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A PROJECT OF EMPIRE 
 
MACMILLAN AND CO., Limited 
 
 LONDON • BOMBAY ■ CALCUTTA 
 MELBOURNE 
 
 THE MACMILLAN COMPANY 
 
 NEW YORK ■ BOSTON • CHICAGO 
 ATLANTA ■ SAN FRANCISCO 
 
 THE MACMILLAN CO. OF CANADA, Ltd. 
 
 TORONTO 
 
A 
 
 PROJECT OF EMPIRE 
 
 A CRITICAL STUDY OF THE ECONOMICS OF 
 
 IMPERIALISM, WITH SPECIAL REFERENCE 
 
 TO THE IDEAS OF ADAM SMITH 
 
 BY 
 
 J. SHIELD NICHOLSON 
 
 M.A., D.Sc, F.B.A. 
 
 PROFESSOR OF POLITICAL ECONOMY IN THE UNIVERSITY OF EDINBURGH 
 
 The rulers of Great Britain have, for more than a century past, 
 amused the people with the imagination that they possessed a great 
 empire on the west side of the Atlantic. This empire, however, has 
 hitherto existed in imagination only. It has hitherto been, not an 
 empire, but the project of an empire ; not a gold mine, but the project 
 of a gold mine. — Adam Smith. 
 
 OF 
 
 MACMILLAN AND CO., LIMITED 
 
 ST. MARTIN'S STREET, LONDON 
 
 1909 
 

 ^PliEGKEu 
 
PREFACE 
 
 The question of imperial defence has suddenly 
 become of pressing importance, and has directed 
 public attention to other aspects of imperial union. 
 The object of the present book is to reconsider the 
 economic problems involved in their due order and 
 proportions. 
 
 And first of defence : So long as this country 
 could maintain the undisputed command of the sea 
 we could afford to wait in case of need for the aid 
 of the overseas dominions. But recent events have 
 shown that this country ought no longer to attempt 
 to provide from its own resources for the naval 
 defence of the whole empire ; and in a great naval 
 war there would be no time to call up the ultimate 
 or potential reserves of men and money from the 
 ends of the earth. 
 
 The self-governing colonies have grown into self- 
 conscious nations, and the recent conference has 
 shown that they recognise that the primary duty of 
 every nation is to provide for its own defence against 
 foreign attack. 
 
 201688 
 
vi A PROJECT OF EMPIRE 
 
 This duty, however, may be performed in two 
 different ways or according to two different ideals ; 
 which may be termed the national and the imperial. 
 On tlie first plan each dominion or commonwealth, or 
 state or nation, would look mainly to its own defence 
 and to the trade routes in which it is most interested. 
 The ultimate ideal would be effective national inde- 
 pendence ; and imperial defence would be resolved 
 into a friendly alliance between the different nations. 
 
 On the second plan each constituent state would 
 contribute to the defence of the whole empire accord- 
 ing to some definite scheme ; as, for example, by the 
 assignment of certain revenues for imperial purposes, 
 or by a payment in proportion to population, or by 
 some combination of these methods, as in the case 
 of the German empire, where imperial revenues are 
 supplemented by the matricular contributions of the 
 states. 
 
 On the first plan, if we look to the natural growth 
 of the British empire, in the course of a century — a 
 short period in the history of nations — there would 
 probably be five cle facto independent nations, con- 
 nected only by nominal ties of sovereignty, and 
 relying on conferences for the exchange of ideas and 
 the acceptance of informal agreements. In such a 
 scheme India, the Crown colonies, the protectorates, 
 and other " appendages " would be considered as 
 special " possessions " of the United Kingdom which 
 would alone bear, as at present, the supplementary 
 
PREFACE vii 
 
 costs of defeuce and administration. In the course 
 of time some of these possessions might become de 
 facto independent, or be transferred to an adjacent 
 "colony." 
 
 On the second plan there would be a union as real 
 as that of the constituent parts of the United States 
 or the German empire. In this scheme the " appen- 
 dages " would be de facto possessions, not of the 
 United Kingdom but of the British empire. 
 
 It is obvious that a real imperial union of this 
 kind would involve the institution of some form of 
 federal government, in which the constituent states 
 were represented. It is beyond the range of the 
 present inquiry to consider the political difficulties 
 involved. It is clear, however, that a real federal 
 government of this kind, although established in the 
 first place for defence, would naturally be used for 
 the furtherance of other objects. Of these secondary 
 objects of political union the most closely connected 
 with defence is the growth of wealth, population, and 
 organisation. And for this economic development a 
 common defensive policy would naturally be supple- 
 mented by a common policy, both as regards trade 
 within the empire, and also as regards commercial 
 relations with foreign states ; and in both cases the 
 ruling idea would be the economic development of 
 the empire as a whole. 
 
 For this further development free trade within the 
 empire seems to be one of the fundamental require- 
 
viii A PROJECT OF EMPIRE 
 
 ments ; especially if the appeal is made to recent 
 experience in empire-making. Internal free trade 
 (i.e. between the constituent parts of the empire) is 
 consistent either with external protection of the most 
 extreme kind or with the complete absence of differ- 
 ential duties or with any via media. In the United 
 Kingdom, for example, free trade between England, 
 Scotland, and Ireland was established whilst the 
 home market was protected against the foreigner by 
 " high duties and absolute prohibitions " ; and no one 
 doubts that for the United Kingdom as a whole, this 
 internal free trade has been most advantageous. 
 
 On this point the history of the United States of 
 America is also most instructive. The thirteen states 
 united to gain their independence ; and for six years 
 after the independence was gained they celebrated 
 their freedom by insisting each for itself on its own 
 sovereign power in making commercial treaties and 
 imposing customs duties — sometimes against one 
 another. The Constitution of 1789 vested this 
 power in the federal government j the thirteen com- 
 mercial " nations" became one commercial " nation"; 
 and with the accession of new states this internal free 
 trade has been extended over vast territories.' 
 
 Internal free trade within the empire would be 
 accompanied naturally, though not necessarily, by 
 the acceptance of common principles and common 
 action in foreign commercial relations. From the 
 
 ' See below, Cliaptor XVI. 
 
PREFACE ix 
 
 point of view of the power of the empire as a whole, 
 such common action would have great advantages, 
 e.g., in making commercial treaties or, in case of 
 need, in retaliation. 
 
 The simplest solution would be a uniform customs 
 system, but uniformity is not essential either to free 
 trade within the empire or to a common commercial 
 policy. The ideal of internal free trade would be 
 attained if the colonies were to carry their preferences 
 to the extreme of reducing the duties on the products 
 of the rest of the empire to zero ; although the 
 United Kingdom retained its free trade system, and 
 the colonies in each case its own protective system 
 against the rest of the world. 
 
 To insist that internal free trade {i.e. within the 
 empire) can only be established if, as a necessary 
 preliminary, this country adopts protection, or the 
 colonies adopt external free trade, is to put needless 
 and probably insuperable difficulties in the way. At 
 the same time, the advantages of a real commercial 
 union of all parts of the empire, based on internal 
 free trade and external common policy, are so great 
 that the question ought to be considered from the 
 point of view, not only of the constituent parts, but 
 of the whole. Free trade and protection are only means 
 to the achievement of national and imperial aims. 
 
 Such are the fundamental questions involved in 
 the economics of empire : defence, internal commercial 
 relations, and external commercial policy. 
 
X A PROJECT OF EMPIRE 
 
 In dealing with these questions, I have taken as 
 the basis the treatment by Adam Smith ; for several 
 reasons. The Wealth of Nations was written under 
 the influence of the events which led up to the separ- 
 ation of the American colonies and the acquisition of 
 India. Then, as now, problems of empire were of 
 urgent importance ; then, as now, trade and trade 
 policy were intertwined with questions of defence 
 and sovereignty ; then, as now, we were faced with 
 the alternatives of real union or disintegration ; then, 
 as now, we had not an empire, but the project of an 
 empire. It is admitted on all sides that Adam Smith 
 was the greatest of economists, but the stress laid on 
 certain parts of his work has caused others to be 
 neglected ; and in this over- emphasis and neglect the 
 sense of just proportion has been lost. No other 
 writer has approached him in the breadth of view 
 and in the appreciation of the different elements 
 involved in the economics of imperialism. 
 
