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 disadvantage—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.