.

The size of domestic trade, and of the capital it can use, is necessarily limited by the value of the surplus output of distant places within the country that need to exchange their products with one another. Foreign trade supplying home consumption is limited by the value of the whole country’s surplus output and what can be bought with it. Carrying trade is limited by the value of the surplus output of all the world’s countries. Its potential size is therefore almost limitless compared with the other two. It can absorb the largest amounts of capital.

The owner of capital chooses among agriculture, manufacturing, and particular types of wholesale or retail trade solely on the basis of his own profit. He never thinks about how much productive labor each use might employ or how much value it might add to society’s annual output from land and labor. So in countries where agriculture is the most profitable work, and farming and land improvement offer the clearest paths to great wealth, individuals’ capital will naturally go into the use most beneficial to society as a whole. But profits from agriculture do not seem higher than those from other work anywhere in Europe. In recent years, speculative promoters across Europe have entertained the public with grand accounts of profits to be made by farming and improving land. We do not need to examine their calculations in detail to see that their conclusions must be wrong. Every day we see enormous fortunes made from trade and manufacturing within a single lifetime, often starting with very little capital and sometimes with none. Perhaps not one such fortune has been made from agriculture in Europe during the present century, within the same time and with the same starting capital. Yet much good land remains untilled throughout Europe’s large countries, and most land that is farmed has not been improved nearly as much as it could be. Agriculture could therefore absorb far more capital almost everywhere than it has ever received. In the following two books I will explain fully which features of European policy have so favored trades carried on in towns over farming in the countryside. These policies often make it more profitable for individuals to put their capital into carrying trades as distant as Asia and America than to improve and farm the most fertile fields in their own neighborhood.