 The popular idea that Adam Smith was cosmo- 
 politan in his moral and political sympathies is 
 exactly the reverse of the truth. He was intensely 
 nationalist ; and his nationalism was founded upon 
 general principles that are specially vindicated in the 
 last edition of his 'Theory of Moral Sentiments} His 
 nationalism grew with the expansion of the nation 
 until, as the logical conclusion of liis great work, we 
 have the most thorough scheme of British imperial 
 
 ' See below, Chapter II. 
 
PREFACE xi 
 
 union ever propounded. Both politically and econo- 
 mically this imperialism was founded on ideas that 
 have their roots far back in English history. Politi- 
 cally Adam Smith looked to the development of 
 the British constitution ; with representatives from 
 every part of the empire, and with the monarchical 
 and democratic elements growing in due propor- 
 tion. Economically his ideal was that the empire 
 ■ should furnish one immense internal market for 
 the produce of every part of it ; and that for im- 
 perial needs certain taxes (of which taxes on land 
 and customs duties are of special interest) should be 
 levied throughout the empire on a uniform system. 
 
 The climax of the argument of the Wealth of 
 Nations is an appeal to British statesmen, and to the 
 British people both in the mother country and in the 
 colonies to convert the project of empire into the 
 reality. 
 
 Equally erroneous are popular ideas on Adam 
 Smith's treatment of free trade and protection. 
 Here also his point of view is national and imperial 
 and not cosmopolitan. He emphasises more than 
 any subsequent writer the importance of the home" 
 market, and the advantage of the employment of the 
 capital of the country within the country ; so strong 
 indeed is his view on the encouragement of home 
 labour and home industries that he has been claimed 
 by protectionist writers as the founder of protection. 
 And yet, as all the world knows, it was to Adam 
 
xii A PROJECT OF EMPIRE 
 
 Smith more than to any statesman that the adoption 
 ^, of free trade by Britain was due ; he it was who gave 
 the ideas with which other people worked. Unfor- 
 tunately, in simplifying these ideas for popular 
 consumption the setting was cast aside, and with 
 the setting many of the ideas also. Free trade was 
 converted into a kind of religious dogma far .removed 
 from the principles of the original author. 
 
 Of the lost ideas of Adam Smith two may be here 
 cited. One is the importance of the local habitation 
 y' of the capital during the process of consumption and 
 reproduction. The popular idea that the employ- 
 ment of capital that is most profitable to the 
 individual (whatever the mode or place) is of 
 necessity also the most advantageous to the nation 
 is utterly opposed to the central doctrine of Adam 
 Smith. From his standpoint it is only the surplus 
 of a nation's capital that can be exported with 
 advantage to the nation. The home requirements 
 should be first met before capital is sent abroad. 
 Capital may be sent abroad for temporary employ- 
 ment in foreign trade or for permanent investment, — 
 even the interest being reinvested, — and between these 
 two extremes there are endless degrees in the absentee- 
 ism of capital. Of these difi'ereuces in the national ad- 
 vantage of employing capital in difi'erent modes Adam 
 Smith takes account in a chapter which might well be 
 called the forgotten chapter of the Wealth of Nations} 
 
 ' Bk. II. chap. V. See below, Chapter VI, 
 
PREFACE xiii 
 
 The other lost idea of special interest at present is as 
 regards the mobility of capital. In what is called the 
 pure theory of foreign trade it is assumed that between 
 different " economic nations " there is no mobility of 
 capital or that the mobility is so imperfect that for 
 theory it may be neglected. Adam Smith, on the 
 other hand, held the view confirmed by experience 
 (and it may be said in harmony with the " modern " 
 principle of continuity) that foreign trade can only 
 be carried on by sending a certain amount of capital 
 out of the country. 
 
 These lost ideas have again been forced on the 
 public attention by two significant facts : first, the 
 enormous investments of British capital in foreign 
 states ; and secondly, the increasing tendency in 
 recent years in the commercial policy of other 
 nations towards the protection of native industries. 
 
 The dogmatic simplification of free trade has had 
 the result that many people think they have made 
 out a case for protection when they have partially 
 re-discovered the ideas which Adam Smith elaborated, 
 to the verge of paradox, on the advantage to a 
 country of the employment of its own labour by its 
 own capital. Always bearing in mind the supreme 
 importance of the home employment of capital, 
 Adam Smith tried to show that "high duties and 
 absolute prohibitions " were either useless or hurtful. 
 But he did not rely on abstractions and hypotheses ; 
 he might have said with his revered Newton hypo- 
 
xiv A PROJECT OF EMPIRE 
 
 theses non Jingo ; so constantly did lie appeal to 
 facts and experience. At this time of day also, the 
 protectionist and free trader, unless they wish to 
 engage in a barren exchange of truisms, must be 
 content to follow his example. And, perhaps, at the 
 present juncture the reference of the case to a strong 
 Royal Commission would be the most effective way 
 of making the appeal to experience. 
 
 In taking as the basis of the present survey the 
 ideas of Adam Smith, there is no intention of any 
 appeal to authority ; to search his scripture for texts 
 which shall solve modern problems would be to miss 
 entirely the spirit of his method. Accordingly, 
 throughout, an endeavour has been made not only to 
 illustrate by modern instances, but to express his 
 ideas in modern equivalents. 
 
 In spite of the changes in the means and con- 
 ditions of war, the military writer still appeals to the 
 ideas and methods of the great soldiers and admirals 
 of the past ; and in this sense and in this sense only, 
 an appeal is made to the authority of the greatest of 
 all economists. 
 
 Incidentally, however, it seemed desirable to show 
 the way in which Adam Smith himself applied his 
 ideas to the similar problems of his own day, and 
 although that was not the primary intention the 
 present work may be considered on one side as a 
 critical study of the Wealth of Nations ; whilst on 
 the other it deals with present problems. 
 
PREFACE XV 
 
 In the final chapter I have given my own opinions 
 on the ultimate aims of imperial union and on the 
 methods by which the ideal may be approached. 
 These opinions are in some respects difi'erent from 
 those expressed in the chapter on Colonies and De- 
 pendencies in my Principles of Political Eco7iomy} 
 The difi'erence is in the main one of emphasis, and 
 the change in emphasis is due to the change in con- 
 ditions. Now that imperial organisation for defence 
 has become a necessity, imperial union for other 
 purposes may be an advantage. 
 
 J. S. N. 
 
 University of Edinburgh, 
 December 1909. 
 
 Note. — The references in the notes without special 
 title are to the Wealth of Nations. 
 
 ^ Vol. iii. Bk. v. chap, xix., first published in 1901. In an intro- 
 ductory essay prefixed to an edition of the Wealth of Nations published in 
 1884 (Nelson), I called attention to the importance of Adam Smith's ideas 
 on the employment of labour and on imperialism. See also my Essay on 
 Tariffs and International Commerce in the volume on Britannic Confederation 
 (1892). 
 
