Economics for Helen

EXCHANGE is really only a form of production, as we saw in the illustration of the island with salt and the main-land with meat. When the exchange of the things is of advantage to both parties it creates wealth for both, and profitable exchange is, therefore, when it takes place, only the last step in a general chain of production.

But Exchange is so separate an action that students of Economics have agreed to treat it as a sort of chapter by itself, and we will do so here.

The characteristic of Exchange is that you take a thing from a place where it has less value to a place where it has more value, thus adding an economic value to the thing moved and so creating wealth. In the same transaction you bring back something else against it, which has more value in your own place than it had in the place from which you took it, that is again adding an economic value and therefore creating wealth. We saw how this was in the case of the salt and the meat, and so it is with thousands upon thousands of exchanges going on all over the world.

For instance, we in England have grown fond of drinking tea in the last 200 years. But our climate will not allow us to grow tea. Tea can only grow in a very hot country.

Now in very hot countries specially heavy labour upon metal work is not to be expected. Men are not fit for it. But in this cool climate men are fit for it, and also men here have through long practice become very skilful at working metal: smelting iron, for instance, and making it up into machines.

Therefore, there is a double advantage to us and to the people who live in the hot countries where tea is grown if we exchange. We send them metal things that we have made and which are useful to them, and which they could hardly make themselves, or only with very great difficulty (and, therefore, at a great expense of energy), and we get from them tea, which we could not grow here except in hot houses: that is, at much more expense of energy than is needed in the countries where tea grows naturally out of doors.

When there are present two or more objects of this kind, such that the exchange of them between two places will benefit both parties, we may speak of “a potential of exchange,” stronger or weaker according to the amount of mutual advantage derived.

This word “potential” you will not find yet in many books, but it is coming in, for it is a very useful word. It is taken by way of metaphor from Physical Science. When there is a head of water over a dam, or a current of electricity of such and such an intensity, we talk of the “potential” and measure it. For instance, we say this electrical current is double the potential of that, or the head of water working such and such turbines is at double the potential of another head of water in the neighbourhood. In the same way we talk of a “potential” of exchange, meaning a tendency for exchange to arise between two places or people because it is of mutual benefit to both.

Potentials of exchange come into existence not only through difference of climate or differences of habit, but also through what is called the Differentiation of Employment, which is also called Division of Labour.

Thus two countries may be both equally able to produce, say, metal work and silk fabrics, and yet if one of them concentrates on getting better and better at metal work and the other on getting better and better at silk fabrics, it may well be that both will benefit by separating their jobs and exchanging the results. And this is true not only of two countries, but of individuals and groups.

The cobbler does not make his own clothes. He makes boots, and by learning his trade and getting used to it makes them much better and in a much shorter time than other men could, and therefore makes a pair of boots with less expense of energy, that is, cheaper, than another man would. The tailor can say the same thing about making clothes. So it is to the advantage of the cobbler to exchange his extra boots against the extra clothes the tailor has made.

In general: intelligent societies always tend to build up a very wide-spread system of exchange, because intelligent people tend to concentrate each on the job that suits him best, and also because intelligent people discover differences of climate and soil and the rest which may make exchange between two places a mutual advantage for both.

It is indeed a great mistake to do as some modern people do, and put Exchange in front of Production. Thus you hear people talking as though the trade a country does, the total amount of its exports and imports, were the test of its prosperity, whereas the real test of its prosperity is what it has the power to consume, not what it manages to exchange.

But still, though it comes at the end of Production and must never be made more important than the whole process of Production, Exchange is present universally wherever there is active production of Wealth. Thus the group of people who build ships are really exchanging what they make against the produce of other people who make clothes and grow food and build houses, and the rest of it; and in a highly-civilised country like ours much the greater part of the wealth you see consumed around you has gone through many processes of exchange.

There are a few elementary Formulæ concerning Exchange which it is important to remember.

