the productive labour of the home country, instead of that of foreign countries, but further elaboration seems needless in view of the passages already cited.

§ 12. How can Adam Smith's Views on the Superior Advantage of Home Trade be reconciled with his advocacy of Free Trade?

But at this point the question naturally arises: If in general the employment of capital at home is more advantageous to the nation than its employment in any form abroad, why should the nation or the sovereign power in the state not give particular encouragement to its own productive labour?

And in particular, if the employment of capital in agriculture is of all employments the most advantageous, why should a nation not give particular encouragement to that form of industry? The answer to these questions is of peculiar interest at the present time. Many of those who advocate the adoption by this country of differential duties in favour of home industries seem to think they have proved their case if they show that capital employed in home industries is more advantageously employed than if it is sent abroad, and that trade, for example, between Edinburgh and London is of more advantage to Britain than trade between London and Lisbon, or trade between Edinburgh and Hamburg. They do not appear to know that Adam Smith gave this illustration, and not only recognised generally the superiority in advantage of the home trade and of the home employment of capital, but

elaborated the distinction in a great variety of forms. Their arguments may be valid against some of the successors (in time) of Adam Smith, but they are worse than irrelevant as against Adam Smith himself. The nationalism of Adam Smith was much more robust than that of the present day, and as will be shown later, so was his imperialism.

The real difficulty as regards Adam Smith is this: Why, holding these very strong national and imperial ideas, did he destroy the old system in which these ideas had also been advanced? The answer is that, in his view, protection to the home market was in general either hurtful or useless, and that the monopoly of the colonial trade was injurious to the economic interest of landlord, capitalist, and labourer, and a source of national weakness instead of being a source of strength.

Those who perverted Adam Smith's system of natural liberty into the simple negative dogma of laisser faire got rid of the difficulty of answering these questions by saying that the great master was wrong in thinking there could ever be any other test of the advantage of employing capital than the test of profit; that in all cases equal profit gave equal advantage and greater profit greater advantage. Those, on the other hand, who accepted Adam Smith's ideas on the employment of capital rejected his ideas on freedom of trade, and argued in effect that he ought never to have destroyed the old system.

§ 13. Bearing of the Answer on the Present
Controversy.

The consistency or the reverse of Adam Smith's arguments may perhaps appear to be a matter of historical interest only. But that is not so. The truth is that no great writer has taken so complete a survey of the complexity of the questions involved. He seems to be inconsistent, because people only take account of the parts of his argument which happen to suit their own narrower view.

An examination of his work in all its aspects ought to be the best introduction to an understanding of our present policy and of the value of the changes that are proposed.

It may happen that such an examination will show that the ideas with which Adam Smith destroyed the old system are no longer applicable to present conditions; and that if his views on nationalism and imperialism are to be effectually realised some parts of the old system must be restored, e.g. a certain moderate amount of protection must be given to home industry and a certain amount of preference to the colonies.

Or, it may happen, that in the course of economic development it is of even greater importance now than it was in the time of Adam Smith that in order to promote the real interests of the nation and the empire no restraints should be imposed or preferences given.

One thing at least ought to be abundantly clear.

Whether we look to Adam Smith's arguments in support of the general policy of freedom from restraints, or to his arguments in support of the important exceptions which he approves of, he certainly did not imagine that in all cases the interests of individuals are always in accord with those of the nation, or that national interests are always in harmony with those of the world. Crucial instances to the contrary have already been given, and the number might be indefinitely extended.

It is highly probable that such an examination of Adam Smith's reasons may give us ideas applicable to the present time. It may be that other ideas must also be introduced, and that the old ideas must be applied to new facts, but in the search for truth one great aid is to have guiding ideas. And whether true or false the ideas of Adam Smith have had a greater effect on the actual making of economic history than those of any other writer.

Note on Byles's "Sophisms of Free Trade."

The failure to distinguish (from the national stand point) between profit and advantage has been curiously persistent. In 1849 John Barnard Byles (later the author of the standard work on Bills of Exchange, and a justice in the Court of Common Pleas) published a book on the Sophisms of Free Trade. At the time (1849 being the year of the completion of the repeal of the Corn Laws) this work was remarkable for many acute criticisms of extreme laisser faire. But, perhaps, the most remarkable feature was the insistence on the position of Adam Smith that in general the home trade was more advantageous than the foreign, and bringing out as Adam Smith had done the difference between profit and advantage. This

work of Byles has recently been rediscovered and republished with notes and comments. The editors, W. S. Lilly and C. S. Devas, two well-known writers on political and economic science, and strong supporters of protection, throughout describe this position of Adam Smith (endorsed by Sir John Byles) as the Home Trade Fallacy. In commenting on Chapter IV. of Byles's book they say: "This chapter repeats the error of Adam Smith that home trade is ipso facto more profitable (sic) to a nation than foreign trade. It is Byles's main mistake, and exposed him to scornful refutation by Bowring and Lord Hobart. For purposes of reference we will label it the Home Trade Fallacy, and we will proceed to expose it. Adam Smith's remarks, then, which Byles quotes on the quicker returns and greater profits of the home trade are doubly incorrect." But neither Adam Smith nor Byles (in this matter his disciple) said that the home trade was more profitable; their contention is that it is more advantageous, and the terms are by no means synonymous.

Byles quotes at length the passage from Adam Smith given above, and restates the position in clear and vigorous language of his own, concluding with the reflection: "These observations of Adam Smith derive additional weight from the quarter from which they come. They are the admissions of the founder of the existing school of political economists on a point of vital importance, so vital that it affects the entire theory of free trade." Although Byles had already stated the argument very clearly and emphatically, he continues: "At the risk of being charged with prolixity and repetition I venture to invite the candid and serious attention of the reader to a further consideration of it." And he gives another rendering.

Other writers of the present day seem to think that if the home trade fallacy is not a fallacy, then, free trade must ipso facto be a fallacy. They accept the authority of Adam Smith on the advantage of home trade over foreign, but they never consider the arguments by which he tries to show that the national advantage is in general attained by freedom and not by restraints on foreign trade. These arguments are examined in the following chapters.