CONTENTS 
 
 CHAPTER I 
 The Personality and Breadth of View of Adam Smith 
 
 PAGE 
 
 § 1. Personality and Character .... 1 
 
 §2. "The Theory of Moral Sentiments" . . 3- 
 
 § 3. Humanist and Nationalist .... 5 
 
 CHAPTER II 
 
 The Nationalism of Adam Smith 
 
 § 1. The Individual, the Family, and the Nation . 7 
 
 § 2. Adam Smith not Cosmopolitan ... 9 
 
 § 3. Of Universal Benevolence . . . .11 
 
 § 4. Two Popular Errors . . . .12 
 
 § 5. Defence of more Importance than Opulence — the 
 
 Navigation Act . . , . .13 
 
 § 6. National Military Training as Part of the 
 
 Education of Youth . . . .15 
 
 § 7. The Soldier and the Statesman Compared . 16 
 
 § 8. Adam Smith and Burkj; — Idea of Historical 
 
 Growth . . . . . 18- 
 
 § 9. Resume ...... 21 
 
 CHAPTER III 
 Of Labour and Capital 
 
 § 1. Labour the Dominant Conception in the " Wealth 
 
 of Nations " . . . . 23 
 
xviH A PROJECT OF EMPIRE 
 
 PAGE 
 
 § 2. Of Productive and Unphoddctive Labour . . 24X 
 
 § 3. Importance and Variety of Unproductive Labour . 25 • 
 § 4. Capital — Sustaining and Auxiliary , . .27 
 
 § 5. The Relations of Capital and Monet . . 28 
 
 .§ 6. Increasing Importance of the Money Attribute op 
 
 Capital ...... 30 
 
 § 7. Circulating and Fixed Capital . . 31- 
 
 § 8. Mental or Immaterial Capital . • . 32 '' 
 
 CHAPTER IV 
 
 Of the Relations of Labour and Capital 
 
 § L Labour and Capital in Relation to the Annual 
 
 Produce ...... 34-^ 
 
 § 2. Meaning of Parsimony or Saving . . . 36 / 
 
 ,§ 3. The Dependence of Labour on Capital . . 37 / 
 
 § 4. Resume of Adam Smith's Ideas on Labour and ' 
 
 Capital . . . . • .38 
 
 § 5. Complexity of Industrial Relations . . 40 ■ > 
 
 § 6. Conflict possible between Individual and Public J 
 
 Interests . . . . . . 41 ^ 
 
 § 7. Weakness of Dogmatic Free Trade owing to \ 
 
 Neglect of Adam Smith's Distinctions . . 42 y 
 
 CHAPTER V 
 
 Of the Different Employments of Capitals 
 
 § 1. Four Modes of Employing Capital . .44 
 
 § 2. Trade Part op Production . . . .45 
 
 S5 3. Capital employed in Agriculture most advanta- 
 geous TO the Society . . . .46 
 }^ 4. Other Social Advantages of Agriculture . . 47 
 § 5. Distinction between Profit and Advantage 49 
 
^^6. 
 
 §7- 
 §8. 
 
 §9- 
 §10. 
 
 §11- 
 
 §12. 
 
 §13. 
 
 CONTENTS 
 
 Home Trade more advantageous than Foreign 
 Trade ...... 
 
 Imports paid for by Exports 
 
 Varieties op Foreign Trade and their relative 
 Advantages ...... 
 
 General Summary ..... 
 
 Importance of the Home Market . 
 
 Export Duties on Wool and Coal . 
 
 How can Adam Smith's Views on the Superior 
 Advantage of Home Trade be reconciled with 
 his Advocacy of Free Trade ? . 
 
 Bearing of the Answer on the Present Con- 
 troversy ...... 
 
 XIX 
 
 PAIJK 
 
 49 
 51 
 
 52 
 55 
 56 
 57 
 
 59 
 
 61 
 
 CHAPTEK VI 
 The Real Advantages of Foreign Trade 
 
 § 1. Critique op Old Ideas of Advantages op Foreign 
 
 Trade ...... 64 
 
 § 2. The Natural Preference op Home to Foreign 
 
 Trade ...... 65 
 
 § 3. Export op Surplus Produce Advantageous . 66 
 
 § 4. Export of Surplus Capital Advantageous . 68 
 
 § 5. General Eesum^ op the Argument . . 70 
 
 § 6. The Employment of Capital by Individuals depends 
 
 ON Profit not on Advantage . . .71 
 
 § 7. Influence of the Policy of Europe . . 72 
 
 § 8. Does Profit in general lead to Advantage ? . 73 
 §9. The "Natural" Protection of Home Industries — 
 
 especially of Agriculture . . .74 
 
 § 10. Other Home Industries . . . .75 
 
 §11. Difficulty if Foreign Trade gives Higher 
 
 Profits ...... 76 
 
 § 12. Eeference to Experience . . . .77 
 
 § 13, Summary of real Advantages of Foreign Trade . 78 
 8 14. Adam Smith's Attitude not purely Negative . 79 
 
XX A PROJECT OF EMPIRE 
 
 PAOE 
 
 § 15. Extension of the Argument on Home Trade to 
 
 Imperial Trade . . . . .80 
 
 §16. Distinction between Active Export Trade and 
 
 Passive Import Trade . . .82 
 
 CHAPTER VII 
 Meaning of Protection to Native Industries 
 
 § 1. The term Protection not used by Adam Smith . 83 
 § 2. Used in narrow sense by Alexander Hamilton . 84 
 § 3. Meaning depends on Correlation . . .85 
 
 § 4. Distinction between Objects and Methods ok 
 
 Protection . . . . . .86 
 
 § 5. Taxes for " Revenue " and for " Monopoly " dis- 
 tinguished ...... 87 
 
 § 6, Adam Smith's Treatment not Abstract or Hypo- 
 thetical ...... 90 
 
 i$ 7. Gross and Net Revenue . . .90 
 
 § 8. Profit on Capital requisite for the Employment 
 
 of Labour . . . . . .92 
 
 § 9. New Theory of Protection . . . .93 
 
 § 10. Protection and Socialism . . . .95 
 
 CHAPTEE Vlll 
 
 Protection to Native Industries 
 
 § 1. Difficulty of the greater Advantage of Employ- 
 ment OF Capital in Home Trade . . .97 
 
 § 2. Possible Displacement of Home Industries by 
 
 Foreign Imports . . . .98 
 
 § 3. Protection in Great Britain in time of Adam 
 
 Smith ...... 100 
 
 § 4. Protection of Advantage to particular Industries 101 
 
 §6. Adam Smith's first Answer: Industry limited bv 
 
 Capital ...... 103 
 
CONTENTS xxi 
 
 PAOK 
 
 § 6. Second Answkr : Home Industries naturally pro- 
 tected . . . . . .106 
 
 § 7. Third Answer : Effect of Protection on " The 
 Annual Produce of the Land and Labour op 
 the Society" . . , ,107 
 
 § 8. Fourth Answer : Displaced Labour and Capital 
 
 will find Employment at Home . . .111 
 
 § 9. Appeal to Experience necessary . . .113 
 
 CHAPTER IX 
 
 The Producer and the Consumer 
 
 § 1. That Cheapness is a Benefit and Employment a 
 
 Necessity to the Consumer: both Truisms . 116 
 
 § 2. " Consumption the sole end and purpose of all 
 
 Production": Critical Examination of . . 118 
 
 § 3. Taxes on Consumable Commodities : Effect on 
 
 Labour . . . . . .120 
 
 §4. Taxation of Necessaries: Eeasons against. . 122 
 
 § 5. Mr. Gladstone on Cheapness and Employment . 124 
 
 § 6. All Taxes on Commodities tend to reduce Employ- 
 ment . . . . . .125 
 
 § 7. The Masses of the People are the Masses of 
 
 Consumers and Producers. . . . 126 
 
 § 8. Adam Smith always considers the Producer as 
 
 well as the Consumer .... 127 
 
 § 9. Peel and Cobden on Consumers and Producers . 134 
 
 CHAPTER X 
 
 The Negative Argument for Freedom of Trade 
 
 § 1. Sidgwick's Critique of Popular Ideas on Free 
 
 Trade and Protection . . . .136 
 
 S 2. Adam Smith on Statesmen and their Advisers . 137 
 
xxii A PROJECT OF EMPIRE 
 
 ,^ 3. Thk f>iLs OF Monopoly .... 
 
 § 4. Monopoly and the Interests ok Labour . 
 § 5. Protection to Agriculture not based on Monopoly 
 § 6. — and unnecessary on account of Natural Con- 
 ditions ...... 
 
 § 7. Import of Food necessary with Growth op Popu- 
 lation ...... 
 
 j § 8. Failure of Protection to prevent Rural Depopu- 
 lation ...... 
 
