Book IV, Chapter III, 4

PART II.—The Unreasonableness of These Extraordinary Restraints on Other Principles.

In the preceding part of this chapter, I have tried to show that, even on the principles of the mercantile system, extraordinary restraints on imports from countries with which the balance of trade is thought unfavorable are unnecessary.

Nothing, however, could be more absurd than the entire doctrine of the balance of trade, on which not only these restraints but almost every other regulation of commerce is founded. When two places trade, the doctrine supposes that if their balance is even neither gains nor loses; but if it tips at all to one side, one loses and the other gains in proportion to its departure from perfect equilibrium. Both assumptions are false. Trade forced by bounties and monopolies may be, and commonly is, disadvantageous to the very country it is meant to favor, as I shall try to show later. But trade carried on naturally and regularly between any two places, without force or constraint, always benefits both, though it does not always benefit them equally.

By benefit or gain I do not mean an increase in the quantity of gold and silver, but an increase in the exchangeable value of the annual produce of a country's land and labor, or in the annual revenue of its inhabitants.

If the balance is even and the trade between the two places consists entirely of exchanging goods produced in each, both will, in most circumstances, not only gain but gain equally, or nearly so. Each provides a market for part of the other's surplus produce. Each replaces a capital employed in producing and preparing that portion of the other's surplus for market, a capital distributed among a number of the other's inhabitants and providing them with revenue and support. Some of each country's inhabitants will therefore receive their revenue and support directly from the other. Since the exchanged goods are assumed to have equal value, the two capitals engaged in this trade will generally be equal, or nearly equal. Both are employed in producing the countries' own goods; thus the revenue and support that their distribution provides to the inhabitants of each country will also be equal, or nearly so. The amount each provides to the other will rise or fall with the scale of their dealings. If these amount annually to £100,000, for example, or to £1,000,000 on each side, each country will provide the inhabitants of the other with annual revenue of £100,000 in the first case and £1,000,000 in the second.

Suppose, instead, that one country exports nothing to the other but its own produce, while the other pays entirely in foreign goods. The balance would still be considered even, since goods are paid for with goods. Both countries would gain here too, but unequally: the inhabitants of the country exporting only its own produce would gain the greater revenue from the trade. Suppose, for example, England imports from France only French produce but, having no produce of its own for which France has demand, annually sends a great quantity of foreign goods in payment—tobacco and East India goods, say. Although this trade would provide revenue to people in both countries, it would provide more to those in France than those in England. The entire French capital annually engaged in it would be distributed each year among the people of France. Only the portion of the English capital used to produce the English goods with which those foreign goods were purchased would be distributed among the people of England. Most of the English capital would replace capitals employed in Virginia, Indostan, and China, which had provided revenue and support to the inhabitants of those distant countries. If the capitals were equal or nearly so, therefore, the French capital employed in this way would increase the revenue of the French people much more than the English capital would increase that of the English people. France would conduct a direct foreign trade of consumption with England, whereas England would conduct an indirect trade of the same kind with France. The differing effects of capital employed in direct and indirect foreign trade of consumption have already been fully explained.

There is probably no trade between two countries that consists entirely either of exchanging goods produced in both countries or of exchanging goods produced in one for foreign goods from the other. Almost every country exchanges some goods of its own and some foreign goods with other countries. The country whose shipments contain the greatest proportion of its own goods and the smallest of foreign goods, however, will always be the principal gainer.

