In a few years, as the result, the rubber will fall in price, and there will be a corresponding expansion in the various industries in which it is used. In the meantime also the higher profit directly increases the national dividend and also stimulates indirectly the creation of more capital. In this way the employment of home labour is directly encouraged by the growth of new industries, and the home country in spite of, or rather in consequence of this export of part of its capital, is kept fully supplied with capital for all possible home requirements.

§ 13. Summary of Real Advantages of Foreign

Trade.

To summarise the argument: Adam Smith contends that capital is not exported under natural conditions for employment abroad until home needs are satisfied; the capital that goes abroad is an overflow. If such an overflow were not possible the capital would not be created. Again, if we look to the export trade considered merely as the exchange of home goods against foreign goods, the goods exported are in general of the nature of a surplus for which there is no demand in the home markets. This surplus is exchanged against the corresponding surplus of other nations with a mutual gain in utility.

In this way the productive powers of the home country are increased; there is, in the words of Adam Smith, an augmentation of industry. There is also, an increase of consuming power on the part of the masses of the people. These are the two great real advantages of foreign trade.

So far, the question has been considered from the point of view of exports, which always means the export also, or the employment out of the country, of a certain amount of capital.

Up to the time of Adam Smith statesmen had tended to overestimate the advantages of large exports mainly because they supposed that the result would be an increase of treasure and thereby an increase of national power. The export trade was specially, stimulated particularly the trade to the countries with which the balance was supposed to be favourable. Adam Smith showed that such artificial encouragement was not desirable. To some extent the ideas which he attacked have survived and remained operative down to our own times, e.g. bounties on exportsopen and concealed-are still given, to the detriment of the nations concerned, as the history of the sugar bounties shows; but no nation frames its policy as regards exports simply with the view of increasing the supply of metallic money.

§ 14. Adam Smith's Attitude not purely

Negative.

But although Adam Smith maintained that the export trade did not need special and artificial encouragement, his attitude was by no means purely negative. If any country by prohibitions or high duties prevents the importation of some of our manufactures it is a matter worthy of deliberation whether we should not impose retaliatory duties with a view to compelling them to open their markets.

"There may be good policy in retaliations of this kind when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods." 1

There can be no question here of the admission by Adam Smith of the principle, although it is true that in the following sentences he shows the difficulties of carrying out the policy mainly owing to the imperfections of the statesmen to whom the negotiations must of necessity be entrusted. If, however, the statesmen are strong enough and the inconveniency is really only temporary, there is no doubt that Adam Smith would approve of retaliation as a practical means of putting the export trade on a fair footing.2 In showing that the export trade needs no special favour Adam Smith relies mainly on his central idea that the employment of capital at home is more advantageous.

§ 15. Extension of the Argument on Home

Trade to Imperial Trade.

This idea has an important bearing on one of the practical controversies of the present. As will be shown in detail later on Adam Smith was not only a nationalist but an imperialist.3

It is only the natural development of his central

1 See below, Chapter XI. § 14.

3 See Chapter XIV.

2 Ibid.

idea to say that the employment of capital within the empire is more advantageous than its employment in foreign states. From this point of view exports to the British dominions and possessions are on the same footing as home trade. The permanent investment of British capital in a foreign state e.g., in a loan to its government for war or other unproductive purposes is, on Adam Smith's showing, the least advantageous of all the employments of the capital of the country. Even if the capital is employed by the foreign state productively, the share of the advantage obtained by this country is relatively small, and practically the gain is confined to the interest that is obtained. If, however, the same amount of capital had been sent to some part of the empire the industry, and with it the power of the empire, is so much increased.

But we certainly cannot say that British capital naturally flows into the various parts of our widely extended empire and satisfies all their requirements before it overflows into foreign countries.

The mobility of capital and its retention within the empire would be greatly increased by an imperial union with free trade between the constituent parts, i.e. if the empire became de facto the "home" country.

This point will come up for consideration in connection with the question of colonial policy, but in the meantime the central position of Adam Smith must be examined from another point of view.

G

§ 16. Distinction between Active Export Trade and Passive Import Trade.

So long as we export surplus goods which would not be made at home unless there was a foreign market for their disposal, and so long as we import in return things which we cannot make at all or only at a disadvantage, there is the augmentation of industry and increase of consuming power that are claimed by Adam Smith as the real advantages of foreign trade.

But suppose, that instead of beginning with an active export trade on our part, we begin with a trade in which we are passive and receive the imports of the foreigner. Is it not possible that these foreign imports may displace some home industry and convert a home trade into a foreign trade of consumption?

This leads up to the famous case of protection to native industries; and having regard to Adam Smith's central idea so often emphasised, the answer is by no means so simple as the supporters of dogmatic laisser faire would imply.