It is not very easy to understand the meaning of this until one is given an example. Supposing a ton of coal from England to be worth £2 by the time it is delivered in Cadiz, and supposing that making a dozen bottles of wine in England, with all the apparatus of hot-house grapes and the rest of it, came to £5 of expense. Supposing that in Cadiz, from the small coal mines near by, they can produce coal at only £1 a ton, but on account of their climate they can produce a dozen of wine for a shilling. Then you get this curious situation:

It pays the exporting country, England, to sell coal in Cadiz at less than its English economic value, and to import the wine from Cadiz. It pays your English owner of coal, although the values attaching to it by the time it has got to Cadiz are £2 a ton, to sell a ton of coal there for only £1, and to exchange that against the wine of Cadiz, and bring that back to England. At first sight it sounds absurd to say that selling thus at a lower value than the cost of production and transport can possibly be profitable. But if you will look at it closely you will see that it is so.

If the Englishman had tried to make his wine at home it would have cost him £100 to make twenty dozen bottles, but when he has sold his coal at Cadiz for £1 he can with that £1 buy twenty dozen of wine and bring it back to England. He is much the wealthier by the transaction, and so is the man at Cadiz. The Cadiz man could have spent his energies in digging out a ton of coal near Cadiz instead of importing it, but the same energies used in making wine produce enough wine to get him rather more coal from England.

Of course, the vehicle by which this is done is a currency, or money, which I will explain in a moment; but the point to seize here is that exchange is just as truly taking place when there is no direct barter of two things but a much longer and complicated process.

For instance, a group of people called a Railway Company in the Argentine want a locomotive. A locomotive can be produced cheaper and better, that is, with less expenditure of energy for the result, in England than in the Argentine. But on the other hand, England wants to import tea. Now the Argentine grows no tea. What happens? How does England get the tea? That locomotive goes out to the Argentine. An amount of wheat sufficient to exchange against the locomotive goes against it, not to England, but to Holland, a country which, like us, has to import a lot of wheat. As against the wheat sent to Holland, the people in Holland send, say, the cheeses which they make so well, on account of their special conditions, and the consignment goes to Germany. The Germans send out a number of rails equivalent to the number of cheeses and of the wheat and of the locomotive, as they are very good at making rails, and have specialised on it. But they do not send the rails to Holland. They send them to some Railway Company which has asked for them in Egypt. The Egyptian people send out an equivalent amount of cotton, which they can grow easily in their climate, and this cotton goes to mills in India, and against it there comes an equivalent amount of tea, but the tea does not go back to Egypt. It goes to England.

There you have a circle of Multiple Exchange in which everybody profits by the exchange going on, although it is indirect. In the same way, of course, it is true that all of our domestic exchanges at home are multiple. If I write a book which people want to read, whereas I want not books but several other things, boots and fuel and furniture, I do not take my books round to the man who provides boots and to the one who provides fuel and to the one who provides furniture. I go through the process of selling my book to a publisher, and through an instrument he gives me, called a cheque (I will explain this when we come to the point of money), I can obtain boots and fuel and furniture to the amount of the value of the books of mine which my publisher will sell. Yet when exchange is thus highly indirect and multiple it is just as much exchange as though I went and bartered one book for one pair of boots with the cobbler.

3. The third thing to remember about Exchange is of the utmost importance, because it has given rise to one of the biggest discussions of our English politics. The Formula runs thus:—

It ought to be self evident, but it is astonishing how muddled people get about it, when they become confused over details and cannot see the wood for the trees. It ought, I say, to be self-evident that if you leave Exchange quite free, anybody being at liberty to produce what he can produce best, and exchange it for things which other men can produce better than he, both parties will tend to be the richer by such freedom and the wealth of the whole country will be greatest when all exchanges in it are thus left free to be worked by the sense of advantage.

If there were a law, for instance, preventing me from buying etchings, or preventing Jones, the etcher, from buying books, Jones would have to write his own books (or do without them, which is what he would do), and I should have to etch my own etchings, which would be exceedingly poor compared with the wonderful etchings of Jones. We are obviously both of us better off if we are left free to exchange what we can each make best. And so it is with all the countless things made in a State.

This principle applies not only to a particular nation but to the whole world. If you left the whole world free to exchange the whole world would be the richer for it. And any interference with exchange between one nation and another lessens the total possible amount of wealth there might be in the world.

So far so good; and, as I have said, such a truth ought to be self-evident. But here there comes in a misunderstanding of its application, and that misunderstanding has made any amount of trouble. It is so important that I must give it a separate division to itself.