Chapter V: Introduction (2)

There is also another disadvantage which the Distributive State has when it is in competition with a Capitalist State, or even a Servile State, and that is _the difficulty of getting a very large number of small owners to put their money together for any great purpose_. The small owner will probably have less opportunities for instruction and judgment than the few directing rich men of a Capitalist or Servile State, and even if he is, on the average, as well educated as these rich men in neighbouring states, it will be more difficult to get a great number of small owners to act together than to persuade a few large owners to act together. Therefore highly Capitalist States, such as England, will be found more enterprising than less Capitalist States in their investments and commerce. They will open up new countries more rapidly, and will get possession of the best markets.

Lastly, this disadvantage attaches to the Distributive State--that it is not so easy in it to collect great funds for war or for national defence, or for any other purpose, as it is in a Capitalist or Servile State. You cannot tax a Distributive State as highly as you can tax a Capitalist State. The reason is obvious enough. A family with, say, £400 a year finds it terribly difficult--almost impossible--to pay out £100 a year in taxation. They live on a certain modest scale to which all their lives are fitted, and which does not leave very much margin for taxation. If you have a million such families with a total income of £400 millions you may collect from them, say, a tenth of their wealth in a year--£40 millions--but you will hardly be able to collect a quarter--£100 millions.

But another society with exactly the same amount of total wealth, £400 millions a year, only divided into very rich and very poor, a society in which there are, say, 1,000 very rich families with £300,000 a year each, and a million families with rather less than £100 a year each, is in quite a different situation. You need not tax at all the million people with a hundred a year each, but the rich people, who between them have £300,000,000 a year, can easily be taxed a quarter of their whole wealth; for a rich man always has a much larger margin, the loss of which he does not really feel.

By a very curious paradox, which it would take much too long to go into in detail, but which it is amusing to notice, this power of taxing a very highly capitalist community is one of the things which is beginning to handicap our Capitalist societies to-day against the Distributive societies. It used to be all the other way, and it seemed common sense that countries where you could levy large sums for State purposes of war or peace would win against countries where you could not levy such sums for public purposes. But the fact that you can tax so very highly a society of a few rich and many poor has been shown in the last few years to have most unexpected results. The very rich men pay all right; but the drain on the total resources of the wealth of the State weakens it.

The money raised by taxation is spent on State servants--many of them inefficient and idle.

Since it is so easy to raise large sums, there is a temptation to indulge in all sorts of expensive State schemes, many of which come to nothing. And this power of easy taxation, which was a strength, becomes a weakness.

No one suspected this until taxation rose to its present height, but now it is clearly apparent; and we in England might perhaps be in a better way later on if there had been as much resistance to high taxation here as there has been in countries where property is better distributed.

SOCIALISM

It remains to deal with a certain remedy which some people have imagined would get rid of all the disadvantages of Capitalism once and for all. This remedy is called _Socialism_, and Socialism, as we shall see in a moment, must mean ultimately _Communism_.

No one has ever succeeded in putting this remedy for the evils of Capitalism into practice, and (though the matter is still very much disputed) it looks more and more as though no one would ever be able to put it into practice.

We have seen what the evils of Capitalism were and how they have exasperated nearly everyone who has become subject to a capitalist state of society. There is the increasing insecurity which everybody feels--all the Proletariat and many of the Capitalists as well--whilst there is the necessary tendency of Capitalism to leave a larger and larger proportion of people unproductive, not making the wealth which is necessary for their support, and therefore either kept in idleness by Doles out of the wealth which is still produced (a process which cannot go on for ever) or starving. Pretty well everyone wants to get rid of these evils and to get out of the Capitalist system, and this idea of Socialism which we are going to examine seemed, when it was first put forward, an easy and obvious shortcut out of the Capitalist muddle. When we have looked into it, we shall see how and why Socialism does not, in practice, turn out to be a shortcut at all, but a blind alley.

* * * * *

Ever since men began to live in societies and to leave records, you will find the poorer people, when their poverty became intolerable, clamouring for a division of the wealth which the more fortunate enjoy.

That is the main, obvious remedy to inequality of wealth; to divide it up again. But such a scheme has nothing to do with Socialism, and must not be mistaken for Socialism.

The Socialist theory was invented, or at any rate was first put clearly, by a man of genius, Louis Blanc, who was Scotch on his father’s side and French on his mother’s. He lived rather less than a hundred years ago and the scheme which he and those around him started was this:--

The Officers of the State were to own all the Means of Production--machinery and land and stores of food, etc.--and they alone should be allowed to own it. Individuals and families and corporations might consume that portion of produced wealth allotted them by the State after it had been produced, _but they might not use it for making future wealth_. ANY WEALTH USED FOR THE MAKING OF FUTURE WEALTH, THAT IS, CAPITAL IN ANY FORM, WAS TO BE HANDED OVER TO THE OFFICERS OF THE STATE; AND ALL LAND AND NATURAL FORCES WERE TO BE OWNED FOR EVER BY THE STATE. That scheme is Socialism, and from that principle all Socialist ideas flow.

