Book IV, Chapter III, 5

By maxims such as these, however, nations have been taught to believe that their interest lay in impoverishing all their neighbors. Each nation has been led to view the prosperity of every nation with which it trades with envy, and to regard their gain as its own loss. Commerce, which ought naturally to bind nations together in friendship, as it does individuals, has become the most fertile source of discord and animosity. The capricious ambition of kings and ministers has been no more destructive to the peace of Europe during this century and the last than the presumptuous jealousy of merchants and manufacturers. The violence and injustice of those who rule mankind is an ancient evil for which, I fear, the nature of human affairs scarcely allows a remedy. But the petty rapacity and monopolizing spirit of merchants and manufacturers, who neither are nor ought to be the rulers of mankind, can very easily be kept from disturbing anyone's peace but their own, even if that spirit cannot be cured.

There can be no doubt that the spirit of monopoly first invented and spread this doctrine; and those who first taught it were by no means such fools as those who believed it. In every country it always is, and must be, in the interest of the great body of the people to buy what they want from whoever sells it cheapest. The proposition is so evident that it seems absurd to take pains to prove it; nor could it ever have been questioned if the self-interested sophistry of merchants and manufacturers had not confused the common sense of mankind. In this respect their interest is directly opposed to that of the great body of the people. Just as the freemen of a corporation have an interest in preventing the other inhabitants from hiring any workmen but themselves, the merchants and manufacturers of every country have an interest in securing a monopoly of the home market. Hence, in Great Britain and most other European countries, the extraordinary duties on nearly all goods imported by foreign merchants. Hence the high duties and prohibitions on foreign manufactures that might compete with our own. Hence, too, the extraordinary restraints on the importation of almost every kind of goods from countries with which the balance of trade is supposed to be unfavorable—that is, the countries against which national animosity happens to burn most fiercely.

The wealth of neighboring nations, however, though dangerous in war and politics, is certainly advantageous in trade. In a state of hostility, it may enable our enemies to maintain fleets and armies stronger than ours; but in a state of peace and commerce, it must also enable them to exchange goods of greater value with us and to offer a better market, whether for the direct produce of our own industry or for goods bought with that produce. Just as a rich man is likely to be a better customer to the industrious people in his neighborhood than a poor man, so is a rich nation. A rich man who is himself a manufacturer is, indeed, a dangerous neighbor to others in the same line of business. All the rest of the neighborhood, however—the overwhelming majority—profit from the good market his spending provides. They even profit when he undersells the poorer workmen in his line of business. In the same way, the manufacturers of a rich nation may certainly be dangerous rivals to those of its neighbors. Yet this very competition benefits the great body of the people, who also profit greatly from the good market that the spending of such a nation affords them in every other respect. Individuals seeking a fortune never think of withdrawing to remote and poor provinces, but go instead to the capital or to one of the great commercial towns. They know that where little wealth circulates there is little to be gained, but where a great deal is in motion some share of it may fall to them. The same maxim that guides the common sense of one, or ten, or twenty individuals ought to guide the judgment of one, or ten, or twenty millions, and lead a whole nation to regard its neighbors' riches as a likely opportunity to gain riches itself. A nation seeking to enrich itself through foreign trade is certainly most likely to succeed when its neighbors are all rich, industrious, commercial nations. A great nation surrounded by wandering savages and poor barbarians might undoubtedly grow rich by cultivating its own lands and by its own domestic commerce, but not by foreign trade. It seems to have been in this way that the ancient Egyptians and the modern Chinese acquired their great wealth. The ancient Egyptians are said to have neglected foreign commerce; the modern Chinese are known to hold it in the utmost contempt and scarcely deign to grant it the ordinary protection of the law. Modern maxims of foreign commerce, insofar as they succeed in impoverishing all our neighbors as intended, tend to make that very commerce insignificant and contemptible.

