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imports of our competitors show their demand for the raw materials of manufacture to be expanding faster than our demand.

Again I think the facts could scarcely be worse even with regard to imports. The most optimistic judgment that the Cobden Club can draw for us from its own tests is that it may be a few decades yet before we fall into the second-class position with respect to total trade and shipping. The third great department of the inquiry touches of course the home market. As to this we shall not possess the same plain data for comparison until Professor Hewins has reported upon the labours of the Tariff Commission. But here again we can make without the slightest fear of contradiction some broad assertions of the most disquieting kind. Stating them as before we say :

(1) That America and Germany in the last twenty years have developed their manufacture without sacrificing their agriculture. Their economic system is absorbing year by year a far greater increase of population than that for which we are able to find employment under the laissez faire system. (2) Every important British industry has weakened in comparative position during the last twenty years, and is still weakening.

(3) In the manufacturing industry, for which we possess the greatest natural aptitude-I mean the iron trade-we have sunk to the third place. To put it that way does not show the full seriousness of the matter. Again, I will not trouble you with the figures, but what they will show is that, in 1880, we still made nearly as much pig-iron as the rest of the world put together, twice as much as the United States, three times as much as Germany. Now we have been immeasurably distanced by the States. We were finally and far outstripped last year by the Fatherland. Our output, which was larger a couple of decades ago than that of both these countries combined, is now only a quarter of their combined production. They are bound to pour their surplus of iron and steel into our market, just as they poured in their surplus of corn and sugar, and the iron trade is bound to be wrecked just as our agriculture was swamped. This fact alone would mean that the centre of our industrial line is being driven in before our eyes, and that we have reached the critical point in the economic life of England. We can sum up the whole matter with regard to the home market and national production in this way. America and Germany have increased their manufacturing output beyond

comparison more rapidly than we have. Exclusion from their markets has restrained our output. Access to this market has promoted theirs. But-and here we come at once to the foundation principle of constructive economics-the larger the output the lower the cost; the larger the output the larger and cheaper, relatively, the export surplus. The larger and cheaper the surplus the more they will dump if this market remains open, and the cheaper they will dump. Look at it as we like, and we shall see that laissez faire promotes the production of our rivals and restricts our own. It claims the name of Free Trade, and produces the characteristic effect it attributes to Protection. Free imports have in reality introduced a more far-reaching check upon British trade and industry than the restrictions Cobdenism removed when it swept away the whole of our historic policy, the good and bad together, the parts of it that had become a clog upon our commerce as well as the parts of it which ought to have been retained as a safeguard and a stimulus. In 1846 everything was secure after three centuries of ancestral stupidity; in 1904 everything is jeopardised after sixty years of concentrated wisdom and enlightenment.

*

We shall find this contrast to be due largely to the fact that before the laissez faire era, statesmen never forgot that in political economy the political comes first. Laissez faire attempted political economy with the politics left out.

IV. THE THEORY OF NATIONAL DEVELOPMENT

The classical economists sincerely believed that they were the people, and that wisdom should die with them. It is important to examine their principles, and to probe the errors of thinking which led their expectations to miscarry. Cobden is justly blamed for his false prophecies because they arose almost entirely from the false principles of that buoyant and vigorous empiric.

Upon the theory of free imports our case ought to be that of Eclipse first and the rest nowhere. The Protectionist nations ought to have taxed themselves to death, under the delusion, as the Americans say, that they were lifting themselves by the straps of their boots. The pernicious thing Protection ought to have * As Dr. Cunningham admirably puts it, the conditions of our industry are now "dictated" to us by foreign nations.

neutralised all America's natural resources; a sickly dependence upon the State should have made the American capitalist languid and the German manufacturer incompetent. If Germany has superior technical education, if her whole industry, as we are told, is more intelligently organised than ours, the first result should have been to expose to Germans the evil of their ways and to wean them from perverted ingenuity in fighting against their own interests. German imports ought certainly to have declined when they adopted the tariff and stopped British dumping. Their exports, upon the famous principle of balance, should have declined with the imports. In the home market, Protection ought to have meant limited consumption and reduced production. The healthy pressure of unlimited foreign competition, on the contrary, should have kept the British manufacturer strung up to the highest pitch of superior activity and intelligence. The more The more our rivals disabled themselves by the so-called restrictive system, the more our trade ought to have bounded. We ought to have swept our competitors long since out of every neutral market in the world.