 ,§ 9. Other Means of encouraging Agriculture 
 §10. Present Importance of the Negative Argument . 
 
 PAGE 
 
 139 
 141 
 144 
 
 146 
 
 147 
 
 55 2. 
 
 55 3. 
 
 
 §4- 
 
 
 §5. 
 
 
 V§6- 
 
 
 §7. 
 
 
 §8. 
 
 
 §9- 
 
 
 §10. 
 
 
 §11- 
 
 
 §12. 
 
 
 §13. 
 
 > 
 
 §14. 
 §15. 
 
 
 §1G. 
 
 
 §17. 
 
 CHAPTER XI 
 Adam Smith's Exceptions to Free Trade 
 
 Meaning of "Exceptions to Free Trade". . 153 
 
 First Exception : if the Industry is necessary 
 
 FOR Defence; the Navigation Act . .163 
 
 Effects of the Navigation Act . . .156 
 
 Adam Smith approves of Bounties for Defence . 159 
 Extension of the Principle of Defence . . 159 
 
 Second Exception : Import Duties to balance Taxes 
 
 ON Home Products. . . . .160 
 
 Import Duties if much heavier lead to Monopoly 161 
 Meaning of "Goods of same Kind" . .162 
 
 Taxation of possible Substitutes . . .162 
 
 Proposed Extension of the Principle to all 
 
 Home Taxes . . . . .163 
 
 Difficulties of such Extension . , .164 
 
 Countervailing Duties on Foreign Bounties . 165 
 Extension of Countervailing Duties . .166 
 
 Third Exception: Case of JJetaliation . .167 
 
 When justified . . . .168 
 
 Difficulties of . . . . .168 
 
 Retaliation on other Grounds — examined . 169 
 
CONTENTS xxiii 
 
 PAOK 
 
 §18. List on Retaliation . . . .171 
 
 §19. Fourth Exception: Case of Vested Interests . 171 
 § 20. Extension op the Principle of Vested Interests 172 
 §21. Fifth Exception: Case of Infant Industries . 173 
 § 22. Significance of the "Exceptions" to Free Trade 174 
 
 CHAPTEK XII 
 
 The State in Relation to Commerce 
 
 § 1. General View of Economic Functions of the 
 
 State . . . . . .175 
 
 § 2. The State and Commerce . . . .175 
 
 § 3. General Rule : Non-interference still prevails 
 
 in spite of Extension of State Regulation . 176 
 
 § 4. Merchants not fit to undertake the Duties of 
 
 the Sovereign Power . . . .177 
 
 § 5. History and Abuses of Foreign Trading Companies : 
 
 Regulated Companies . . . .178 
 
 § 6. Joint-Stock Companies — East India Company . 179 
 
 .;§ 7. General View of Relation of Trade to Sove- 
 reignty . . . . . .182 
 
 § 8. Adam Smith's Appreciation of the Founders of 
 
 the Indian Empire . . . r, . 183 
 
 CHAPTEE XIII 
 
 Adam Smith on Colonial Policy 
 
 § 1. Historical conditions affecting the Composition 
 
 OF THE "Wealth of Nations" . . . 185 
 
 § 2. Adam Smith's Appreciation of History and Fore- 
 sight . . . . . .186 
 
 § 3. Bearing of Argument on Present Situation . 187 
 
 § 4. Reasons for Colonisation, Ancient and Modern . 188 
 
xxiv A PROJECT OF EMPIRE 
 
 PA(;e 
 
 § 5. Causes of Prosperity op New Colonies . .189 
 
 § 6. Special Causes of R^vpid Progress of North 
 
 American Colonies. . . . .191 
 
 § 7. Advantages to Europe of Colonies in new 
 
 Countries ...... 192 
 
 § 8. National Advantages from Colonies, in Military 
 
 Power or Revenue not realised . . .193 
 
 § 9. Supposed Advantage of the Monopoly of the 
 
 Colonial Trade examined. . . .195 
 
 § 10. Present Importance of the Argument . . 196 
 
 § 11. Effects of Monopoly must be separated from 
 
 THE Natural Effects . . . .197 
 
 §12. General Effects op the Monopoly . . 199 
 
 § 13. Disadvantage of high Rate of Profit . .200 
 
 § 14. Effects of Monopoly on Rents, Wages, and 
 
 Profits ...... 200 
 
 §15. Effects of the Monopoly in the Colonies . 201 
 
 § 16. General Summary of Profit and Loss to Britain 
 
 from the Colonies . . . .204 
 
 i:^ 17. Alternative of Disintegration or Real Union . 206 
 
 §1- 
 §2. 
 §3. 
 
 M- 
 
 §6. 
 
 8 8. 
 §10. 
 
 CHAPTEE XIV 
 The Imi'erialism of Adam Smith 
 
 The " Shopkeeper " Idea of Empire criticised 
 The Ideal op Empire not purely Economic 
 Ideal op British Empire in Development of 
 
 British Constitution 
 Practical Difficulties 
 The Case of India . 
 
 The Public Dehts of the British Empire 
 The Union with Ireland 
 Imperial Taxation and Representation 
 Bases of Imperial Taxation 
 Summary of Leading Ideas . 
 
 209 
 211 
 
 213 
 
 214 
 216 
 217 
 218 
 219 
 221 
 223 
 
CONTENTS 
 
 XXV 
 
 CHAPTEE XV 
 British Colonial Policy since Adam Smith 
 
 PAGE 
 
 § 1. Different Ideas of Colonial Policy . . 226 
 
 § 2. Growth of Self-Government — Preferential Duties 228 
 § 3. View of Present Position op Imperial Union : a 
 
 Contrast . . . . . .230 
 
 §4. "Not an Empire bdt the Project of an Empire" . 231 
 § 5. What at Present are the National Advantages op 
 
 Empire? ...... 232 
 
 gi- 
 §3. 
 
 H- 
 
 §6. 
 
 §7. 
 §8. 
 
 §9- 
 §10. 
 
 §11. 
 
 CHAPTEPt XVI 
 Conclusion 
 
 British Command op the Sea needs Colonial 
 
 Co-operation .... 
 
 Present and Future Need for Co-operation 
 Defence a Primary Duty for every Nation 
 Imperial Co-operation most Efficient and Econo 
 
 MICAL ..... 
 
 Sources of Revenue for Imperial Defence 
 Free Trade within the Empire 
 Advantages of Internal Free Trade 
 Difficulties in the Establishment of Internal 
 
 Free Trade — how met 
 The Method of Preferential Duties 
 Fiscal and Commercial Relations op the Empire 
 
 with Foreign Countries . 
 The Project of an Empire . 
 
 237 
 238 
 239 
 
 240 
 242 
 245 
 
 247 
 
 253 
 256 
 
 260 
 270 
 
 INDEX 
 
 273 
 
CHAPTER I 
 
 THE PERSONALITY AND BREADTH OF VIEW OF 
 ADAM SMITH 
 
 § 1. Personality and Character. 
 
 By way of preliminary it is necessary to get rid 
 of some popular prejudices about the character and 
 personality of Adam Smith. 
 
 Those who think he was a kind of parrot who could 
 only say "cheap food," "competition," "let alone," 
 " devil take the hindmost," and other simple cries, 
 will be surprised to hear that, with the possible 
 exception of Lord Bacon, he was the most broad- 
 minded and most sympathetic of all the philosophers 
 who have condescended to make themselves intel- 
 ligible to the common man. He had planned "a 
 connected history of the liberal sciences and elegant 
 arts." For this purpose he had collected a mass 
 of material and written a variety of papers, some of 
 which, published by his executors, illustrate in a 
 curious manner his breadth of view. There is, for 
 example, a fragment on the affinity between music, 
 dancing, and poetry. This is of special interest at 
 the present time with the revival of the methods 
 
2 A PROJECT OF EMPIRE 
 
 of the classical " pantomime " dances. Adam Smith 
 shows, by " philosophic art," that dancing (of the 
 descriptive kind) is capable of affecting us much 
 more than statuary or painting, and that like epic 
 poetry it can represent all the events of a long 
 story. In another paper he made a comparison of 
 English and Italian metres to the admiration of 
 Dr. Johnson, who said he could have huoraed him for 
 his preference of rhyme to blank verse. There is an 
 essay on the formation of languages and a history 
 of astronomy. His appreciation of Newton's great 
 discovery shows that it was not for want of mathe- 
 matics that he did not set much store by political 
 arithmetic. 
 