It is because of these maxims that commerce between France and England has been subjected to so many discouragements and restraints in both countries. Yet if the two countries considered their true interests without mercantile jealousy or national animosity, trade with France might be more advantageous to Great Britain than trade with any other country, and for the same reason trade with Great Britain might be more advantageous to France. France is Great Britain's nearest neighbor. In trade between the southern coast of England and the northern and northwestern coast of France, returns might be expected, as in inland trade, four, five, or six times a year. The capital employed in this trade could therefore, in each country, keep four, five, or six times as much industry in motion, and provide employment and subsistence for four, five, or six times as many people, as an equal capital employed in most other branches of foreign trade. Even between the most distant parts of France and Great Britain, returns might be expected at least once a year; and in this respect even that trade would be at least as advantageous as most other branches of our foreign European trade. It would be at least three times more advantageous than the much-praised trade with our North American colonies, where returns were seldom made in less than three years and frequently not in less than four or five years. France, moreover, is supposed to contain 24,000,000 inhabitants. Our North American colonies were never supposed to contain more than 3,000,000; and France is a much richer country than North America, though, because its riches are distributed more unequally, there is much more poverty and begging in France than in North America. France could therefore offer a market at least eight times larger and, because returns would be more frequent, four-and-twenty times more advantageous than the market our North American colonies ever offered. Britain's trade would be just as advantageous to France and, in proportion to the respective countries' wealth, population, and proximity, would have the same superiority over France's trade with its own colonies. Such is the immense difference between the trade that the wisdom of both nations has seen fit to discourage and the trade it has favored most.

But the very circumstances that would make free and open commerce between the two countries so advantageous to both have given rise to its principal obstacles. Being neighbors, they are necessarily enemies, and each country's wealth and power therefore become more threatening to the other; what would heighten the benefits of national friendship serves only to intensify national animosity. Both are rich and industrious nations, and the merchants and manufacturers of each fear competition from the skill and activity of their counterparts in the other. Mercantile jealousy is aroused: it both inflames national animosity and is inflamed by it. And the traders of both countries, with all the passionate certainty of self-interested falsehood, have proclaimed the certain ruin of each as the consequence of the unfavorable balance of trade that they claim would inevitably follow unrestricted commerce with the other.

There is no commercial country in Europe whose approaching ruin the supposed experts of this system have not repeatedly predicted on the grounds of an unfavorable balance of trade. Yet for all the anxiety they have stirred up about it, and despite the futile attempts of nearly all trading nations to turn that balance in their own favor and against their neighbors, no nation in Europe appears to have been impoverished in any respect by this cause. On the contrary, towns and countries have grown richer, in proportion as they have opened their ports to all nations, rather than being ruined by free trade as the principles of the mercantile system would lead us to expect. Though a few towns in Europe do, in some respects, deserve the name of free ports, no country does. Holland perhaps comes nearer to it than any other, though still very far from it; and Holland is acknowledged to derive not only all its wealth but much of its essential subsistence from foreign trade.

There is indeed another balance, already explained, very different from the balance of trade, which necessarily brings about the prosperity or decline of every nation according as it is favorable or unfavorable. This is the balance of annual produce and consumption. As already observed, if the exchangeable value of annual produce exceeds that of annual consumption, the society's capital must increase each year in proportion to the surplus. In this case society lives within its revenue; what it saves from that revenue each year is naturally added to its capital and employed to increase annual produce still further. If, on the contrary, the exchangeable value of annual produce falls short of annual consumption, the society's capital must diminish each year in proportion to the shortfall. In this case society's expenditure exceeds its revenue and necessarily eats into its capital. Its capital must therefore decline, and with it the exchangeable value of the annual produce of its industry.

This balance of produce and consumption is entirely different from what is called the balance of trade. It could exist in a nation with no foreign trade, wholly cut off from the rest of the world. It can exist across the whole globe, whose wealth, population, and improvement may be gradually increasing or gradually declining.