In this way, it was claimed, there would be no division of society into Capitalists and Proletarians, no chaos of competition with its alternating riches and ruin; insecurity would be done away with, and insufficiency as well. Everyone in the country would be a worker, the State itself would be the Universal Capitalist. So there would be no struggle of capitalists going up and down one against the other, and no unemployment or lack of necessaries for anyone.

Among the energetic and keen set of men who surrounded Blanc in Paris was a certain Mordecai, who wrote under the name his father had assumed, that of “Marx.” He wrote (in German) a very long and detailed book describing the whole scheme, as well as describing the evils of Capitalism, and showing how this scheme would remedy those evils. His book was pushed forward by the people who were converted to the idea, and that is why the theory of Socialism is now often called “Marxism.”

For instance: the coal-mines and all the machinery of the coal-mines and the houses in which the miners live and the stores of food and the clothing, etc., which keep the miners alive while the coal is being mined, that is during the process of production--all these, which now belong to capitalists who make a profit out of the miners’ labour, would then belong to the State, which would allot the coal produced to all who needed it. So it would be with all farms, farming implements, and cattle and horses and the stores of food and clothing and houses necessary to the labourers on the land during the process of production. So it would be with all stone-quarrying and timber-felling, and carpentry and brick-making for the continued production of the houses necessary to the producers during production. So it would be with all corresponding material for making cloth for clothing. So it would be with everything which was made in the whole country. The officers of the State would share out the wealth produced, so that it would be consumed by all the citizens, and there would be an end to the exploitation of one man by another and to the uncertainty of living.

Communism is simply that form of Socialism in which all that is thus shared out by the State would be shared equally, the State giving every family an equal share in proportion to the numbers of people which had to be supported in the family, from one upwards.

The reason I have called Communism the logical and only possible ultimate form of Socialism is that there could be under Socialism no reason for any other form of distribution.

Some time ago certain Socialists used to try to get out of this necessity for Communism, so as not to frighten rich people with their proposals for reform. They would say to a man who was making, say, £5,000 a year because he owned a lot of capital and land and had rents and profits coming to him from the work of his labourers: “You will have just as much under Socialism, for we recognise what a superior kind of person you are, and when the State shares out its wealth among its citizens it will give you as much as you have now, leaving the same difference between rich and poor, only seeing to it that the poor always at least have enough to live on. Where we give one ticket to the labourer to claim out of the common stores what he wants for a week we will give you fifty tickets, so that you will get fifty times as much if you like.” But of course this was nonsense, and was soon discovered to be nonsense. With everybody working for the State under orders all would naturally claim equality, and there would be no way of preventing their getting an equal share except force. In justice, supposing a Socialist state to arise, there could be only the Communist form of it.

This scheme has never been put into practice, and when we look closely at it we shall discover, I think, why it never will be put into practice.

The reason it cannot be put into practice is this: Although we use the words “the State” this mere idea means in practice real men who act as officials to represent the State. Actual men with their varying characters, good and bad, lazy and industrious, just and unjust, have got to undertake the enormous business _first_ of running production in the interest of all, _next_ of distributing the resultant wealth equally to all.

Now there are two qualities in man which make action of this sort break down. The first is that men love independence--they like to feel themselves their own masters. They like therefore to _own_, so that they may do what they like with material things. The next is that men like to get as much as possible of good things. Both these feelings are universally true of the human race. You will find exceptional people, of course, who are just as contented with a little as with a great deal, and you will find exceptional people who do not care about independence or about owning, and who are quite willing to be run by other people, or to give up all possession for the sake of some special way of living: that is, there is a comparatively small number of men and women who, in order to live free from responsibility, or in order to devote themselves to religion or to some form of study and contemplation, will give up all property and have the material side of their lives administered for them. But men and women in general will both want to get all they can of good things with the least possible exertion in the getting of them, and they will also desire freedom to exercise their own wills and deal with material objects as they choose.

Now the Socialist scheme requires both these very strong emotions, common to all mankind, to be suppressed. The people who run the State--that is the politicians--are to be absolutely just (although there is no one to force them to be just), they are to forget all personal wishes and to think of nothing but the good of those whose labour they direct and among whom they share out the wealth that is produced. We know by experience that politicians are not angels of this sort. It is absurd to imagine that men coveting public office (and living the life of intrigue necessary to get it) would suddenly turn into unselfish and devoted beings of this ideal kind. You cannot give this enormous power to men without their abusing it.