 The influence of Newton is shown by the analogies 
 \y) adopted to illustrate two of the fundamental principles 
 of the Wealth of Nations. First, the theory of natural 
 and market values: "The natural price, therefore, is 
 as it were the central price to which the [market] 
 prices of all commodities are continually gravitating. 
 . . , But whatever may be the obstacles which hinder 
 them from settling in this centre of repose and con- 
 tinuance, they are constantly tending towards it." ^ 
 
 Secondly, the theory that ** naturally every indi- 
 vidual endeavours to employ his capital as near home 
 as he can " — a principle that is constantly appealed to 
 ^ — is expressed in similar terms : '* Home is in this 
 '' manner the centre, if I may say so, round which the 
 capitals of the inhabitants of every country are 
 continually circulating and towards which they are 
 
 ' Rook I. chap. ii. 
 
I PERSONALITY OF ADAM SMITH 3 
 
 tending, though by particular causes they may some- 
 times be driven off and repelled from it toward more 
 distant employments." ^ 
 
 The catalogue ^ of Adam Smith's library illustrates 
 the variety of his tastes and learning. He was widely 
 read in history, law, geography, and books of travel. 
 He knew all the best men of his time — Pitt, Burke, 
 Hume, Reynolds,^ for example, in England ; and in 
 France, Turgot, Voltaire, Quesnay, Rousseau, and the 
 philosophers who were sowing the seeds of the 
 revolution in France. 
 
 For the greater part of his life Adam Smith lived \ff^-''^^' 
 in touch with the great world and the real world, and 
 not in a world of abstractions, though for the final 
 composition of the Wealth of Nations he retired to , 
 the quiet of his native town, Kirkcaldy, for a period 
 of seven years (1767-1773). 
 
 § 2. " TJie Tlieory of Moral Sentiments.'^ 
 
 The Adam Smith of popular tradition is supposed 
 to be the apostle of selfishness — the creator and 
 glorifier of the " economic man." 
 
 The real Adam Smith, about twenty years before 
 the publication of the Wealth of Nations, made a 
 world-wide reputation by his Essay on the Theory of 
 Moral Sentiments. The basis of the whole theory 
 is not selfishness but sympathy ; the practical test 
 of right conduct is the judgment of the impartial 
 
 ^ Book IV. chap. ii. 2 Edited by Dr. Bonar, 1894. 
 
 •^ The writer is the fortunate possessor of Adam Smith's presentation copy 
 of tlie Wealth of Nations to Sir Joshua Reynolds. 
 
4 A PROJECT OF EMPIRE chap. 
 
 spectator. " When the happiness or misery of others 
 depends in any respect on our conduct we dare not, as 
 self-love would suggest to us, prefer the interest of one 
 to that of many." And yet it is " not the soft power 
 of humanity, it is not that feeble spark of benevolence 
 which nature has lighted up in the human heart, that, 
 is thus capable of counteracting the strongest impulses 
 of self-love. It is a stronger power, a more forcible 
 motive which exerts itself on such occasions. It is 
 reason, principle, conscience, the inhabitant of the 
 breast, the man within, the great judge and arbiter 
 of our conduct."^ 
 
 The- man within is the ideal of humanity; he is 
 the true impartial spectator to whom the final appeal 
 must be made. To this work on moral philosophy 
 Adam Smith made some important additions just 
 before his death in 1790. One passage is strangely 
 pathetic : " It is only to the virtuous and humane 
 that the infirmities of old age are not the objects of 
 contempt and aversion. In ordinary cases, an old 
 man dies without being much regretted by anybody. 
 Scarce a child can die without rending asunder the 
 heart of somebody." It was found on his death 
 that his property was much less than had been 
 expected, because he had given away the greater part 
 in secret charity. 
 
 It may perhaps be thought a matter of little 
 
 ^ The need for emphasising the moral jiliiiosopliy of Adam Smith is shown 
 by the following quotation from the Introduction to Byles's Sophisins of Free 
 Trade signed by the editors W. S. Lilly and C. S. Devas : " No doubt Adam 
 Smith regarded liis political economy as a branch of Ids moral philoBOphy. 
 But unfortunately liis moral philosophy is in no true sense moral." — Op. cU. 
 ntroJuction, j). xviii, note. 
 
. PERSONALITY OF ADAM SMITH 5 
 
 importance in applying the ideas of Adam Smith to 
 our present economic problems to show that he was 
 not a "one-eyed flatfish with the side on which 
 there is an eye always in the mud," but a man as 
 keen in his appreciation of art and literature as his 
 principal detractor — and with a far wider outlook 
 and larger sympathies. 
 
 § 3. Humanist and Nationalist. 
 
 Adam Smith had, no doubt, an exceptional genius 
 for dealing with the economic side of human affairs, 
 and he is rightly regarded as the founder of syste- 
 matic political economy as distinct from the allied 
 moral and social sciences ; but his influence as an 
 economist was enormously increased owing to his 
 breadth of view, both moral and intellectual. Adam 
 Smith was emphatically a great humanist, and that is 
 the reason why, in treating of new economic problems, 
 it is well to refresh our sympathies and sharpen our 
 wits by a study of the master mind in this part of 
 life. In particular we may learn of Adam Smith that 
 questions of foreign trade require for their adequate 
 discussion a reference to the great ideas of humanity 
 and nationality as well as the more material interests 
 of cheapness and plenty. 
 
 In the whole range of the history of perversions 
 there is no more curious error than the popular idea 
 that Adam Smith treated of the wealth of nations 
 from the cosmopolitan standpoint, and that List, as 
 opposed to Adam Smith, is the founder of national 
 economy. If the two men are to be named by these 
 
6 A PROJECT OF EMPIRE chap, i 
 
 two names, then it is Adam Smith who must be 
 ranked as the nationalist and List as the cosmo- 
 politan. List ^ had apparently taken his views of 
 Adam Smith not from the original source but from 
 the " school," and indeed it is to the " school " that 
 he constantly refers. Most of his criticism, though 
 valid as against the dogmas of the " school," is quite 
 irrelevant as applied to the real Adam Smith. The 
 nationalism of Adam Smith is so important that it is 
 best treated in a separate chapter. 
 
 ^ Cf. The National System of Political Ecooiomy by Fiiedi-icli List (edition 
 Lougmans, 1904). Introductory Essay by present writer, p. xiv. 
 
CHAPTER II 
 
 THE NATIONALISM OF ADAM SMITH 
 
 § 1. The Individual, the Family, and the Nation. 
 
 In tlie last edition of the Moral Sentiments, which 
 was revised by the author just before his death, a 
 new part was introduced/ which gives clearly his 
 mature views on the relations of the individual to 
 the family, the nation, and the world at large. The 
 treatment of the family is interesting in connection 
 with recent socialistic attacks, and gives a philo- 
 sophical foundation to the common thought of the 
 average Englishman. Adam Smith lays the greatest 
 stress on the importance of the family relationships 
 being intimate and continuous. The mere tie of 
 blood is not enough. He goes so far, indeed, as to 
 disapprove of the education of boys at distant great 
 schools, and of young men at distant great colleges, a 
 practice which he considered had hurt most essentially 
 the domestic morals both of France and England. 
 " From their parents' house they may, with propriety 
 and advantage, go out every day to attend public 
 schools : but let their dwelling be always at home. 
 
 1 Partvi. 
 7 
 
8 A PROJECT OF EMPIRE 
 
 Surely no acquirement which can possibly be derived 
 from what is called a public education can make any 
 sort of compensation for what is almost certainly and 
 necessarily lost by it." 
 
