and any growth of the export trade under the conditions assumed, gives, in general, more employment to home labour and capital.1

§ 2. Possible Displacement of Home Industries by Foreign Imports.

But when we consider imports made into a country it does not follow on Adam Smith's principles that the expansion of the import trade will necessarily mean a corresponding increase in home industry. It is quite possible that the new import may displace the product of some old industry instead of being exchanged against a surplus that would naturally be exported.

Suppose, for example, that before the trade is opened, a million pounds worth of English manufactures were exchanged against a million pounds worth of English corn. If a million pounds worth of corn are now imported (at a cheaper rate per unit), the English manufactures formerly given in exchange to the English producers of corn will now be given to the foreigner.

In this case it is not the surplus of an expanding manufacture that is exchanged for foreign goods that cannot be produced at home. On the contrary, a foreign trade displaces a home trade. And the immediate effect on Adam Smith's views is disadvantage.

That the immediate effect would be a disadvantage (measured by the test of the employment 1 See Chapter VII.

within the country of capital and labour) is confirmed from other cases taken by Adam Smith.

If, for example, an industry has been dependent on protection, then he argues that the freedom of trade should only be restored by slow gradations. The implication, of course, is that the displaced labour and capital can only gradually find other employment. In the same way Adam Smith's support of retaliation depends on the idea that the recovery of a great market is worth the cost of the temporary inconvenience. It is assumed that the check given to the export trade by the foreign duties cannot be met at once by the opening up of new markets, or by the application of the productive power to other industries. Indeed, in this case, the implication as regards the employment of capital goes farther, and the recovery of the great market is supposed to be a permanent advantage. If another foreign market could always be obtained, why submit to the losses of retaliation?

And when a foreign import displaces some home product, it is plain that in the normal case another market cannot at once be found for that particular product, and the capital and labour must be diverted into a new industry. But in general the transfer cannot be made immediately, nor can it be made without a loss of the capital already specialised.1

1 "If the free importation of foreign manufactures were permitted, several of the home manufactures would probably suffer, and some of them perhaps go to ruin altogether, and a considerable part of the stock and industry employed in them would be forced to find out some other employment. [But the freest importation of the rude produce of the soil could have no such effect upon the agriculture of the country.]" Book IV. Chap. ii. The sentence in [ ] is noticed below.

It is clear that Adam Smith did not hold the opinion that it was in all cases an immediate advantage to the nation if a new import displaced some old home product from home consumption.

It is, however, also equally clear from the conclusions of his argument that he did not think it was generally desirable to prevent the import of foreign goods in order to preserve the home market for the home producer. He notices, indeed, some very important exceptions, but these very exceptions may be used so far to prove the rule.

What, then, are the reasons which at the time convinced Adam Smith that "restraints upon the importation from foreign countries of such goods as can be produced at home" were in general not desirable from the national point of view?

These reasons are given at length in the second chapter of the fourth book of the Wealth of Nations. Under present conditions this chapter deserves a careful critical examination.

§ 3. Protection in Great Britain in Time of Adam Smith.

To begin with, he shows that at the time by far the greater part of the industries of the country were actually protected "by high duties or absolute prohibitions" against foreign competition in the home markets. The importation of live cattle and salt provisions was prohibited, so that the graziers had a monopoly of the market for butcher's meat. The high duties on corn in times of moderate plenty also

amounted to a prohibition. With regard to manufactures, the importation of foreign woollens and of silks was prohibited, linen was making great strides towards the same privilege, and many other sorts of manufactures had obtained in Great Britain "altogether, or very nearly, a monopoly against their countrymen." "The variety of goods of which the importation into Great Britain is prohibited, either absolutely or under certain conditions greatly exceeds what can easily be suspected by those who are not well acquainted with the laws of the customs." 1

1

He admits that this monopoly of the home market frequently gives great encouragement to the particular species of industry that enjoys it, and also that frequently a greater amount of the labour and stock of the society is turned to this industry than otherwise would have gone to it.

But he goes on to say: "Whether this monopoly tends either to increase the general industry of the society or to give it the most advantageous direction is not perhaps altogether so evident.” 2

§ 4. Protection of Advantage to Particular
Industries.

It is absolutely necessary to see clearly the difference between the interests of particular industries and the interests of the nation at large.

It cannot be doubted-that is Adam Smith's own

1 On the number of duties and prohibitions which survived in 1842 see the famous report of that year.

2 In the first edition "certain" is used in place of "evident," as pointed out in Dr. Cannan's edition.

expression that frequently the particular industries may, under such protection, grow to larger dimensions than otherwise would be the case, and attract to themselves a larger amount of labour and capital than if they were subject to foreign competition in the home market.

In the light of recent history this is an admission of serious importance. In all the great staple industries the tendency has been towards production on a larger and larger scale; and for large-scale production in highly developed countries it is contended that the possession of the home market—in Adam Smith's own words "the most important of all markets"-is an immense advantage.

Again, it is contended by modern supporters of protection that the great staple industries, that can be carried on on a large scale, from the nature of the case, and the very meaning of the terms, are limited in number; this is not a matter of opinion but a matter of arithmetic. Accordingly, if the principal staples of a country are benefited by protection—if they become larger than otherwise would be the case -that means, it is argued, that the greater part of the industries of the country are also benefited.

This expansion, which is rendered possible by the possession of the home market, also gives-it is maintained-encouragement to the expansion of foreign trade; and no one has shown more clearly than Adam Smith that the natural exports from a country are the surplus products of the home industries. With the augmentation of industry and the