The second force making against the establishment of Socialism is still stronger. You will never get the run of men and women contented to live their whole lives entirely under orders. In exceptional moments a large part of individual freedom will be given up to the necessity of the State--as during the Great War; for if the State did not survive the individual’s life and that of his children would not be worth living. The individual in abnormal crises goes through a great deal of suffering for a moment in order that he and his should have less pain in the long run. But even in such crises a large part of liberty remains to him. Under Socialism he would have none. He would have to do what he was told by his task-masters, much more than even the poorest labourers now have to do what they are told by task-masters. And there would also be this difference: that _everyone_ would be in that situation and there would be no way out. Not a part of life, nor so many hours a day, but the whole of life, would be subject to orders given by others. This, humanity would certainly find intolerable.

That is why, I think, Socialism has never been put into practice and never can be put into practice. There have been attempts at it, but even when they are sincere and not the mere product of alien despotism they break down. As in Russia to-day, where, whether the Jew adventurers who seized power were sincere or mere tyrants, they have, in spite of their attempt at seizing all the soil and keeping the peasants dependent on them, been compelled at last to let nearly all the nation live as owners tilling their own land.

It is no reply to this to say that the State always has owned, and actually can and does own, _some_ part of the means of Production (such as the Post Office and certain forests and lands here in England, and, abroad, most mountain land, all mines and much else) and direct them with success. The point of Socialism--the one condition necessary to its existence--is that the State should own _all_ the means of Production that really count. Between the normal exercise of a partial function and the abnormal exercise of a universal function is all the difference between _plus_ and _minus_. A partial State ownership working in a society the determining character of which is private ownership is an utterly different thing, even an _opposite_ thing to general State ownership determining the character of Society and allowing only exceptional private ownership. Socialism can only be (_a_) good (_b_) possible when men desire, and are at ease in, the latter kind of state; that is, desire and are at ease in complete forgetfulness of self coupled with justice as men ruling, and complete surrender of personal honour and freedom and appetite as men ruled.

INTERNATIONAL EXCHANGE

International exchange is not really different from the domestic exchanges which go on within a nation. The foreigner who has some product of his own to exchange against a product of ours deals as a private man with other private men, and if you could see all the exchanges of the world going on you would not distinguish between the character of an exchange, say, between Devonshire and London and one between London and the Argentine. The Devonshire man grows wheat, which he sells perhaps in a London market, and buys manufactured products which a merchant in London provides. The farmer in the Argentine does much the same thing, sells wheat and receives in exchange what manufactures he needs, precisely as though he were living in Devonshire instead of abroad. He does not trade with “England,” but with a particular merchant or company in England.

But there are certain points about international trade which one must get clear unless one is to make mistakes in the political problems arising out of it.

In the first place, international trade is always subject to a certain interference which domestic trade does not suffer. All countries have a _tariff_, that is a set of taxes upon a great number of the articles coming in from abroad. Even those countries which, as England did until quite lately, believe in leaving their citizens on equal terms with foreign competitors and have gone in for complete free trade, examine all goods at the port of entry or at special points on the frontier, both in order to raise revenue and to keep out undesirable goods, such as certain drugs; nor does any country allow _all_ things to come in unexamined, lest forbidden things should come in unobserved. Moreover, it is important to measure the nature and volume of a nation’s foreign trade, and this cannot be done without stopping things at the ports or frontiers and examining them.

In general, international trade differs from domestic trade first of all in this--that it always has to pass through an examination at the frontiers through which it enters. It also differs from domestic trade in that it has to use another currency. Even when all countries have a gold currency, there are certain small fluctuations in the exchange values of the different currencies. For instance: before the war the English pound was worth in gold about 25¼ French francs, but you hardly ever had this “Parity” (as it is called) exact. The franc would fluctuate slightly against the sovereign--sometimes above, sometimes below “Parity” by a penny, or even sometimes more than a penny, one way or the other. With many countries whose currency was not in a good condition the fluctuations would be more violent, and of course since the war, now that so many nations no longer have a gold currency at all, but a fictitious paper currency, the value of one currency against another fluctuates wildly. Within a year you could get only 50 francs for an English sovereign and then a little later as much as 80 francs.

Within one country exchanges can be simply conducted by counting all values in the currency of the country; but international trade, involving the use of two or more currencies, cannot be so simple.

There is also a third point in international trade which must be understood, and which proceeds from the very fact that international exchanges do not essentially differ from the exchanges which take place within the same country, and that is the fact that exchanges are not simple contracts between two parties, but follow a whole chain of contracts, covering a great number of parties.