 It is beyond the scope of the present inquiry to 
 consider the validity of Adam Smith's general philo- 
 sophical ideas ; but the point is, that properly to 
 understand his economics we must at any rate under- 
 stand his attitude as regards the moral foundations of 
 society. His individualism wears a different aspect 
 if we remember that he was a passionate admirer 
 of home and home life ; and that on liis view 
 from the home as the centre the sympathies of 
 the individual are extended throuf]jh ever- widening 
 circles of friends and acquaintances, until in this 
 way the family is naturally linked with the state or 
 nation. 
 
 " The state or sovereignty in which we have been 
 born and educated and under the protection of which 
 we continue to live is in ordinary cases the greatest 
 society, upon whose happiness or misery our good or 
 bad conduct can have much influence. Not only we 
 ourselves, but all the objects of our kindest affections, 
 our children, our parents, our relations, our friends, 
 our benefactors, all those whom we naturally love and 
 revere the most, are commonly comprehended within 
 it ; and their prosperity and safety depend in some 
 measure upon its prosperity and safety. . . . When 
 we compare it with other societies of the same kind 
 we are proud of its superiority and mortified in some 
 degree if it appears in any respect below them. All 
 
n NATIONALISM OF ADAM SMITH 9 
 
 the illustrious characters which it has produced in 
 former times, its warriors, its statesmen, its poets, its 
 philosophers, and men of letters of all kinds, we are 
 disposed to view with the most partial admiration 
 and to rank them (sometimes most unjustly) above 
 those of all other nations. The patriot who lays 
 down his life for the safety or even for the vain 
 glory of this society appears to act with the most 
 exact propriety. . . . But though this sacrifice 
 appears to be perfectly just and proper we know 
 how difficult it is to make it and how few people are 
 capable of making it. His conduct, therefore, excites 
 not only our entire approbation but our highest 
 wonder and admiration, and seems to merit all the 
 applause which can be due to the most heroic virtue. 
 The traitor, on the contrary, who in some peculiar 
 situation fancies he can promote his own little 
 interest by betraying to the public enemy that of 
 his native country ; who, regardless of the judgment 
 of the man within the breast, prefers himself in this 
 respect so shamefully and so basely to all those with 
 whom he has any connection, appears to be, of all 
 villains, the most detestable." ^ 
 
 § 2. Adani Smith not Cosmopolitan. 
 
 The following passage is still more remarkable as 
 throwinof liorht on Adam Smith's nationalism: "The 
 love of our country seems not to be derived from the 
 love of mankind. The former sentiment is altogether 
 independent of the 'latter, and seems sometimes even 
 
 ^ Theory of Moral Scntlmenlx, part vi. section ii. chap. ii. 
 
 OP The 
 
lo A PROJECT OF EMPIRE 
 
 to dispose us to act inconsistently with it. France 
 may contain, perhaps, near three times the number of 
 inhabitants which Great Britain contains. In the 
 great society of mankind, therefore, the prosperity of 
 France should appear to be an object of much 
 greater importance than that of Great Britain. The 
 y ^ British subject, however, who upon that account 
 should prefer on all occasions the prosperity of the 
 former to that of the latter country, would not be 
 thought a good citizen of Great Britain. We do not 
 love our country merely as "part of the great society 
 ofTYianhmd; we love it for its own sake, and inde- 
 pendently of any such consideration."^ Adam Smith, 
 .' indeed, shows that the sentiment of nationality and 
 patriotism may be pushed too far, and that the 
 " mean principle of national prejudice is often 
 founded upon the noble one of the love of our own 
 country." He admits that France and England 
 may each of them have some reason to dread the 
 increase of the naval and military power of the 
 other, but "it is beneath the dignity of two such 
 great nations to envy the internal happiness and 
 prosperity of the other, the cultivation of its lands, 
 the advancement of its manufactures, the increase of 
 its commerce, the security and number of its ports 
 and harbours, and its proficiency in all the arts and 
 sciences."^ 
 f" It is important to observe, however, that even as 
 \i regards material and economic interests on Adam 
 '\ Smith's view the prosperity of our own country 
 
 * Theory of Moral Sentiments, part. iv. section, ii. chap. ii. ^ Ibid. 
 
II NATIONALISM OF ADAM SMITH ii 
 
 ouofbt to be our chief concern, though, as is shown 
 in detail in the Wealth of Nations, we gain indirectly 
 from the prosperity of our neighbours. '* The love of 
 our country seems in ordinary cases to involve in it 
 two principles ; first, a certain respect and reverence 
 for that constitution or form of government that is 
 actually established ; and secondly, an earnest desire 
 to render the condition of our fellow-citizens as safe, 
 respectable, and hnppy as we can. He is not a 
 citizen, who is not disposed to respect the laws and 
 obey the civil magistrate ; and he is certainly not a 
 citizen who does not wish to promote, by every means 
 in his power, the welfare of the whole society of his 
 fellow-citizens. " 
 
 § 3. Of Universal Benevolence. 
 
 The chapter in this section which is entitled " Of 
 universal benevolence " ^ completes the survey of the 
 moral duties of the individual to others. "Though 
 our effectual good ofiices can very seldom be extended 
 to any wider society than that of our own country ; 
 our good will is circumscribed by no boundary but 
 may embrace the immensity of the universe." . . . 
 " Nor does the mag-nanimous resio-nation to the will 
 of the great Director of the universe seem in any 
 respect beyond the reach of human nature. In the 
 greatest public, as well as private disasters, a wise 
 man ought to consider that he himself, his friends, 
 and countrymen have only been ordered upon the 
 forlorn station of the universe. A wise man should 
 
 ^ Theory of Moral Sentiments, part vi. section ii. chap. iii. 
 
12 A PROJECT OF EMPIRE 
 
 surely be capable of doing what a good soldier holds 
 himself at all times in readiness to do." But although 
 "the idea of the divine being who rules the universe 
 is of all objects of human contemplation by far the 
 most sublime"; and although " we look with reverence 
 on the man who is capable of absorbing himself in 
 contemplation of this kind," we are told, as the 
 conclusion of the whole matter, that " the most 
 sublime speculation of the contemplative philosopher 
 can scarce compensate the neglect of the smallest 
 active duty. The administration of the great system 
 of the universe is the business of God and not of man. 
 To man is allotted a much humbler department : the 
 care of his own happiness, of that of his family, his 
 friends, his country.'' ' 
 
 § 4. Ttvo Popular Errors. 
 
 It ought to be abundantly clear from the fore- 
 going passages that popular opinion on Adam 
 Smith's philosophy is fundamentally wrong on two 
 points. ' In the first place, he did not inculcate any 
 doctrines implying that every individual ought simply 
 to look to his own interests, regardless of the interests 
 of others ; and in the second place, he did not main- 
 tain that the policy of nations ought to be directed 
 solely by cosmopolitan considerations. These two 
 ideas, as so often happens with 2)opular delusions, 
 
 ' Some writers liave laid too much stress on Adam Smith's "natural 
 tlieolo^y " and the optimism su])]iosed to be based on it. In jmrticular, the 
 referoiice to the "invisible hand" which directs private ])eople towards the 
 public good has been strained to absurd lengths. Adam Smith was the 
 ardent admirer of Hume and Voltaire, and his theology wa,s not altogether 
 uncritical. 
 
II NATIONALISM OF ADAM SMITH 13 
 
 are in effect contradictory, except on the simple 
 supposition that absolute laisser faire is best for the 
 individual and also for Tiumanity. This, however, 
 so far as Adam Smith is concerned, is a greater 
 delusion than the other two which it is advanced 
 to reconcile. 
 
 The real Adam Smith never thought of the 
 
 a 
 
 individual in isolation. The foundation of his 
 whole system of moral philosophy is sympathy ; the 
 test of right conduct is the opinion of the impartial 
 spectator ; the individual is a member of a family ; 
 and through the family life he is brought in touch 
 with ever -widening circles of friends and associates 
 until he naturally regards himself as a member of 
 the state. And here for most practical purposes 
 the sympathies of the individual find their natural 
 boundaries; although no doubt in moments of exalta- 
 tion he may indeed seek to enter into communion 
 with the spirit of the universe, and in the same way 
 he may on occasion regard himself as a citizen of 
 the world and a lover of all humanity. 
 