Such was the prophesied result. The actual picture presents an unsatisfying substitute. We shall most clearly grasp the principles of constructive economics by showing what were and are the fallacies of destructive economics. They can be compressed into a single sentence. The classical economists, like our contemporary Cobdenites, forgot the fundamental distinction between raw material and manufacture; they never made and never attempted to make a thorough analysis of foreign trade in its competitive aspect; they almost ignored the fact, for us gigantic, that foreign trade had a competitive aspect; they advocated the same treatment for competitive and non-competitive imports; they no longer made any real distinction between the things that are partly destructive and the things that are wholly and entirely beneficial; and, far above all, the laissez faire school, turning their back upon the whole history of their own country, overlooked the ability of States pursuing a positive policy of economic development to create competitive power where it had not existed. Created aptitude in the modern world is as conspicuous a factor as natural aptitude.

Hence the code of orthodox dogma that we are bound to criticise with profanity. Take first the idea of laissez faire itself with reference to foreign trade. This idea finds its best expression in a statement attributed to Lord Grenville, which I have taken from a famous protest in 1815 against the Corn Laws. "Public prosperity," it says, "is best promoted by leaving uncon

trolled the free current of national industry." Fair words! The Cobden Club thinks that something has been done to realise them. But it takes two to make a Free Trade bargain, and other countries have always refused to strike one with us since the competitive era began. In other words, it takes two to remove restrictions upon exchange-that is, upon the "current of national industry" flowing out into the channels of foreign trade. It takes two to set that current free. Free imports into this market have enabled foreign Protection to develop with impunity, with the result of checking the sale of British goods abroad, and sending competitive imports here to check the sale of British goods at home-a double check through foreign legislation upon the output of British goods. Foreign tariffs acting directly upon this market through indiscriminate free imports exert a very powerful influence upon the operations of British capital and industry; which are being gradually forced out of the more natural into less natural channels. There is no laissez faire in foreign trade. The system we call laissez faire is simply one which leaves foreign restrictions free to act most adversely upon The paradox of laissez faire is that, by comparison with our protected rivals, our competitive power is knee-haltered.

our commerce.

Thus, free imports are the principle of least development because they limit our market to the utmost, and at the same time expand the markets of our competitors. America and Germany, while keeping a firm grip of their home markets, enjoy in neutral markets the most-favoured-nation clause just as we do, and get more practical benefit out of it, since it is they who in the course of their tariff negotiations actually adjust the most-favourednation clause to suit their own trade. They enjoy also the absolute freedom of this vast consuming centre. They have monopoly at home, equality abroad, and an enormous privilege in this market, for which they concede nothing corresponding. Again, let us note that political economy wholly ceases to be a dismal science, and rivals the gay one when the chief Protectionist Powers enjoy most Free Trade, having their imports mainly free and a large proportion of their exports free also.

Let me state here a first positive principle. We cannot claim to force our goods upon foreign nations who desire to manufacture their own just as we do. For this reason the half-way house of retaliation must ultimately be advertised to let. We cannot get Free Trade for Free Trade. That we know. "Retaliation," therefore, must come to the alternative-tariffs for tariffs. Our first constructive principle is that when foreign nations use their

VOL. XLIII

35

power to contract our market abroad, we must, to begin with, use our power to extend our market at home.

This brings us at once to another of the celebrated sophistries. I quote it from the great petition* drawn up by Tooke and presented by the City of London in 1820. It tells us: "The maxim of buying in the cheapest and selling in the dearest market, which regulates every merchant in his individual dealings, is strictly applicable as the best rule for the whole nation." That celebrated form of words has simply no application to the conditions of British business. It is more and more a question to-day of buying in the cheapest market and selling in the biggest, upon the principle of small profits and largest transactions. It is the foreign manufacturer who buys in the cheapest market and sells in the biggest. Have our Cobdenites ever considered the full meaning of the fact that raw material is free under every scientific tariff? Nearly half the imports, roughly speaking, of America, half the imports of Germany, far more than half in the case of France, consist of raw material; those Powers enjoy free imports of all that can develop a trade without hurting any other trade. Thus American manufacturers buy their raw material as cheap as we do. The Germans also buy their raw material as cheap and their labour cheaper. But when it comes to disposing of the finished product and selling it in the widest market they have the conquering pull. America has the whole of her own market and ours-free sale among 120 millions of people. Germany has the whole of her own market and ours-free sale among 100 millions of people. Our only field of free sale is what we share with the other two in this market of 40 millions.

We can no longer afford to give America and Germany points in the game; and to secure equal opportunity for British capital and labour to compete with the protected nations, we must continue to admit raw material as freely as they do, but must restrain the sale of their manufactures in order to increase the sale of

our own.

A third principal fallacy, stated by John Stuart Mill, is that either the consumer must bear the tax owing to a rise in prices or else Protection will not protect. "In the case of manufactured goods," says Mill, "the doctrine of taxing for revenue and protection simultaneously involves a palpable inconsistency. . . . The object of the duty as a means of revenue is inconsistent with its affording incidentally any protection. It can only operate its protection in so far as it prevents importation, and to whatever degree it prevents importation it affords no revenue." But this is * See Appendix.

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