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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.

CHAPTER VI

THE REAL ADVANTAGES OF FOREIGN TRADE

§ 1. Critique of Old Ideas of Advantages of Foreign Trade.

THE mercantilists, whose maxims in political economy were accepted and acted on by all the nations of Europe up to the time of Adam Smith, laid an exaggerated stress on the value to a nation of its foreign trade. In opposition to this view Adam Smith insisted on the greater advantage in itself of the home trade, and showed that some of the principal advantages claimed for foreign trade were illusory, e.g. the acquisition of gold and silver by means of a favourable balance of trade. The refutation of the favourable balance theory-that the advantage of foreign trade was to be measured by the money balance due for the excess of exports over importswas so complete that its success has been admitted by the strongest writers on the protectionist side (e.g. Cournot).1

So insistent indeed is Adam Smith

on the

1 "By an admirable piece of dialectics, full of vigour and flexibility, Smith utterly ruined the system known as the balance of trade which can no longer be sustained."-Cournot, Mathematical Principles of the Theory of Wealth, p. 164 (translation).

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advantages of the employment of the capital of a nation at home that it might be thought the logical outcome of his argument would be a kind of Chinese isolation.

Apart from other reasons, however, he was well aware from the teachings of history, that England had gained enormously by the expansion of foreign trade, and he never held any theory which would not bear the test of experience.

It is true that all foreign trade involves the export of a certain amount of capital, but Adam Smith tried to show that if such export took place under natural` conditions - that is to say, without any artificial encouragement as by bounties or monoplies of various kinds the resulting trade would in general be of advantage to the nation.

§ 2. The Natural Preference of Home to
Foreign Trade.

The fundamental position in this proof is that capital naturally seeks employment at home in preference to any foreign employment, and that it is only when the home channels are filled up that there will be an overflow of the surplus abroad. "Each of these different branches [of foreign trade] is not only advantageous but necessary and unavoidable, when the course of things, without any constraint or violence, naturally introduces it." The term "naturally" is suggestive of an a priori appeal to the system of natural liberty, but Adam Smith does not rely on any any such appeal; he

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advances purely economic arguments founded on experience.

§ 3. Export of Surplus Produce Advantageous.

"When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish. The land and labour of Great Britain produce generally more corn, woollens, and hardware than the demand of the home market requires. The surplus part of them, therefore, must be sent abroad and exchanged for something for which there is a demand at home. It is only by means of such exportation that this surplus can acquire a value sufficient to compensate the labour and expense of producing it. The neighbourhood of the sea-coast and the banks of all navigable rivers are advantageous situations for industry only because they facilitate the exportation and exchange of such surplus produce for something else which is more in demand there." In this way arises the direct foreign trade of consumption.

Again: "When the foreign goods which are thus purchased with the surplus produce of domestic industry exceed the demand of the home market, the surplus part of them must be sent abroad again and exchanged for something more in demand at home." 2

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England, for example, it is shown, imports from Virginia and Maryland about seven times as much tobacco as there is a demand for in the English markets. If, then, the six-sevenths could not be sent abroad and exchanged for something more in demand at home, the importation of that part must cease, and with it the productive labour of all the people of Great Britain who are employed in making the goods to pay for the tobacco imported. "The most roundabout foreign trade of consumption, therefore, may upon some occasions be as necessary for supporting the productive labour of the country and the value of its annual produce as the most direct."

Finally, we have the advantage, admitted under natural conditions, of the development of the carrying trade. "When the capital stock of any country is increased to such a degree that it cannot be all employed in supplying the consumption and supporting the productive labour of that particular country, the surplus part of it naturálly disgorges itself into the carrying trade, and is employed in performing the same offices to other countries."

The carrying trade that arises in this way under natural conditions is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen who have ⚫ been disposed to favour it with particular encouragement seem to have mistaken the effect and symptom for the cause. "Holland, in proportion to the extent of the land and the number of its inhabitants by far the richest country in Europe, has, accordingly, the

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