 § 5. Defence of more Importance than Opulence 
 — the Navigation Act. 
 
 It is remarkable, in view of the attacks that have 
 been made by List and others on the cosmopolitan 
 ideas of Adam Smith on economic matters, that it is 
 in the Wealth of Nations itself that the nationalism 
 of Adam Smith finds the most unreserved and 
 unqualified expression. "The great object of the 
 political economy of every country is to increase the 
 
14 A PROJECT OF EMPIRE 
 
 riches and the power of that country."^ This 
 reference to national power as the object and aim of 
 national policy shows as always the influence on the 
 mind of Adam Smith of historical development. 
 That the reference is not merely a polite tribute to 
 popular sentiment is shown by the application to the 
 Naviofation Laws. Here the leadinsr idea is that 
 though these laws may be prejudicial to the wealth 
 of the nation they are to be approved on the very 
 ground that " defence is of more importance than 
 opulence." Writing of the famous Navigation Act 
 of 1660 he points out tliat though England and 
 Holland were not actually at war tlie most violent 
 animosity subsisted between the two nations. " It 
 is not impossible, therefore, that some of the regula- 
 tions of this most famous Act may have proceeded 
 from national animosity. They are as wise, how- 
 ever, as 'if they had been dictated by the most 
 deliberate wisdom. National animosity at that par- 
 ticular time aimed at the very same object which the 
 most deliberate wisdom would have recommended 
 — the diminution of the naval power of Holland, the 
 only naval power which could endanger the security 
 of England."^ The application of this remarkable 
 passage to the present time mutatis mutandis is too 
 obvious to need comment. 
 
 It is no doubt quite true tliat it was this very 
 part of the old commercial policy which was first 
 seriously attacked and modified by Huskisson (1825) 
 and eventually the whole system was abandoned 
 
 ' Hook II. cliiij). V. ^ I?ook IV. chap. ii. 
 
II NATIONALISM OF ADAM SMITH 15 
 
 more than fifty years ago. Adam Smith also himself 
 condemned the navigation acts so far as the colonies 
 were concerned. 
 
 § 6. National Military Training as Part of the 
 Education of Youth. 
 
 But for the present we are concerned only with 
 the ideas of Adam Smith on nationality and the 
 advancement of national power. These ideas are 
 even more forcibly illustrated, and have a much 
 more intimate bearing on present problems as 
 they are set forth in the chapter on the education 
 of youth.^ 
 
 One of the popular ideas on Adam Smith, founded 
 apparently on a confusion between Adam Smith and 
 Cobden, and a misunderstanding even of Cobden, is 
 that he was a man who loved peace at any price, 
 loved all countries more than his own, and hated the 
 very idea of w^ar. As a matter of fact, as shown in 
 this chapter, Adam Smith regarded a military training 
 as one of the most essential parts of the education of 
 the youth of the nation. " The art of war is certainly 
 the noblest of all arts." " A coward, a man incapable 
 either of defending or revenging himself wants one 
 of the most essential parts of the character of a man. 
 . . . Even though the martial spirit of the people 
 were of no use towards the defence of the society, 
 yet to prevent that sort of mental mutilation and 
 deformity and wretchedness which cowardice necessarily 
 involves in it from spreading themselves through the 
 
 ^ Book V. chap. i. part iii. article 2. 
 
i6 A PROJECT OF EMPIRE 
 
 great body of the people would still deserve the most 
 serious attention of government ; in the same manner 
 as it would deserve its most serious attention to 
 prevent a leprosy or any other loathsome or offensive 
 disease, though neither mortal nor dangerous, from 
 spreading itself among them." ' 
 
 ^' Again, after describing the advantages of natural 
 liberty, he goes on to indicate broadly the most 
 important functions of the state ; the first duty 
 imposed is that of defence — " the duty of protecting 
 the society from the violence and invasion of other 
 independent societies " ; and this is spoken of as 
 one of the duties of the state, " plain and intelli- 
 gible to common understandings." In treating of 
 the expenditure of the state the first charge made 
 on the revenue is for the expenses of defence; and 
 in dealing with this topic he applies, according to 
 his custom, the historical method and discusses the 
 merits and demerits of militias and standing armies, 
 and shows an intimate acquaintance with the 
 " noblest of all arts." " 
 
 § 7. The Soldier and the Statesman Compared. 
 
 In the final addition to the Moral Sentiments, 
 to which references have already been made, the 
 glory of war is introduced in the discussion on the 
 character of virtue. }i^i[iim Smith compares the 
 relative merits of the statesman who is at the head 
 of one of the great political parties with the soldier 
 
 1 Hook V. chai). i. jmrt iii. article 2. - IJook v. cliaji. i. part i. 
 
u NATIONALISM OF ADAM SMITH 17 
 
 who has the conduct of a great national war. " The 
 leaders of the contending parties, though they may 
 be admired by one half of their fellow-citizens, are 
 commonly execrated by the other. Their characters 
 and the merit of their respective services appear 
 commonly more than doubtful. The glory which is 
 acquired by foreign war is upon this account almost 
 always more pure and more splendid than that 
 which can be acquired in civil faction." ^ "The 
 hero who serves his country successfully in foreign 
 war gratifies the wishes of the whole nation, and is 
 on that account the object of universal gratitude and 
 admiration." 
 
 It must not be supposed, however, that the national- 
 ism of Adam Smith was mainly dominated by ideas 
 of territorial expansion and military glory. In this 
 very chapter," which gives his final views on national 
 policy, we are told that the leader of a political party 
 may sometimes render to his country a service much 
 more essential and important than the greatest 
 victories and the ' most extensive conquests. "He 
 may re-establish and improve the constitution, and 
 from the very doubtful and ambiguous character of 
 the leader of a party he may assume the greatest and 
 noblest of all characters, that of the reformer and 
 legislator of a great state ; and by the wisdom of his 
 institutions secure the internal tranquillity and 
 happiness of his fellow-citizens for many succeeding 
 generations." 
 
 ^ Moral Sentiments, part vi. section ii. chap. ii. See also chap. iii. on 
 " Self Command." '^ Ibid. 
 
i8 A PROJECT OF EMPIRE chap. 
 
 § 8. Adam Smith and Burke — Idea of 
 Histoiical Growth. 
 
 Adam Smith and Burke were close friends, and 
 had much in common in their general ideas of political 
 philosophy. The former is so well known as the 
 destroyer of old systems, and the latter as the most 
 thorough opponent of revolutions, that the fundamental 
 agreement between the two thinkers may seem 
 surprising. But Adam Smith himself is reported to 
 have said of Burke that " he was the only man he 
 had met with who thought as he did on the chief 
 topics of political economy without previous com- 
 munication." ^ And following on the passage quoted 
 above from the last words of Adam Smith, we find 
 an appreciation of the historical growth of a great 
 state which is in exact harmony with the dominant 
 idea in Burke's Reflections on the Revolution in 
 France (published in the same year (1790) as this 
 last edition of the Moral Sentiments). " The man," 
 writes Adam Smith, " whose public spirit is prompted 
 altogether by humanity and benevolence will respect 
 the established powers and privileges even of 
 individuals and still more those of the great orders 
 and societies into which the state is divided. Though 
 he should consider some of these as in some measure 
 abusive, he will content himself with moderating 
 what he often cannot annihilate without great 
 
 ' IJurko said of the Wfnlth of Nations when jmblished : " Excellent ; a 
 dry abstract of which would convey no juster idea of it than the skeleton of 
 a departed beauty would of her form wlicn she was alive." — Prior's Life if 
 Burke, p. CI (George Bell, 188'.i). 
 