We saw, in the first part of this book, that exchange even within one country, was not simple barter but _multiple exchange_.

In domestic exchange a farmer sells his wheat to a broker, but does not purchase a lorry from the same buyer: he receives money from the buyer, and with that money buys a lorry, say, a month later. But what has really happened is a whole chain of exchanges in between the wheat and the lorry--a miller has bought the wheat from the broker, a baker the flour from the miller, and so on until towards the end of the chain a caster has sold castings to a motor maker who has assembled them and sold the lorry to the farmer.

It is the same with international exchanges; as we saw in the earlier part of this book. There is an international chain of exchanges.

The total number of units engaged in this international chain may be as large as you like; there may be ten or fifty or a hundred links before it is complete. But the universal principle holds that imports and exports usually balance. Whatever you import from abroad into a country you must, as a general rule, pay for by exporting an equivalent set of values created within your own country. But there are certain exceptions to this rule which are sometimes lost sight of.

In the first place, the imports and the exports need not all be what are called “visible” imports and exports. Many of them may be, and some always are, “invisible.” The most obvious example of these are “freights,” that is, sums paid for the carriage of goods between one country and another. Thus, in the old days before the war you would find England importing more than she exported, and one of the principal reasons for the difference was that the imports were mostly brought in English ships. Thus if a man in the Argentine were sending 50 tons of wheat to England worth £500, England, after a long chain of trade with many countries, including the Argentine, would be exporting values against this £500 worth of wheat, which would be worth, say, not £500, but only £450. The difference of £50 was made up by the cost of bringing the wheat from the Argentine to England _in an English ship_. In other words, £50 worth of the total £500 worth of wheat stood for the sum which the man in the Argentine had to pay to the English sailors to bring his wheat over the sea.

Further, a wealthy or strong country very often levied tribute upon a poorer or weaker one, and this tribute might take several forms. There was the tribute of _interest upon loans_. If English bankers had lent to people in Egypt a million pounds with interest at forty thousand pounds a year Egyptian production would have to export to England, either directly or roundabout through the chain of trade, forty thousand pounds’ worth of goods, against which England had not to send out anything.

Another form of tribute--though a small one--is that paid in pensions. A man having worked all his life in the Civil Service in India (for instance) would retire upon a yearly pension of a thousand pounds a year; but this pension was levied upon the taxpayers of India, and if the man came to live in England and spent his pension there--as nearly all of them did--it meant that India had to export a thousand pounds’ worth of goods every year to England, against which England sent nothing back.

In the same way the shareholder in some works or firms situated in a foreign country would, if he lived in England, cause an import to come in equivalent to his dividends or profits, and against that England would send out nothing.

But the point to remember is, that _the mere volume of trade_ (that is, _the total of things imported and of things exported_) _is no indication of the wealth or prosperity of the country importing and exporting_.

A country may be very wealthy, although it is doing hardly any international trade, because it may be producing within its own boundaries a great deal of wealth of a kind sufficient to nearly all, or all, its needs. Again, of international trade (and it is exceedingly important to remember this, because most people go wrong on it) _nothing increases the wealth of a country except the imports_.

It ought to be quite clear, especially in the case of an island like Great Britain, that it _loses_ what it sends out and _gains_ what it brings in. Yet people get muddled about even this very simple proposition, because the individual trader thinks of his transactions as an individual sale. He does not consider the nature of trade as a whole. The individual trader, for instance, who makes locomotives and exports them, gets paid, let us say, £10,000 for each locomotive. In point of fact this means that in the long run he or someone else in England will exercise £10,000 worth of demand for foreign goods. But the individual trader does not usually think of that; he thinks only of his own transactions, and he would be very much surprised if he were told that his sending the locomotive abroad was, _regarded in itself, and apart from the import which it assumed_, a loss to the country of £10,000 worth of wealth.

You often hear people in political arguments talking as though the falling off of exports from a country were a bad thing and the increase of imports also a bad thing. It cannot be so in the long run. The excess of imports over exports is the national profit on the whole of its foreign transactions, and any country which is exporting regularly more than it imports is paying tribute to foreigners abroad, while every country which regularly imports more than it exports is receiving tribute.

Of course, if you consider only a short period of time, the falling off of exports may be a bad sign; for it may mean that the corresponding imports will not be gathered. If in this country we saw our exports regularly falling year by year we should be right to take alarm, for this would almost certainly mean that a corresponding falling off in imports would sooner or later take place also, and that therefore our total wealth would be diminished. But considered over a sufficient space of time, it is obvious that the excess of imports over exports is a gain and that the excess of exports over imports is a loss.

