point of view of the power of the empire as a whole, such common action would have great advantages, e.g., in making commercial treaties or, in case of need, in retaliation.

The simplest solution would be a uniform customs system, but uniformity is not essential either to free trade within the empire or to a common commercial policy. The ideal of internal free trade would be attained if the colonies were to carry their preferences to the extreme of reducing the duties on the products of the rest of the empire to zero; although the United Kingdom retained its free trade system, and the colonies in each case its own protective system against the rest of the world.

To insist that internal free trade (i.e. within the empire) can only be established if, as a necessary preliminary, this country adopts protection, or the colonies adopt external free trade, is to put needless and probably insuperable difficulties in the way. At the same time, the advantages of a real commercial union of all parts of the empire, based on internal free trade and external common policy, are so great that the question ought to be considered from the point of view, not only of the constituent parts, but of the whole. Free trade and protection are only means to the achievement of national and imperial aims.

Such are the fundamental questions involved in the economics of empire: defence, internal commercial relations, and external commercial policy.

In dealing with these questions, I have taken as the basis the treatment by Adam Smith; for several reasons. The Wealth of Nations was written under the influence of the events which led up to the separation of the American colonies and the acquisition of India. Then, as now, problems of empire were of urgent importance; then, as now, trade and trade policy were intertwined with questions of defence and sovereignty; then, as now, we were faced with the alternatives of real union or disintegration; then, as now, we had not an empire, but the project of an empire. It is admitted on all sides that Adam Smith was the greatest of economists, but the stress laid on certain parts of his work has caused others to be neglected; and in this over-emphasis and neglect the sense of just proportion has been lost. No other writer has approached him in the breadth of view and in the appreciation of the different elements involved in the economics of imperialism.

The popular idea that Adam Smith was cosmopolitan in his moral and political sympathies is exactly the reverse of the truth. He was intensely nationalist; and his nationalism was founded upon general principles that are specially vindicated in the last edition of his Theory of Moral Sentiments.1 His nationalism grew with the expansion of the nation until, as the logical conclusion of his great work, we have the most thorough scheme of British imperial

1 See below, Chapter II.

union ever propounded. Both politically and economically this imperialism was founded on ideas that have their roots far back in English history. Politically Adam Smith looked to the development of the British constitution; with representatives from every part of the empire, and with the monarchical and democratic elements growing in due proportion. Economically his ideal was that the empire should furnish one immense internal market for the produce of every part of it; and that for imperial needs certain taxes (of which taxes on land and customs duties are of special interest) should be levied throughout the empire on a uniform system.

The climax of the argument of the Wealth of Nations is an appeal to British statesmen, and to the British people both in the mother country and in the colonies to convert the project of empire into the reality.

Equally erroneous are popular ideas on Adam Smith's treatment of free trade and protection. Here also his point of view is national and imperial and not cosmopolitan. He emphasises more than any subsequent writer the importance of the home market, and the advantage of the employment of the capital of the country within the country; so strong indeed is his view on the encouragement of home labour and home industries that he has been claimed by protectionist writers as the founder of protection. And yet, as all the world knows, it was to Adam

b

Smith more than to any statesman that the adoption of free trade by Britain was due; he it was who gave the ideas with which other people worked. Unfortunately, in simplifying these ideas for popular consumption the setting was cast aside, and with the setting many of the ideas also. Free trade was converted into a kind of religious dogma far removed from the principles of the original author.

Of the lost ideas of Adam Smith two may be here cited. One is the importance of the local habitation of the capital during the process of consumption and reproduction. The popular idea that the employment of capital that is most profitable to the individual (whatever the mode or place) is of necessity also the most advantageous to the nation is utterly opposed to the central doctrine of Adam Smith. From his standpoint it is only the surplus of a nation's capital that can be exported with advantage to the nation. The home requirements should be first met before capital is sent abroad. Capital may be sent abroad for temporary employment in foreign trade or for permanent investment,— even the interest being reinvested,—and between these two extremes there are endless degrees in the absenteeism of capital. Of these differences in the national advantage of employing capital in different modes Adam Smith takes account in a chapter which might well be called the forgotten chapter of the Wealth of Nations.1 1 Bk. II. chap. v. See below, Chapter VI.

The other lost idea of special interest at present is as regards the mobility of capital. In what is called the pure theory of foreign trade it is assumed that between different "economic nations" there is no mobility of capital or that the mobility is so imperfect that for theory it may be neglected. Adam Smith, on the other hand, held the view confirmed by experience (and it may be said in harmony with the "modern" principle of continuity) that foreign trade can only be carried on by sending a certain amount of capital out of the country.

These lost ideas have again been forced on the public attention by two significant facts: first, the enormous investments of British capital in foreign states; and secondly, the increasing tendency in recent years in the commercial policy of other nations towards the protection of native industries.

The dogmatic simplification of free trade has had the result that many people think they have made out a case for protection when they have partially re-discovered the ideas which Adam Smith elaborated, to the verge of paradox, on the advantage to a country of the employment of its own labour by its own capital. Always bearing in mind the supreme importance of the home employment of capital, Adam Smith tried to show that "high duties and absolute prohibitions" were either useless or hurtful. But he did not rely on abstractions and hypotheses; he might have said with his revered Newton hypo