Australasian colonies compared with what might have been expected seems to confirm this view. § 22. Significance of the "Exceptions" to It is a common mistake to look on the exceptions examined in this chapter as of no practical importance, and as having no effect on the general argument in favour of free trade. The truth, as confirmed by history, is that the actual policy of different nations has been determined not by the rule but by the exception. Germany protects her agriculture partly for defence, partly for the sake of the vested interests involved; all our self-governing colonies insist on the protection of infant industries; the United States has defended its protective system by all the exceptions in turn, beginning (under Hamilton) with defence. All the protectionist nations make much of the power of retaliation; and all of them are prevented from lowering their duties by the vested interests of capital. CHAPTER XII THE STATE IN RELATION TO COMMERCE § 1. General View of Economic Functions of the State. IN In his fifth book Adam Smith discusses the expenses of the sovereign or commonwealth in the performance of admitted public duties and the sources from which the necessary revenue may be obtained. A great part of this book deals with topics beyond the scope of the present work, e.g. the expense of the administration of justice, of educational and religious establishments, etc.; but there are certain leading ideas which throw light on his views on colonial and imperial policy, and form a fitting introduction to that subject. § 2. The State and Commerce. The first fundamental position of Adam Smith in treating of the relations of the state to commerce is that for the development and maintenance of commerce certain public works and institutions are necessary which it can never be the interest of any individual or small number of individuals to maintain. If under natural conditions private enterprise is sufficient, the intervention of the state is worse than useless. But private enterprise presupposes profit, and profit is not always the test of public advantage. The state can undertake works of public utility which not only yield no profit but may be a source of permanent expense. Again, the state can look to a more distant future for a return, and the return need not be measured only in terms of money. Accordingly, the intervention of the state may be justified as supplementary to private effort.1 In the second place Adam Smith shows that some commercial undertakings are unsuited for private effort on account of the abuses that are likely to arise. If, for example, any undertaking is likely to acquire a practical monopoly, some kind of state regulation is necessary. And, on the other hand, monopolies may be granted for a limited time, as in the case of patents or copyrights or charters to companies. § 3. General Rule: Non-interference still prevails in spite of Extension of State Regulation. On the whole, however, apart from such generally admitted cases as the management of the currency, the provision of roads and the like, Adam Smith does not approve of any wide extension of the industrial domain of the state. Commerce should be left to the merchants, and the state should only intervene in case of need or to check abuses. 1 These are the economic principles appealed to in support of the Development Fund of the Budget of 1909. And just as the state should not as a rule interfere in the affairs of commerce-but laisser faire laisser passer-so also the merchants should not as a rule interfere in affairs of the state. Since Adam Smith's time the necessary functions of the state, as regards the regulation of industry and commerce, have been widely extended, and with general approval the intervention has gone far beyond what may be called necessary. In spite, however, of this wide extension of state management this presumption still survives; for if it did not, it would mean that state socialism was approved generally as the ideal-which, in regard to British public opinion, as a statement of fact, is of course absurd. In the present work these wider aspects of the relations of the state to industry in general may be passed over; but some attention must be given to Adam Smith's converse proposition that merchants should not interfere with the proper functions of the state. § 4. Merchants not fit to undertake the Duties of the Sovereign Power. It was to enforce this teaching with special reference to the case of India that Adam Smith introduced into his third edition a history of the great foreign trading companies which played such an important part in the expansion of the British Empire.2 66 The protection of trade in general has always 1 The subject is treated by the present writer in Principles of Political Economy, Book v., and in the Cambridge Modern History, vol. x. chap. xxiv., "On the British Economists." 2 Book v. chap. i. part iii. art. i. N been considered as essential to the defence of the commonwealth, and upon that account a necessary part of the duty of the executive power. The collection and application of the general duties of customs, therefore, have always been left to that power. But the protection of any particular branch of trade is a part of the general protection of trade ; e; a part, therefore of the duty of that power; and if nations always acted consistently the particular duties levied for the purposes of such particular protection should always have been left equally to its disposal. But in this respect, as well as in many others, nations have not always acted consistently; and in the greater part of the commercial states of Europe particular companies of merchants have had the address to persuade the legislature to entrust to them the performance of this part of the duty of the sovereign, together with all the powers which are naturally connected with it. These companies, though they may perhaps have been useful for the first introduction of some branches of commerce by making at their own expense an experiment which the estate might not think it prudent to make, have in the long run proved universally either burdensome or useless, and have either mismanaged or confined the trade." § 5. History and Abuses of Foreign Trading Companies: Regulated Companies. This opinion is supported by an appeal to history. An account is given first of the old "regulated" |