§ 5. Distinction between Profit and Advantage.

And in the first place we must realise that Adam Smith does not suppose that the advantage of the employment of capital is to be measured simply by the profit that is earned.

Throughout the Wealth of Nations profit and national advantage are distinguished, and very often indeed they are definitely opposed. In dealing, for example, with the monopoly of the colonial trade, the central point of the attack is that the monopoly of this trade had unduly raised the rate of profit, not only in that trade but in the country generally, and this rise in the rate of profit is shown to be a national disadvantage, and especially a disadvantage to labour. The argument will be examined later on, but, in the meantime, it is an excellent example of the distinction in idea, at any rate, between profit and advantage.

"The difference [in the advantage of the employment of capital] is very great according to the different sorts of wholesale trade in which any part of it is employed."

§ 6. Home Trade more advantageous than

Foreign Trade.

All wholesale trade may be reduced to three different sorts the home trade, the foreign trade of consumption, and the carrying trade.

The greatest national advantage is obtained by the employment of the capital in the home trade. The distinction turns on the fact of the employment of

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the capital within the country and the encouragement of productive labour in the home country. The advantage is distinctly and emphatically a national advantage. The position is best illustrated by a concrete case. "The capital which sends Scotch manufactures to London and brings back English corn and manufactures to Edinburgh necessarily replaces by every such operation two British capitals which had both been employed in the agriculture and manufactures of Great Britain. The capital employed in purchasing foreign goods for home consumption, when this purchase is made with the produce of domestic industry replaces, too, by every such operation two distinct capitals; but one of them only is employed in supporting domestic industry. The capital which sends British goods to Portugal and brings back Portuguese goods to Great Britain replaces by every such operation only one British capital. The other is a Portuguese one. Though the returns, therefore, of the foreign trade of consumption should be as quick as those of the home trade the capital employed in it will give but one-half of the encouragement to the industry or productive labour of the country. But the returns of the foreign trade of consumption are very seldom so quick as those of the home trade. The returns of the home trade generally come in before the end of the year, and sometimes three or four times in the year. The returns of the foreign trade of consumption seldom come in before the end of the year and sometimes not till after two or three years. A

capital therefore employed in the home trade will sometimes make twelve operations, or be sent out and returned twelve times before a capital employed in the foreign trade of consumption has made one. If the capitals are equal, therefore, the one will give fourand-twenty times more encouragement and support to the industry of the country than the other."

This passage has been quoted at length in order to show that in Adam Smith's opinion the first test of the national advantage in the employment of capital is that the capital should be employed within the country. It is not a question of profit. Foreign employment of the capital may give greater profit. The advantage to the country itself, or the greater part of the advantage, consists in the consumption and reproduction of the capital by the productive labour of the country itself, and not by that of some other country.

§ 7. Imports paid for by Exports.

And it must not be supposed that Adam Smith was not perfectly aware of the elementary fact that (other items of international indebtedness being omitted) imports must be paid for by exports. This is clearly brought out in the passage following that just quoted. "The foreign goods for home consumption may sometimes be purchased not with the produce of domestic industry but with some other foreign goods. These last, however, must have been purchased either immediately with the produce of domestic industry or with something else which had

been purchased with it; for, the case of war or conquest excepted, foreign goods can never be acquired but in exchange for something that "had been produced at home, either immediately or after two or more different exchanges."

§ 8. Varieties of Foreign Trade and their
Relative Advantages.

He goes on to say that the effects of such a roundabout trade of consumption are exactly the same as those of the direct foreign trade, except that the final returns are likely to be still more distant, as they must depend on the returns of two or three distinct foreign trades.

A roundabout foreign trade of consumption is therefore in general less advantageous to the nation than a direct trade, on the ground that the capital is kept longer out of the country.

Precisely the same principle is applied in determining the relative advantages of other kinds of foreign trade. The near trade, e.g. trade with France, is more advantageous than the distant trade, e.g. with India or America. And finally the pure carrying trade in which the capital of the country is employed in carrying between two foreign countries, and in its services is kept out of the home country altogether, is the least advantageous of all modes of the employment of capital. "That part of the capital of any country which is employed in the carrying trade is altogether withdrawn from supporting the productive labour of that particular country to support that of

some foreign countries. Though it may replace by every operation two distinct capitals, yet neither of them belongs to that particular country. The capital of the Dutch merchant which carries the corn of Poland to Portugal and brings back the fruits and wines of Portugal to Poland replaces by every such operation two capitals, neither of which had been employed in supporting the productive labour of Holland; but one of them in supporting that of Poland and the other that of Portugal." 1

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And here again it must not be supposed that Adam Smith did not realise that the ships of a country are part of its capital and the crews of those ships part of its productive labour. For he goes on to say: "When indeed the carrying trade of any particular country is carried on with the ships and the sailors of that country that part of the capital employed in it which pays the freight is distributed among and puts in motion a certain number of productive labourers of that country. It does not, however, seem essential to the nature of the trade that it should be so." In our own times one of the most frequent complaints against our merchant shipping

1 The passage which immediately follows also illustrates very forcibly the distinction between profits and advantage. "The profits only return regularly to Holland and constitute the whole addition which this trade necessarily makes to the annual produce of the land and labour of that country."

A good example of the difference between profit and advantage is given in the chapter on Colonies (Bk. IV. ch. vii.). "In the trade, therefore, to which these regulations confine the merchant of Hamburg his capital can keep in constant employment a much greater quantity of German industry than it possibly could have done in the trade from which he is excluded." [The reference is to the exclusion from the distant trade of the British colonies.] "Though the one employment, therefore, may perhaps be to him less profitable than the other, it cannot be less advantageous to his country.'