One last thing to remember about international trade is that the very different importance of foreign trade to different countries makes the foreign politics of nations differ equally. A country which can supply itself with all it needs is free to risk its foreign trade for some other issue. A country importing its necessities cannot risk the loss of such trade, for it is a matter of life and death. The United States is in the first position. It has within its own boundaries not only all the minerals it needs, but also all the petrol and all the raw material for making cloth, and all the leather for boots, and all the rest of it. But a country like England is in quite a different position. We only grow half the meat we need and about one-fifth of the corn. Therefore it is absolutely necessary for us to have a foreign trade. If all the foreign trade of the United States were to be destroyed to-morrow, the United States, though somewhat poorer, would still be very rich and able to carry on without the help of anyone else. But if our foreign trade were destroyed there would be a terrible famine and most of us would die.

Nations differ very much in this respect, but of all nations Great Britain is that which is most vitally interested in maintaining a great foreign trade, and next after Great Britain Belgium is similarly interested, for Belgium also needs to import four-fifths of its bread-stuffs. Almost every country except the United States _must_ have some foreign trade if it is to live normally. For instance: France, though largely a self-sufficing country, has no petrol. It has to buy its petrol abroad and must export goods to pay for that import. Nor has it quite enough coal for its needs, and, before the war, it had not nearly enough iron. Italy has no coal, no petrol and no iron to speak of--not nearly enough for its needs. And so it is with pretty well every nation in Europe. But of all nations our own and Belgium--our own particularly--are in the most need of maintaining a large foreign trade.

This affects all our policy, it is the root of both the greatness and peril of England. It also tends to make English people judge the wealth of foreigners by the volume of their trade, and that is a great error.

FREE TRADE AND PROTECTION AS POLITICAL ISSUES

In this matter of international trade there rose up, about a hundred years ago, a great political discussion in England between what was called _Free Trade_ and what was called _Protection_.

This discussion is still going on and affecting the life of the country, and it is important to understand the principles of it, for we have here one of the chief applications of theoretical Political Economy to actual conditions.

I dealt with this subject briefly in the first part of this book under “Elementary Principles,” but I return to it here in more detail because it has given rise, in political application, to the most important economic discussion in modern England.

The Free Traders were those who said that England would be wealthier, as a whole, if there were no restriction upon exchange at all, whether internal or external. A man having something to exchange with his English neighbour was, of course, free to exchange it without any interference; but the Free Trader’s particular point was that a man having something to exchange with a _foreign_ purchaser should be equally free to exchange it, without any interference at the ports in the way of export duty taxing the transaction. In the same way he said that the foreigner should be perfectly free to send here any goods he had to exchange against ours, and should neither be kept out by laws nor restricted by special import duties at the ports.

“In this way,” said the Free Traders, “we shall get the maximum of wealth for the whole country.”

The Protectionists, on the other hand, said: “Here are a lot of people engaged on a particular form of production in England. Those who have their capital in it are making profits, those who own the land on which the capital is invested are getting rents, and the working people are getting wages. The foreigner, having special advantages for this kind of production, which make him able to produce this particular thing more cheaply than we can, brings in that cheaper produce and offers it for sale to Englishmen. The people to whom it is offered for sale will, of course, buy the foreign stuff because it is cheaper. The result will be that the English people who have invested their capital in producing this particular thing--that is, who have got implements together and buildings, and the rest, suitable for producing this thing--will be ruined. It will not be worth their while to go on, for no one will buy their goods. Their profits will be extinguished, and their capital will decay to nothing. The rents on the land they occupy will also disappear, and, what is worst of all, the large population which live on wages produced by this kind of work will starve or have to be supported, idle, by other people. Their power of producing wealth will be lost to England. Therefore, let us tax this cheap foreign import so that our production at home shall be _protected_. Let us tax the foreign goods as they come in, so that the cost of producing abroad, with this tax added, comes to at least as much as the cost of producing the same stuff at home. In this way it will still be worth while for our people at home to go on producing this kind of thing. The Englishman at home will be just as ready to buy his fellow-citizen’s produce as the foreigner’s, for the price of each will be the same.”

The Protectionist even said: “Let us make this tariff so high that the foreign goods are sold at a _dis_advantage--that is, let the tax on the foreign goods be such that, added to the cost of production abroad, they cannot be sold in England save at a _higher_ price than the English goods. In this way only the English goods will be bought here and the home industry will flourish as it did before.”

Such were the two political theories, standing one against the other.

Now let us look into the economic principles underlying these two opposing parties, and see which of them had the best of the argument.

We have already seen, in the first part of this book, the elementary economic principle that Exchange is only the last stage in the process of production.