Suppose England paid for the goods it annually imports from France not with tobacco and East India goods, but with gold and silver. The balance would then be considered uneven, because goods were paid for not with goods but with gold and silver. Yet here, as in the previous case, the trade would provide some revenue to people in both countries, though more to those in France than to those in England. It would provide some revenue to the English. The capital used to produce the English goods that bought this gold and silver—a capital distributed among certain inhabitants of England and providing them with revenue—would thereby be replaced and enabled to remain in that employment. Exporting gold and silver would no more diminish England's total capital than exporting other goods of equal value. On the contrary, in most cases it would increase it. Goods are sent abroad only when demand for them is thought greater there than at home, and when the proceeds are therefore expected to be worth more at home than the goods exported. If tobacco worth only £100,000 in England can be sent to France and exchanged for wine worth £110,000 in England, the exchange increases English capital by £10,000. If £100,000 in English gold likewise buys French wine worth £110,000 in England, the exchange increases English capital by the same £10,000. A merchant with £110,000 worth of wine in his cellar is richer than one with only £100,000 worth of tobacco in his warehouse; he is equally richer than one with only £100,000 worth of gold in his coffers. He can set more industry in motion and provide revenue, support, and employment to more people than either of the others. But a country's capital is the sum of the capitals of all its inhabitants, and the amount of industry it can support annually is what those individual capitals can together support. Both the country's capital and the amount of industry it can support annually must therefore generally grow through this exchange. It would indeed be more advantageous for England if it could buy French wines with its own hardware and broadcloth than with either Virginia tobacco or the gold and silver of Brazil and Peru. A direct foreign trade of consumption is always more advantageous than an indirect one. But an indirect foreign trade of consumption conducted with gold and silver does not seem less advantageous than any other equally indirect trade. Nor is a country without mines more likely to be drained of gold and silver by annually exporting those metals than a country that grows no tobacco is likely to be drained of tobacco by annually exporting that plant. A country with the means to buy tobacco will never lack it for long; neither will a country with the means to buy gold and silver long lack those metals.

It is said that a worker's dealings with the alehouse are a losing trade, and that the trade a manufacturing nation would naturally conduct with a wine-producing country is of the same kind. I answer that trade with the alehouse is not necessarily a losing trade. In itself it is as advantageous as any other, though perhaps somewhat more liable to abuse. Brewing and even retailing fermented liquor are divisions of labor as necessary as any others. A worker will generally do better to buy the quantity he needs from a brewer than to brew it himself; if he is poor, he will generally do better to buy it a little at a time from a retailer than to buy a large quantity from the brewer. Certainly he may buy too much from either, as he may from any other neighborhood dealer: from the butcher, if he is a glutton, or from the cloth seller, if he affects fashionable elegance among his companions. Still, it benefits the great body of workers that all these trades should be free, even if freedom can be abused in every one of them and perhaps more readily in some than in others. Individuals may sometimes ruin themselves by drinking fermented liquor to excess, but there seems no danger of a nation doing so. In every country many people spend more than they can afford on such drinks, but many more spend less. It is worth observing, too, that experience suggests cheap wine promotes not drunkenness but sobriety. The inhabitants of wine-producing countries are generally the most sober people in Europe: witness the Spaniards, the Italians, and the inhabitants of southern France. People seldom indulge to excess in what they have every day. No one tries to appear generous and sociable by lavishing a drink as cheap as small beer. By contrast, where extreme heat or cold prevents grapes from growing, and wine is therefore expensive and rare, drunkenness is a common vice—as among the northern nations and all those who live between the tropics, for example the Black inhabitants of the Guinea coast. When a French regiment comes from one of France's northern provinces, where wine is somewhat dear, to be quartered in the south, where it is very cheap, the soldiers at first, I have often heard it observed, drink to excess because good wine is cheap and new to them. After a few months' residence, however, most become as sober as the other inhabitants. If the duties on foreign wines and the excise taxes on malt, beer, and ale were all removed at once, Great Britain might similarly experience widespread temporary drunkenness among people of the middle and lower ranks, probably followed soon afterward by lasting and almost universal sobriety. At present, drunkenness is by no means a vice of the fashionable, or of those who can easily afford the most expensive drinks. A gentleman drunk on ale is hardly ever seen among us. Moreover, Britain's restraints on the wine trade seem designed less to keep people, so to speak, out of the alehouse than to keep them away from the place where they can buy the best and cheapest drink. They favor the wine trade of Portugal and discourage that of France. The Portuguese, it is said, are better customers for our manufactures than the French and should therefore be favored over them. Since they buy from us, it is argued, we should buy from them. The petty stratagems of lowly shopkeepers are thus raised to political maxims for governing a great empire; only the humblest shopkeepers make a rule of dealing chiefly with their own customers. A great merchant always buys his goods where they are best and cheapest, without regard to such petty considerations.

