Later Exponents of Free Trade Doctrine

Later Exponents of the Free Trade Doctrine

The arguments for and against free trade following the death of Adam Smith were carried on by men whose names stand high in the ranks of great economists. J. B. Say in France was the first continental follower of Adam Smith to give widespread circulation to Smith's ideas. In addition to popularizing The Wealth of Nations, Say also made some clear observations of his own on the question of trade and the functions of markets. To him, as to Smith, money merely facilitated exchange of goods. It had no value in itself and it created none. Consequently, trade was really an exchange of goods for goods, and every supply of goods gave rise to a demand. Thus trade could be fostered if each nation would increase its own surpluses so that trade could take place. An over supply of goods generally he believed impossible, although scarcity and abundance might occur in particular commodities.

The protection of trade as a government policy died slowly in England, but many aspects of the theory of free trade were worked out in the controversies that accompanied every change in existing legislation. It was through Ricardo's participation in the protest against the Corn Laws that he clearly stated his position on free trade. Before Adam Smith a common principle of the anti-mercantilists was "that it pays to import commodities from abroad whenever they can be obtained in exchange for exports at a smaller real cost than their production at home would entail." This seems almost a truism.

Obviously a nation is not going to engage in trade unless it seems less costly than to produce the commodities at home. Nevertheless, it is usually a different matter to convince a nation that this principle is worth following. Ricardo, in developing an idea which is known in economics as the doctrine of comparative costs was merely restating and amplifying a rule of trade developed much earlier. To make the idea clearer, Ricardo used an illustration which has continued in use ever since. In speaking of trade between England and Portugal he said that if Portugal could produce cloth with the labor of go men and wine with the labor of 80 men, and England could produce the same quantity of cloth with 100 men and the wine with 120, it would be advantageous for these nations to exchange English cloth for Portuguese wine. For by concentrating upon the thing each nation could do with the least effort each had a greater comparative advantage. Thus each nation had more wine and more cloth than it could have had by producing each commodity independently without the benefit of exchange. Ricardo used another illustration to drive home this same point:

Two men can both make shoes and hats, and one is superior to the other in both employments; but in making hats, he can only exceed his competitor by one-fifth or 20 percent—and in making shoes he can exceed him by one-third or 33 percent;—will it not be for the interest of both, that the superior man should employ himself exclusively in making shoes, and the inferior man in making hats?

It was Ricardo's contention that imports could be profitable to a nation even though that nation could produce the imported article at a lower cost. Consequently, it was not true, as some of the early economists had believed, that under free trade each commodity would be produced by that country which produced it at the lowest real cost. Ricardo had a great deal more to say on the subject of trade; but since his ideas were concerned with the money aspects of trade, they will be discussed in the following chapter.

Further elaboration of this method of calculating the advantages of foreign trade was made by John Stuart Mill. In his Essays on Some Unsettled Questions of Political Economy, he discussed the quantities of goods which would be exchanged under a system of free trade. He showed that prices of commodities in exchange would adjust themselves so that the quantities of each article imported would be just sufficient to pay for the article exported. He said that no nation would give more units of commodity A for commodity B than it could produce at a cost equal to that which it could produce B. Thus the law of comparative costs while indicating the advantage of exchange also indicated the limits beyond which exchange was unprofitable.

One of the most tantalizing problems connected with foreign trade was the degree of specialization that would bring the greatest economic advantage. Mill at first held that under free trade complete specialization would take place, but he later modified this idea to take account of the fact that although complete exchange might be advantageous the productive facilities of the producing countries might be such that one country would have to make up for a deficiency of supply by domestic production. Ricardo had made allowance for the fact that complete specialization might not be possible. He claimed that partial specialization might still be profitable. However, extensive discussions have taken place among economists on this point, many of them holding Ricardo in error.

Practical applications of the principles of free trade began to appear in England with the close of the Napoleonic wars. At the beginning of the Corn Law controversy, Thomas Malthus made keen observations as to the effect of high duties upon imported corn. He said that the restriction upon imports caused a greater expense of raising corn in England due in a large part to the "necessity of yearly cultivating and improving more poor land to provide for the demands of an increasing population; which land must, of course, require more labor and dressing and expense of all kinds of cultivation." While this argument was used by agriculturalists to secure greater protection, the net effect was to open the minds of the people to the need for importing cheaper corn. Richard Cobden and John Bright, the recognized leaders of the so-called Manchester school of economic thought, several years later formed the Anti-Corn Law League to combat not only the Corn Laws but trade restrictions generally. Using Malthus arguments, they were able to show a greater advantage to England by allowing foreign corn to enter, which would lower living costs, eventually therefore lower costs of production through lower wages, and allow the concentration of land and men to industrial uses in which England had recognized superiority. The Corn Laws were repealed in 1846, the Navigation Acts were abolished a year later, and by 1860 protection was completely removed from English economic practice.

The English economists took the lead in the battle for free trade, but they received able support at times from Europe. Frederic Bastiat (1801-1850), a French politician who gave serious attention to economic matters, advocated the adoption of free trade as a government policy. His best known work on this subject was a satirical pamphlet purporting to be a petition of manufacturers of candles and wax lights—and all others in any way engaged in the production of lighting equipment—against the sun. Since the sun was the lighting industry's chief competitor flooding the market with light at cheap prices, the petitioners advised the passing of laws requiring the closing of all openings through which sunlight was accustomed to pass. Bastiat introduced a sly dig at the unreasonable animosity against England when he intimated that England had encouraged the sun to shine so brilliantly on France as contrasted with the circumspection the sun "displays toward that haughty island." The early writing of Bastiat indicated a thorough-going support of free trade and opposition to government intervention of any kind save in the interests of justice. His final work, Harmonies Economiques showed him to be less certain as to the degree of freedom from government control that was desirable.
Johann Heinrich von Thunen (1783-1850) is best known among economists for his method of analysis. His principal work, Der Isolierte Stoat, was an attempt to set up an isolated community free from external contacts. In that rarefied situation, von Thunen proceeded to show how the important aspects of economic life operated. For his discussion of trade von Thunen divided his community into two parts, thus showing how exchange benefited both groups. Nevertheless, acquaintance with List's works gave him serious doubts about an absolute free trade position; he recognized, as Adam Smith did, and quoted Smith as an authority, that on occasion government regulation and protection was necessary. Von Thunen began a line of investigation which in modern times has had considerable bearing upon trade, both domestic and foreign. In his ideal community, which was primarily agricultural, he was able to reduce to mathematical precision the location of various crops and the type of agricultural techniques that would be used, depending upon size and distance from the market. This same principle applied to modem industry and transportation presents important aspects of the problem of locating industry in relation to the character of the market.

Although free trade ultimately became the keystone of classical economics, not all economists supported free trade. Indeed, outside of England, while strong groups of free traders were to be found, there were always those who criticized the laissez faire (or the government-let-alone) policy. This non-conformity was a product of different conditions in widely scattered parts of the world. Consequently there was little similarity either in the reasons for opposition or the alternative plans suggested for the control of trade.

Before going further in the discussion it may be well to point out that the opposite of free trade is protection which is usually achieved through the instrument of a tariff, or duty, on imports. Exports in the modern day have seldom been subject to duty; indeed, the American constitution forbids such imposts. Free traders as a rule do not object to a tariff as long as it is for revenue purposes only, that is, as long as it is low enough to allow for competition of foreign goods with domestic products. Protection means a tariff high enough to make the sale price of foreign goods prohibitive in the domestic market.