disapproving of a customs revenue, he proposed that the British system of customs should be extended with some modifications to the rest of the empire, so that a great customs union might be established with free trade within its borders.1

A careful examination of the Wealth of Nations also shows that Adam Smith was not opposed to the customs duties of a kind and degree that would give some advantage to the home producer over his foreign competitor. He states that when an excise duty is imposed in the home country a corresponding customs duty ought also to be imposed, but he does not state in the same emphatic manner that corresponding to every customs duty there ought to be an excise precisely equivalent. On the contrary, in several passages, he indicates that some advantage might properly be given to the home producer.

Writing of the customs duties that prevailed in his day he says: "The taxes which at present subsist upon foreign manufactures have, the greater part of them, been imposed for the purpose not of revenue, but of monopoly, or to give our own merchants an advantage in the home market. By removing all prohibitions and by subjecting all foreign manufactures to such moderate taxes as it was found from experience afforded upon each article the greatest revenue to the public our own workmen might still have a considerable advantage in the home market; and many articles which at present afford no revenue to government 2 See below, Chapter XVI.

1 See below, Chapter XIV.

and others a very inconsiderable one might afford a very great one." 1

It is clear from this, and from similar passages, that Adam Smith had no objection to customs duties not exactly balanced by an excise, provided that such duties yielded a considerable revenue; if they did yield such a revenue they could only do so by entering into the home market and destroying the monopoly of the home producer; and it was against this monopoly that his attack was directed.

The opening sentences of the chapter now under consideration (Bk. Iv. ch. ii.) confirm this view. "By restraining either by high duties or by absolute prohibitions the importation of such goods from foreign countries as can be produced at home the monopoly of the home market is more or less secured to the domestic industry employed in producing them.' This was the system which prevailed in England at the time and this is the system which he attacked; and it is universally admitted that the great evil of protection at present is this evil of monopoly.

Yet even on this point the opinion of Adam Smith is by no means unrestrained. Writing of the protection of infant industries he says: "By means of such regulations, indeed, a particular manufacture may sometimes be acquired sooner than it could have been otherwise, and after a certain time may be made at home as cheap or cheaper than in the foreign country." Provided there is a sufficiency of competition in the home country-and competition means the absence 1 Book v. chap. ii. art. iv.

of monopoly-restraints on imports lose one of their worst effects.1

§ 6. Adam Smith's Treatment not Abstract
or Hypothetical.

It must be remembered that Adam Smith was never content merely with abstractions and hypotheses, but always sought for verification in the actual experience of nations and especially in the actual practice of his own times and of his own country. He found in existence a complicated mass of restrictions and prohibitions the immediate aim of which was to secure the monopoly of the home market to the home producer. He set himself to prove that in general the whole system was either useless or hurtful for the attainment of the ultimate object-this ultimate object being the promotion of native industries and the increase of the national wealth. It was with protection of the most extreme kind that Adam Smith had to deal with "high duties and absolute prohibitions" intended not for revenue, but for the effective exclusion of rival commodities from the home markets.

Accordingly, it is the method of monopoly which he attacks and not the principle of the encouragement of home employment.

§ 7. Gross and Net Revenue.

Ricardo complains that Adam Smith constantly exaggerates the importance of gross revenue compared

1 Cf. Hamilton, quoted below, Chapter XVI.
2 Principles of Political Economy, chap. xxvi.

with net revenue; but the exaggeration, if it be such, may be explained by the fact that Adam Smith was concerned to show that the masses of the people lived on the consumption of the gross revenue and that it was the aim of the monopolists to secure a maximum net revenue. In general, in the case of monopoly, the maximum net revenue can only be attained by the contraction of the gross revenue.

These are now the commonplaces of economic theory. But the application of any theory to practical cases is never commonplace. Suppose, for example, that it is admitted that under present conditions a certain amount of unemployment in England may be ascribed to the displacement of English labour by the admission of foreign goods. This means that capital is not applied to the same extent to this form of industry; and the proximate reason is that it does not obtain enough profit. Accordingly, the first condition for the restoration of the industry is that it shall be made profitable. The primary object then of protection must be profit, although the ultimate object may be the wages of labour.

In the recent debates on the new tariff in the United States the ostensible aim of the "reformers was to fix the duties in such a way that having regard to the cost of production in competing countries a reasonable profit should be left to the American producer. This was the practical test. The consequent employment of labour was taken for granted or not considered at all. In Australia, where the labour

party has more political power, attempts have been made in recent legislation to secure the advantages of protection directly to labour.

§ 8. Profit on Capital requisite for the Employment of Labour.

In treating of the relative advantages of employing capital in different modes and in emphasising the superiority in this respect of the home employment Adam Smith always introduces the proviso "on equal or nearly equal profits." The employment of home labour is the ultimate test of advantage, but a necessary condition is that the capital should get its profits. If capital cannot obtain the usual or minimum profits in the home country either it will not be accumulated and reproduced or it will be sent abroad. Accordingly, the only way of giving any artificial encouragement to the employment of labour within the country is to give an artificial encouragement to the retention of capital. That means, in the common phrase, to make the employment of the capital remunerative. In this way every protective system, however loudly it may proclaim the interests of labour, must in the first place look to the increase of profit. If an industry is to be maintained in any country secure against foreign competition the profits must be secured as the primary condition.

If the necessary profit is secured by protection it can only be obtained by raising the price. But this rise in price, if it yields the least exceptional profit, increases natural competition within the country.