The balance of produce and consumption can be steadily in a nation's favor even when what is called the balance of trade is generally against it. A nation may import goods of greater value than it exports for perhaps half a century on end; all the gold and silver entering it during that time may immediately leave again; its circulating coin may gradually dwindle as different kinds of paper money take its place; even its debts to the principal nations with which it trades may gradually increase. Yet during the same period its real wealth—the exchangeable value of the annual produce of its land and labor—may have increased by a much greater proportion. The condition of our North American colonies and their trade with Great Britain before the beginning of the present disturbances, [This paragraph was written in the year 1775.] may serve to show that this is by no means an impossible supposition.

But rules like these have taught nations to think that they can prosper only by making all their neighbors poor. Each nation has been led to resent the prosperity of the nations it trades with and to treat their gains as its own losses. Trade should naturally bring nations together in friendship, just as it does individuals. Instead, it has become a major source of conflict and hostility. In this century and the last, the baseless jealousy of merchants and manufacturers has disturbed Europe's peace as much as the erratic ambitions of kings and ministers. Violence and injustice by rulers are ancient evils. I fear human affairs leave little room to cure them. But even if we cannot cure the greed and desire for monopoly among merchants and manufacturers, we can easily keep these people, who neither are nor should be our rulers, from disturbing anyone else's peace.

There is no doubt that the desire for monopoly invented and spread this doctrine. The people who first taught it were much cleverer than those who believed it. In every country, most people's interest is, and must be, to buy what they need from whoever sells it cheapest. This is so obvious that proving it seems silly. No one would have questioned it if merchants and manufacturers had not used self-serving arguments to confuse common sense. On this matter, their interest is directly opposed to that of most people. Members of a privileged trade association want to stop other residents from hiring anyone but themselves. In the same way, each country's merchants and manufacturers want a monopoly over their home market. This explains the unusually high duties in Great Britain and most other European countries on nearly all goods imported by foreign merchants. It also explains the high duties and bans on foreign manufactured goods that compete with our own. And it explains the unusual limits on imports from countries said to have an unfavorable balance of trade with us—that is, the countries toward which our national hostility is strongest.

Still, the wealth of neighboring nations, although dangerous in war and politics, clearly benefits trade. During a war, it may let our enemies support bigger fleets and armies than ours. But in peacetime, it also lets them trade more valuable goods with us. They become better customers for our own products and for goods bought with those products. A rich person is likely to be a better customer for hardworking neighbors than a poor one. The same is true of a rich nation. A rich person who also makes goods is indeed a dangerous neighbor for others in the same line of work. But everyone else nearby, who greatly outnumber those competitors, benefits from the market created by that person's spending. They even benefit when that person sells more cheaply than poorer workers in the same trade. Likewise, the manufacturers of a rich nation can certainly be dangerous competitors for manufacturers in neighboring countries. But that competition helps most people, who also benefit greatly from the rich nation's spending on everything else. People hoping to make a fortune do not move to remote, poor provinces. They go to the capital or to major trading cities. They know there is little to gain where little wealth circulates, but where a great deal is changing hands, some of it may come their way. The same common-sense rule that guides one, ten, or twenty people should guide one, ten, or twenty million. An entire nation should see its neighbors' wealth as an opportunity to gain wealth itself. A nation seeking riches through foreign trade has the best chance when its neighbors are rich, productive trading nations. A large nation surrounded by wandering peoples and poor, less-developed communities could certainly grow rich by farming its land and trading within its borders, but not through foreign trade. The ancient Egyptians and modern Chinese seem to have become wealthy this way. The ancient Egyptians are said to have neglected foreign trade. The modern Chinese are known to hold it in deep contempt and scarcely give it even basic legal protection. Modern rules of foreign trade aim to impoverish all our neighbors. To the extent they succeed, they make foreign trade itself small and worthless.