And we have also had fixed the principle that _freedom of exchange tends to produce a maximum of wealth within the area to which it applies_, and that interference with freedom of exchange tends to reduce the total possible wealth of that area. This is so obvious that all the great modern nations are careful to let exchange be as free as possible _within their own boundaries_.

Goods can be freely exchanged without interference all over the United States and all over Great Britain and all over France, etc., because if you were to set up tolls and interferences with exchange _within_ the country the total wealth of the country would necessarily be diminished.

Now the Free Traders extended this principle to foreign trade. They said: “If the foreigner comes to us with something which he can sell to us cheaper than we can make it ourselves that is an advantage to us, and it is short-sighted to interfere with it under the idea that we are benefiting the existing trade which is threatened by foreign competition. For it means that we are producing something with difficulty which we could get with much less work if we turned our attention to things which we can produce with ease. Or, again, it means that with the same amount of work devoted to things we make well and exchange against the foreigner’s goods we shall get much more of the things which the foreigner can make more easily than we can.”

If we take a concrete example we shall see what the Free Traders’ argument means.

Supposing people in this country had never heard of foreign wine, but had to make their wine out of their own grapes grown in hot-houses, and at great expense, the wine coming, let us say, to £1 a gallon. Meanwhile we are producing easily great quantities of coal because we have great coal-mines near the surface. We come to hear of people living in another climate who can grow grapes easily in the open, who need much less labour and capital to ripen them than we do in our artificial way in hot-houses, and who can therefore send us wine at 10s. a gallon. Then we can get for each £1 worth of labour and capital twice as much wine as we got before. Instead of wasting our time artificially growing grapes in hot-houses to make our wine, let the people who used to work in the hot-houses become coal-miners, so that more coal may be produced and this extra coal exchanged for foreign wine. A pound’s worth of labour and capital in coal will get us 2 gallons of wine from the foreigner when the same amount of labour and capital used in making the wine ourselves would only get us one gallon. Let the capital that used to keep up the hot-houses be spent in developing mines, and we shall find as a result that we are as rich as ever we used to be in coal and richer in wine. Our total wealth will be increased.

In the particular case of the English dispute about Free Trade and Protection not wine but a much more important thing was concerned, namely food; and that was what gave the political discussion its practical value and made it so violent. It is also because food was in question that the Free Traders won, and that England was, for a whole lifetime, up to the Great War, a Free Trade country--that is, a country allowing all foreign produce to come in and compete on equal terms with home produce.

This country, at the beginning of the discussion a hundred years ago, was already producing great quantities of manufactured goods: cloth and machinery, ships and so on. It also produced on its fields the wheat and meat and dairy produce with which it fed itself. But as the population increased the amount of food being produced on the soil of England, though getting larger in the total, got smaller in proportion to the rapidly increasing population. Therefore there was a danger of its getting dearer. The Free Traders said: “Let foreign food come in free. If it is produced in climates where for the same amount of labour you can get more wheat and more meat and more dairy produce then, of course, many of our agricultural people will have to give up working on the land. But they can take to manufacturing, and the total amount of food which the English will get for so much labour on their part will be greater. Where an agricultural labourer working an hour, for instance, can get a pound’s weight of food, the same man working one hour in a factory will get, say, by exchange of the manufacture against foreign food, two pounds of food, if we allow all foreign food to come in free.”

These Free Trade arguments look, when they are first studied, not only simple and clear, but unanswerable, and indeed most educated men--nearly all educated men--in Queen Victoria’s reign, thought they _were_ unanswerable, and that Protectionists here at home (who were no longer allowed to put their theories into laws) and Protectionists abroad who had kept up tariffs against foreign trade, were simply ignorant and foolish men who did not properly understand the elements of Economic Science.

To see whether the Free Traders were right or wrong in these ideas, let us next turn to the arguments with which the Protectionists met them.

These arguments were of two kinds:--

(_a_) There were Protectionists who said: “We cannot follow all these elaborate abstract discussions about a science called Economics; we are practical men with plenty of common sense and experience, and all we know is that if the foreigner comes in free we shall be ruined. He can sell his wheat at such a price that our farmers will lose on it. Our labourers will leave the land, the rents paid to our landlords will vanish. You will thus ruin English wealth altogether.”

(_b_) There was another kind of Protectionist who said: “You Free Traders take for granted, and depend upon, one capital point, to wit, _that the labour now employed in a particular form of production, and the capital employed in it, both of which will be destroyed by Free Trade, can be used more profitably in some other form of Production_. But we, the Protectionists, say that, in the particular case in question, they would _not_ be used more profitably. We say that, in point of fact, things being as they are, the national character being what it is, the arrangements of our English society and its traditions being what we know them to be, the ruined industry will go on getting worse and worse, artificially supported by relief from the community outside it, the farmer losing year after year and still hanging on, the land going back to weeds and marsh, the buildings falling down, and so forth. _We_ say that, though it may theoretically be possible to use in other ways the labour and capital thus displaced, in practice you will destroy more wealth than you will create.”