PART II.—Why These Extraordinary Restrictions Are Unreasonable for Other Reasons.

In the earlier part of this chapter, I tried to show that even by the principles of the mercantile system, there is no need for extraordinary restrictions on imports from countries with which the balance of trade is thought to be unfavorable.

But the entire doctrine of the balance of trade is absurd. Not only these restrictions but nearly every other trade regulation rests on it. According to the doctrine, when two places trade and their balance is even, neither gains or loses. If the balance shifts to either side, one loses and the other gains in proportion to the size of the shift. Both claims are false. Trade forced into existence by bounties and monopolies can harm the country it is meant to benefit, and usually does, as I will try to show later. But trade that develops naturally and continues regularly between two places without coercion always benefits both, though not necessarily to the same degree.

By benefit or gain, I do not mean an increase in the amount of gold and silver. I mean an increase in the exchangeable value of what the country's land and labor produce each year, or an increase in the annual revenue of its inhabitants.

Suppose trade is balanced and the two places exchange only goods produced at home. Usually both places will gain equally, or almost equally. Each provides a market for some of the other's surplus goods. Each replaces stock used to produce and prepare the other's surplus for sale, stock that was distributed among some of the other's inhabitants and gave them income and a means of living. Some inhabitants of each place therefore get their income and means of living directly from the other. The goods exchanged are assumed to have equal value. So the stock each side uses in the trade will usually be equal or nearly equal. Both amounts of stock are used to produce each country's domestic goods. The income and means of living their distribution provides to each country's inhabitants will therefore also be equal or nearly equal. The greater the trade, the greater this mutual income and support. If each place trades £100,000 of goods each year, each provides the other's inhabitants with annual revenue of £100,000. If each trades £1,000,000, each provides annual revenue of £1,000,000 to the other.

Now suppose one place exports only its own products to the other, but receives only foreign products in return. The balance would still be considered even, since goods are paid for with goods. Both places would still gain, but unequally. The people in the country exporting only its own products would receive the greater income from the trade. Suppose, for example, that England imported only French products from France. England had nothing of its own that the French wanted, so it paid each year by shipping them large amounts of foreign goods, say tobacco and East India goods. This trade would provide some income to both countries, but more to France. All the French stock invested in the trade each year would be distributed among people in France. Only the part of English stock used to produce the English goods that bought those foreign goods would be distributed among people in England. Most of it would replace stock invested in Virginia, Indostan, and China, stock that had provided income and support to people in those distant countries. If the two amounts of stock were equal or nearly equal, the use of French stock would increase the income of France's people far more than the use of English stock would increase the income of England's people. France would conduct a direct foreign trade in consumer goods with England, while England would conduct an indirect trade of the same kind with France. I have already explained fully how stock invested in direct and indirect foreign trade in consumer goods affects each country differently.

There is probably no trade between two countries consisting entirely of an exchange of domestic goods on both sides, or entirely of domestic goods on one side and foreign goods on the other. Nearly every country exchanges a mixture of domestic and foreign goods. Still, the country whose shipments contain the largest share of domestic goods and the smallest share of foreign goods will always gain the most.