These rules are why trade between France and England faces so many obstacles in both countries. If they considered their real interests without commercial jealousy or national hostility, trade with France might benefit Great Britain more than trade with any other country. For the same reason, trade with Great Britain might benefit France most. France is Great Britain's nearest neighbor. In trade between England's southern coast and France's northern and northwestern coast, capital could return four, five, or six times a year, as it does in domestic trade. So the capital used in this trade could support four, five, or six times as much industry in either country, employing and supporting four, five, or six times as many people as an equal amount of capital in most other kinds of foreign trade. Even between the most distant parts of France and Great Britain, capital could return at least once a year. In that respect, such trade would be at least as valuable as most of our other European foreign trade. It would be at least three times as valuable as the celebrated trade with our North American colonies, where capital rarely returned in less than three years and often took four or five years. France is also thought to have 24,000,000 inhabitants. Our North American colonies were never thought to have more than 3,000,000. France is much richer than North America, although its wealth is less evenly distributed, so it has far more poverty and begging. France could therefore offer a market at least eight times as large and, because capital could return more often, four-and-twenty times as advantageous as our North American colonies ever offered. Trade with Great Britain would benefit France just as much. Given the countries' wealth, populations, and nearness to each other, it would have the same advantage over France's trade with its own colonies. That is how greatly the trade discouraged by the supposedly wise policies of both nations exceeds the trade they have favored most.

Yet the very things that would make free trade between the two countries so beneficial have also created its main obstacles. As neighbors, they inevitably become enemies. Each finds the other's wealth and power more threatening, and what could strengthen a national friendship instead intensifies national hostility. Both nations are rich and productive, and each one's merchants and manufacturers fear competition from the other's skill and energy. Commercial jealousy grows, both feeding national hostility and being fed by it. Traders in both countries confidently insist, with the passionate dishonesty of people protecting their own interests, that unrestricted trade with the other would inevitably produce an unfavorable balance of trade and ruin their country.

The supposed experts in this system have repeatedly predicted the coming ruin of every trading country in Europe because of an unfavorable balance of trade. They have caused much anxiety, and nearly all trading nations have made futile attempts to shift that balance in their own favor and against their neighbors. Yet there is no sign that this has made any European nation poorer in any way. On the contrary, towns and countries have grown richer as they have opened their ports to all nations, instead of being ruined by free trade as the commercial system predicts. A few European towns can in some respects be called free ports, but no country can. Holland perhaps comes closest, though it is still far from fully open. Everyone acknowledges that Holland gets not only all its wealth but much of what it needs to survive from foreign trade.

There is another balance, already explained, quite different from the balance of trade. Whether it is favorable or unfavorable necessarily determines whether a nation prospers or declines. It is the balance between annual production and consumption. As already noted, if the exchangeable value of a society's annual output exceeds the value of its annual consumption, its capital must grow each year by the difference. The society is living within its revenue. What it saves each year is added to its capital and used to raise annual production further. If annual output is worth less than annual consumption, however, the society's capital must shrink each year by the shortfall. Its spending exceeds its revenue and eats into its capital. Both its capital and the exchangeable value of what its workers produce each year must then decline.

This balance between production and consumption is entirely different from the so-called balance of trade. It could exist in a nation completely cut off from the rest of the world, with no foreign trade. It also exists for the whole earth: its wealth, population, and development may gradually rise or gradually fall.

A nation's balance between production and consumption may consistently favor it even if its so-called balance of trade is generally against it. For perhaps half a century, a nation may import goods worth more than its exports. All the gold and silver entering it may immediately leave again. Its supply of coins may gradually shrink as various kinds of paper money replace them, while its debts to its principal trading partners grow. Yet during the same period its real wealth—the exchangeable value of what its land and labor produce annually—may grow by a far greater proportion. Our North American colonies and their trade with Great Britain before the present disturbances began [This paragraph was written in the year 1775.] show that this situation is quite possible.