These two kinds of arguments on the Protectionist side are still to be heard everywhere to-day.

It ought to be perfectly clear to anyone who thinks about the matter at all that argument (_a_) was nonsense, for people and capital driven out of an industry ill suited to our present conditions are not thereby destroyed. They may very well find employment producing more total wealth in another. But argument (_b_) was a good argument _if the statement about the impossibility of changing from one trade to another were in practice true_. The whole discussion really turned upon the last point.

Unfortunately for the Protectionists, those who defended their cause in this country nearly all used argument (_a_), and were very properly derided as fools by the Free Traders. Argument (_b_) was only used by a comparatively small number of thoughtful men and they were under this disadvantage--that they were arguing with regard to a possible or probable future with no past experience to guide them, and that many years must pass before it could be discovered whether, in practice, what they said was true or false; whether in practice the ruin of English agriculture would diminish the well-being of England as a whole or not.

Further, the population continued to increase at a great rate, and that all in the towns and on the coal-fields. Our manufacturing productions went up and up and up, the total wealth of the country enormously increased, and these processes hid and made to seem insignificant the corresponding decay of the fields. We had no need for Protection in any domestic manufactured goods; we had begun to use coal before anybody else; we had developed machinery before anybody else. The only thing which there could be any point in protecting was agriculture, and that would have meant dearer food for the wage-earners in the towns.

The great consequence was that Free Trade won hands down, and for a long time all its opponents, however distinguished or reasonable, were laughed at.

But if we wish to be worthy students of Economic Science we cannot dismiss the quarrel so simply. There is such a thing as a strong _economic_ argument in favour of Protection in particular circumstances. The practical proof of this truth is the immense increase in wealth which took place in the German Empire during the thirty years before the Great War, which increase exactly corresponded with a highly protective tariff. The same thing happened in the United States at the same time. But the theoretical argument in favour of Protection is much better, because the increase of wealth in Germany and the United States under Protection might be due to other causes, whilst it can be shown by _reason_ that Protection itself, in particular cases, increases the total national wealth. With the proof of this I will end the present chapter.

We have seen that the following formula is true:--_Freedom of exchange tends to increase the total amount of wealth of all that area which it covers._

But what gives the argument for Protection, in special cases, its value is, as we saw on page 64, a second Formula equally true. Though freedom of exchange tends to increase the total wealth of an area over which it extends, _yet it does not tend to increase the wealth of every part of that area_. Therefore, if a part of the area over which freedom of exchange extends finds itself impoverished by the process, it may be enriched by interfering with freedom of exchange over the boundaries of its own special part.

Therein lies the whole argument for Protection in particular cases.

Let us take for example three islands, two close together and one far away and prove the case by figures.

We will number them A, B, C. Island A is full of iron ore. Island B is full of coal. Island C is also full of iron ore, like No. A, but it is a long way off.

Iron ore naturally comes to the coal area to be smelted, because, being heavier, it can be carried in smaller bulk. It is cheaper to bring iron ore to coal than coal to iron ore. If all three islands belong to the same realm what will happen is quite clear. Island B will import iron ore from Island A and will smelt it and turn it into pig-iron and steel and iron manufactures of all kinds, while Island C, a long way off, will remain unused. We will suppose the climate of No. C to be bleak, the soil bad, and the people there, since they cannot sell their iron ore on account of the distance at which they stand, make a very poor livelihood out of grazing a few cattle.

Let us suppose that the amount of iron ore imported every year by No. B from No. A is worth £10 million. This of course has to be paid for. In other words, Island No. B has got to export manufactured goods in iron and steel back to Island No. A as payment for the iron ore which No. B imports for smelting. It also has to pay for the freight on the iron ore from No. A, that is, for the cost of bringing it over the sea to No. B. Let us suppose this cost to be one million. The total value of the iron goods produced on No. B, after being smelted with the coal of No. B, is, let us say, £30 million. Of this, £11 million goes back for the cost of carrying the ore from Island No. A and for its purchase. Meanwhile we may neglect economic values of Island No. C, because the few wretched inhabitants and their handful of cattle hardly count.

Here, then, we have a wealth of £30,000,000 in manufactured iron goods, of which £10,000,000 goes to Island No. A and £19,000,000 to Island No. B, and £1 million to whoever carries the ore in ships. If you were estimating the wealth of the whole realm made up of the three islands, A, B and C, you would say: “The wealth of these people consists in manufactured iron and steel goods. It is equivalent to £30,000,000 a year, of which some £10,000,000 is revenue to Island A and £19,000,000 is revenue to Island B and £1 million earned in freights. The wealth of Island C is negligible.” Well and good.