Suppose England paid for its annual imports from France with gold and silver instead of tobacco and East India goods. The balance would then be considered unequal, because goods were paid for with gold and silver instead of other goods. Yet this trade would provide some income to people in both countries, just as the previous example did. It would provide more income to the French, but some to the English as well. English goods were produced to buy the gold and silver. The stock used in producing those goods, and distributed as income to some people in England, would be replaced, allowing that work to continue. Exporting gold and silver would no more reduce England's total stock than exporting other goods of equal value. In fact, in most cases it would increase that stock. Goods are sent abroad only when people expect demand for them to be greater there than at home. They therefore expect the goods received in return to be worth more at home than those sent away. If tobacco worth only £100,000 in England buys wine in France worth £110,000 in England, the exchange increases English stock by £10,000. If £100,000 in English gold buys French wine worth £110,000 in England, that exchange increases English stock by the same £10,000. A merchant with £110,000 worth of wine in a cellar is richer than one with only £100,000 worth of tobacco in a warehouse. The wine merchant is also richer than one with only £100,000 worth of gold in a strongbox. The wine merchant can set more labor to work and provide income, support, and employment to more people than either of the others. A country's stock is the combined stock of all its inhabitants. The amount of labor that can be supported in the country each year is what all those amounts of stock together can support. So the exchange will usually increase both the country's stock and the amount of labor it can support each year. England would certainly gain more if it could buy French wine with its own hardware and broadcloth, rather than with Virginia tobacco or gold and silver from Brazil and Peru. Direct foreign trade in consumer goods is always more beneficial than indirect trade. But indirect foreign trade in consumer goods carried on with gold and silver does not seem less beneficial than any other equally indirect trade. Nor is a country without mines more likely to run out of gold and silver by exporting them each year than a country that grows no tobacco is likely to run out of tobacco by exporting it each year. A country that can afford to buy tobacco will not lack it for long. Neither will a country able to buy gold and silver lack those metals for long.

Some say that a worker loses money by trading with the alehouse and that a manufacturing nation's natural trade with a wine-producing country is much the same. My answer is that trade with the alehouse does not necessarily cause a loss. In itself it is as beneficial as any other trade, though it may be somewhat easier to misuse. The brewer's job, and even the sale of alcoholic drinks by a retailer, are divisions of labor as necessary as any others. A worker usually does better buying the amount needed from a brewer than brewing it personally. A poor worker usually does better buying small amounts at a time from a retailer than buying a large amount from a brewer. Of course the worker might buy too much from either, just as from other neighborhood sellers: too much from a butcher out of greed for food, or too much from a cloth seller to look fashionable among friends. Nonetheless, workers in general benefit when all these trades are free, even though people can misuse that freedom in any of them, and perhaps more easily in some than in others. Individuals may sometimes ruin themselves by drinking too much, but there seems to be no risk that a nation will do so. In every country many people spend more on alcoholic drinks than they can afford, but many more spend less. Experience also suggests that cheap wine leads not to drunkenness but to moderation. People in wine-producing countries are generally the most moderate drinkers in Europe. Consider the Spanish, the Italians, and the people of the southern provinces of France. People seldom overindulge in something they have every day. Nobody tries to seem generous and sociable by pouring out too much of a drink as cheap as weak beer. By contrast, in countries where excessive heat or cold prevents grapes from growing, wine is expensive and rare, and drunkenness is a common vice. This includes northern peoples and all those living between the tropics, such as Black people on the coast of Guinea. I have often heard that when a French regiment from one of the northern provinces, where wine is somewhat expensive, is stationed in the south, where it is very cheap, its soldiers at first drink to excess because good wine is cheap and new to them. But after living there for a few months, most become as moderate as the other inhabitants. Similarly, abolishing all duties on foreign wines and all excise taxes on malt, beer, and ale at once might cause fairly widespread but temporary drunkenness among Britain's middle and lower classes. It would probably soon give way to lasting and almost universal moderation. As things stand, drunkenness is certainly not a vice of fashionable people, or of people who can easily afford the most expensive drinks. We hardly ever see one of our gentlemen drunk on ale. Moreover, restrictions on the British wine trade seem designed less to stop people going to the alehouse, so to speak, than to stop them going where they could buy the best and cheapest drink. They favor Portuguese wine and discourage French wine. It is said that the Portuguese buy more of our manufactured goods than the French do, and should therefore receive our preference. Because they buy from us, the argument goes, we should buy from them. The petty tactics of low-level tradesmen are thus turned into rules for governing a great empire. Only the lowest-level tradesmen make a rule of buying mainly from their own customers. A major merchant always buys goods wherever they are cheapest and best, without regard to that kind of petty interest.