Smith wrote, most of the particular abuses which interfered with what he considered the natural distribution of capital, have been destroyed, and there has been a closer approximation to freedom in the application of capital apart from the direction of the state than he had deemed possible. Under these conditions a question of the greatest interest at present is, whether this natural distribution of capital is that which is most advantageous for the nation. For it is certainly as true as ever that the guide to the employment of their capital by individuals is the profit to be obtained.

§ 8. Does Profit in general lead to Advantage?

Much attention has recently been given to the investment of British capital in foreign states. Supposing that we still accept Adam Smith's ideas on the relative advantage of the employment of capital at home, are we entitled to say that the capital now exported is only a surplus?

Again, there has been an enormous development of all branches of foreign trade. Has this development taken place in such a way as to lead to an increase also in the home employment of capital, or has it been at the expense of the latter?

Adam Smith tried to show that under natural conditions, that is, apart from the influence of the state, individuals in seeking to promote their own interest would in general also promote that of the nation. If left to themselves, without any artificial system of preference or restraint, they would be

induced to employ their capital in that very order which is most advantageous to the society; first in agriculture, and then in all sorts of employment at home before the surplus was sent abroad.

§ 9. The "Natural" Protection of Home Industries -especially of Agriculture.

What, then, are these arguments on which Adam Smith relied, and have they been strengthened or weakened by the change in conditions?

1

"That order of things which necessity imposes in general (because subsistence is prior to conveniency and luxury), though not in every particular country, is in every particular country promoted by the natural inclinations of man. . . . Upon equal or nearly equal profits most men will choose to employ their capitals rather in the improvement and cultivation of land than in manufacture or in foreign trade." The capital is more under their view and command, it is more secure than if entrusted to the risky credit and the uncertain laws of foreign countries, and, besides, there are the pleasures of the country life and the attractions of the beauties of nature. The experience of England in the nineteenth century confirms this general position. As a matter of fact, the landlords of England have been content to invest capital in land and its improvement with a lower average return than is to be found in any other mode of employment. People who have made money in the towns still spend it in

1 Book III. chap. i.

2 Book IV. chap. ii.

the country, and the profits of farming are lower than in any other industry.

But one part of Adam Smith's argument is no longer valid, or, to say the least, it has lost much of its force. In recent years the security for the investment of capital in foreign states has greatly increased and the organisation of credit has spread over the civilised world. There can be no question that as regards security a person can make a much safer investment of his capital by a proper geographical distribution over the whole world than by putting it in the permanent improvements of land which seemed so attractive to Adam Smith as to Arthur Young. Judging by the experience of the last quarter of a century, land is no longer regarded as the premier security for the investment of capital. The attraction of the country is, however, still so great that capital is applied to agriculture at very low rates of profit.

§ 10. Other Home Industries.

Adam Smith also argues that as regards home industries generally, the natural preference is so strong that capital will not be sent abroad in any way until all the home requirements are satisfied. Here, again, the low yield on home investments, and the relatively low profits of home trade, seem to show that it is only the surplus capital that is exported.

It must be noted, however, that Adam Smith himself always introduces the important proviso that it is only "upon equal or nearly equal profits" that

people will prefer those employments of capital which are most advantageous to the nation.

§ 11. Difficulty if Foreign Trade gives Higher Profits.

But the question arises: What if these less advantageous employments offer considerably higher profits? The individual thinks nothing of the national advantage of the employment of productive labour, as Adam Smith has so emphatically declared.

This difficulty is met by Adam Smith to some extent in dealing with the natural development of the trade with the colonies.

Trade with the British colonies in North America was an example of a very distant trade in which the returns of the capital employed were very slow; that is to say, according to Adam Smith's test of advantage, it was one of the least advantageous employments of the national capital (i.e. to the home. country). But he says capital would only be drawn into this distant and uncertain trade if it were attracted by a very high rate of profit. If, however, under natural conditions a very high rate of profit is obtainable from the purchase and sale of any kind of goods, that shows the price of these goods is higher than it should be according to the natural conditions of demand as compared with other things of the same kind. He argues, therefore, that in the circumstances of the society this high price for the colonial produce shows that the trade is understocked. If, then, under 1 See below, Chapter XIII. § 15, on the advantage to the colonies.

the attraction of this high profit more capital were drawn into this trade prices would fall and the home producer who uses colonial raw materials would gain. The raw materials obtained from the colonies at the cheaper rates would be worked up by the home manufacturer, and a greater surplus would be available for export. This extension of the export trade would in turn lead to the increase of imports of things for which there was a demand for home consumption.

§ 12. Reference to Experience.

As usual in this argument Adam Smith was influenced by the actual conditions of British trade. In the eighteenth century, as Dr. Cunningham has so ably shown,' the progress of manufactures in general was checked by the dearth of raw materials. For these materials it was necessary to open up new sources of supply in distant lands.

This argument seems even stronger under present conditions. Our principal imports are articles of food and the raw materials of manufacture. The countries that supply these things are largely financed by the export of British capital. The high rate of profit obtainable through this application of British capital shows that prices are still higher than is necessary. The rubber industry gives a good illustration. to the development of new uses for this material the price is high, profits are high, and British capital is being attracted to rubber plantations in distant lands.2 1 Op. cit. vol. ii. p. 495.

Owing

2 September 1909, plantation rubber sold at 9s. 7d. per lb., the average cost being reckoned at 1s. 6d. to 2s.