Now supposing the political conditions to change. Islands B and C belong to one realm in future but Island A has become a foreigner. The realm to which Islands B and C belong turns Protectionist and sets up a barrier in the shape of a tariff against iron ore coming from abroad. We have seen that the cost of carrying iron ore from No. A to No. B was £1,000,000. No. C being much farther away from No. B, let us say that the cost of carrying is £5,000,000, but it is carried by subjects of the realm. The tariff put up by the realm to which Island B and C belong is what is called “prohibitive”--that is, it is so high that it keeps the iron ore of No. A out altogether, and the smelters on Island No. B are bound to get their iron ore from that distant Island C. Let us see what happens.

Island No. B has now got to pay a freight, that is, cost of bringing the iron ore, five times as much as it used to be. Instead of paying £11,000,000 for its ore (£10,000,000 at the mine and £1,000,000 for carriage) it is now paying £15,000,000 (£10,000,000 at the mine and £5,000,000 for carriage). It still makes £30,000,000 worth of goods a year, but it only has £15,000,000 left over for its own income, instead of the £19,000,000 which it used to have. It is thus impoverished.

But Island C, from having hardly any income at all, has now an income of £10,000,000 a year. Island A is ruined. Protection has put the getting of the ore under unnatural conditions. It has compelled the coal-owners to go much farther off for their ore than they need have done under Free Trade. The total wealth of all three islands altogether is less than it used to be by £4,000,000, for they are adding £4,000,000 extra to the cost of getting the raw material. _But the total combined wealth of B and C, even if they pay foreign ships to bring the ore, is now greater than it used to be under the old Free Trade._ No. B has £15,000,000; No. C has £10,000,000--the total is £25,000,000. If they pay their own sailors to bring the ore it is £30,000,000. Under the old conditions the total of B and C alone was only £19,000,000. Island A is ruined and the total wealth of the whole system is less, but the Protectionists of the realm, which now only includes B and C, are quite indifferent to that. They are thinking of the wealth of their common country, and are indifferent to the ruin of others, and their policy is _increasing_ the wealth of their common country at the expense of foreigners.

In that example lies the argument for Protection. _If Island C could do something other than mine ore, if it had other forms of wealth, or by ingenuity or luck could discover some new fields in which its activities might develop, then the argument for Protection in this case would break down._ Island B would say: “Let me get my iron ore cheap from the foreigner in Island A, and do you, on Island C, develop (let us say) dairy farming, or something else which I cannot do and which Island B cannot do. In that way we shall all three benefit, and the common realm, consisting of Island B and Island C, will be richer than ever. Island B will have all its old profit of £19,000,000 (instead of being reduced to £15,000,000), and Island C can well develop a dairy produce of more than £7,000,000.”

One ought to be able to see quite clearly from an example like this how true it is that _the argument in favour of Protection applies to particular cases only, and turns entirely upon whether an undeveloped part of the energies of the community can be turned into new channels or not_.

We have an excellent, though small, example to hand in England to-day. The English people have to send abroad about £4 worth of goods every year per family for pig-meat, that is, bacon and hams and the rest. There is no reason why they should do this. They could produce the pigs on their own farms without drawing a single person from the factories and keep this mass of manufactured goods for their own use. The reason we are in this state in the matter of pig-meat is that our agriculture has generally got into such a hole that people will not bestir themselves to produce enough pigs. So here is a definite case in point, and only experiment could show whether Protection would pay here or would not pay.

Protection ought to take the form of saying:--

“Any pig-meat from abroad must pay such and such a sum per pound at the ports as it enters.” This would raise the price of pig-meat in England somewhat. If it raised the price to such an amount that the English people as a whole had to pay £2 more a family, _and if at that increased rate of price agricultural people could be stimulated into feeding the right amount of pigs and taking the necessary trouble to keep the supply going_, then the total wealth of the community would be increased £2 per family. Even if the price had to increase till each family on the average paid £3 more, or £3 10s. 0d. more, it would still be of advantage to the nation _on condition that the higher price really did make the farmers breed enough pigs, without lessening their production of other things_. But if, when the charge on the community had risen to £4 per family, it did not stimulate the production of pigs in this country sufficiently to supply the market, then your Protection of Pigs would be run at a loss.

BANKING

During the last two hundred and fifty years there has arisen, among other modern economic institutions, the institution of _Banking_.

It has origins much older; indeed, people did something of the kind at _all_ times, but Banking as a fully developed institution grew up in this comparatively short time: since the middle of the seventeenth century. It began in Holland and England and spread to other countries.