I. NATIONALISM OF ADAM SMITH 19 
 
 violence. . . . He will accommodate as well as he 
 can his public arrangements to the confirmed habits 
 and prejudices of the people. . . . Like Solon, when 
 he cannot establish the best system of laws, he will 
 endeavour to establish the best that the people can 
 bear." ^ It may be noted in passing that Adam 
 Smith used precisely the same expression regarding 
 the system of Corn Law's that prevailed in his day 
 (13 Geo. III. c. 43) : "With all its imperfections w^e 
 may, perhaps, say of it what was said of the laws of 
 Solon, that though not the best in itself it is the best 
 which the interests, prejudices, and temper of the 
 times admit of. It may, perhaps, in due time 
 prepare the way for a better." ^ 
 
 Burke himself could not have attacked more 
 vehemently " the man of system who seems to 
 imagine that he can arrange the different members 
 of a great society wath as much ease as the hand 
 arranges the different pieces upon a chessboard, but 
 forgets that in the great chessboard of human society 
 every single piece has a principle of motion of its 
 own, and that if this is not taken account of the game 
 of human society wall go on miserably." ^ 
 
 Adam Smith allows that some general and even 
 systematic idea of the perfection of policy and law may 
 be necessary for directing the views of the statesman ; 
 but he must not insist on establishing, and establish- 
 ing all at once, and in spite of all opposition, everything 
 which that idea may seem to require. 
 
 1 Moral Sentiinents, part vi. section ii. chap. ii. 
 - Book IV. chap. v. ^ jforal Sentiments, loc. cit. 
 
20 A PROJECT OF EMPIRE 
 
 ^\/ This insistence by Adam Smith on the growth of 
 the nation and the constitution throws a new light on 
 his attitude towards the system of natural liberty in 
 general and the particular manifestation of that system 
 in the policy of international free trade. 
 
 He did not expect that the freedom of trade would 
 ever be entirely restored in Great Britain ; and he 
 thought that any approach to it should be made very 
 gradually. " The undertaker of a great manufacture 
 
 sM who by the home markets being suddenly laid open to 
 the competition of foreigners should be obliged to 
 abandon his trade would no doubt suffer very consider- 
 ably. . . . The equitable regard, therefore, to his interest 
 requires that changes of this kind should never be 
 introduced suddenly, but slowly, gradually, and after 
 lonof warning." ^ And the case is still stronger if 
 we consider the question from the point of view of 
 the labour employed. " Humanity may in this case 
 require that the freedom of trade should be restored 
 only by slow gradations, and with a good deal of 
 reserve and circumspection. Were those high duties 
 and prohibitions taken away all at once, cheaper 
 foreign goods of the same kind might be poured so fast 
 into the home market as to deprive all at once many 
 thousands of our people of their ordinary employment 
 and means of subsistence." '" " The very bad policy of 
 one country may render it in some measure dangerous 
 and imprudent to establish what would otherwise be 
 the best policy in another."^ This last quotation 
 
 ' Book IV. chap. ii. "^ See below, p. 171. 
 
 ' Hook IV. chap, v., " Digrexsion on Cora Laws." 
 
I. NATIONALISM OF ADAM SMITH 21 
 
 refers, indeed, to a case of a special kind, namely, the 
 danger to a small state under certain conditions of the 
 exportation of its corn to meet the famine require- 
 ments of a larger state. But it serves to illustrate 
 very forcibly Adam Smith's constant appeal to the 
 idea of nationality. 
 
 § 9. Resume. 
 
 It is probable that if he had ever anticipated in the 
 smallest degree the singular perversion by List, who 
 accused him of neglect of national interests for cosmo- 
 politan ideals, he would have made his nationalism 
 still more prominent. But, in truth, Adam Smith 
 took it for granted that in every country the idea 
 of nationality was absolutely dominant. One more 
 instance must suffice. In discussing the general 
 question of colonial policy he considers the case of 
 possible abandonment safeguarded by adequate com- 
 mercial treaties. He shows that this alternative has 
 certain advantages, even from the point of view of 
 national power and wealth. But the idea is dismissed 
 as not even worthy of practical consideration. " The 
 most visionary enthusiast would scarce be capable of 
 proposing such a measure with any serious hopes at 
 least of its ever being adopted."^ "No nation ever 
 voluntarily gave up the dominion of any province 
 how troublesome soever it might be to govern it, and 
 how small soever the revenue which it afforded might 
 be in proportion to the expense which it occasioned." ^ 
 The presentation, however, of Adam Smith's views on 
 
 ^ Book IV. chap. vii. ^ Ibid. 
 
 \y 
 
22 A PROJECT OF EMPIRE chap, n 
 
 colonial policy and imperial federation must be 
 deferred. To understand this part of his argument 
 account must be taken in the first place of his 
 position on the employment of labour and the relations 
 of labour and capital. Here again it will be found 
 that the standpoint is unc[uiestionably nationalist and 
 not cosmopolitan. 
 
CHAPTER III 
 
 OF LABOUR AND CAPITAL 
 
 § 1. Labour the Dominant Conception in the ,^ 
 " Wealth of Nations.'' 
 
 The dominant conception in Adam Smith's whole 
 treatment of the Wealth of Nations is unquestionably 
 labour. The opening sentence runs : " The annual 
 labour of every nation is the fund which originally 
 supplies it with all the necessaries and conveniences 
 of life which it annually consumes, and which consist 
 always either in the immediate produce of that labour 
 or in what is purchased with that produce from 
 other nations." 
 
 Even List is forced to admit that this passage shows 
 how clearly Adam Smith in general perceived that the 
 condition of nations is principally dependent on the 
 sum of their productive powers. The first book deals 
 avowedly with the causes of the improvement in the 
 productive powers of labour and the distribution of the 
 produce amongst the different ranks and conditions of 
 men in the society. The second book discusses in par- 
 ticular the relations of labour and capital, whilst in the 
 third and fourth the influence on industry of political 
 and economic systems is considered. In Adam Smith's 
 
 23 
 
 J 
 
24 A PROJECT OF EMPIRE chap. 
 
 own words the object of these first four books is to 
 explain in what has consisted the revenue of the great 
 body of the people, or what has been the nature of those 
 funds which in different ages and nations have supplied 
 their aunual consumption. The " annual produce of 
 the land and labour " is an expression that is of as 
 frequent occurrence in Adam Smith as the correspond- 
 ing (and much more misleading) term the " national 
 dividend " in writers of the present day. 
 
 The term "annual" indicates the continuous con- 
 sumption and reproduction of the wealth, and the 
 repetition of the term " labour" emphasises its funda- 
 mental importance. 
 
 \ 
 
 § 2. Of Productive and Unproductive Labour. 
 
 It would be easy to show by the citation of 
 particular instances that labour is used by Adam 
 Smith in the most extended sense. There are, in 
 his view, two kinds of labour — productive and un- 
 productive ; each necessary to the welfare of the 
 society, and each with a multitude of varieties. 
 " There is one sort of labour which adds to the 
 value of the subject upon which it is bestowed ; there 
 is another which has no such effect. The former, as 
 it produces a value, may be called productive, the 
 latter unproductive." Typical of the former is the 
 labour of the manufacturer which fixes and realises 
 itself in some vendible commodity. It is, as it were, 
 a certain quantity of labour stocked and stored up ^ to 
 be employed if necessary on some future occasion. 
 
 ' Cf. the exi>xes&iQii fcstgermiiunt Arheilzeit of the Socialists. 
 
Ill LABOUR AND CAPITAL 25 
 
 That subject, or what is the same thing, the price 
 of that subject, can afterwards, if necessary, put into 
 motion a quantity of labour equal to that which had 
 originally produced it. Typical of unproductive 
 labour is the labour of the menial servant which does 
 not fix or realise itself in any vendible commodity. 
 His services generally perish in the very instant of 
 their performance, and seldom leave any trace of 
 value behind them for which an equal quantity of 
 service could afterwards be procured. 
 
 The distinction as drawn is quite clear and dis- 
 tinct ; it answers to common usage, and calls atten- 
 tion to an important difference in the uses of labour. 
 
 § 3. Importance and Variety of Unproductive 
 Labour. 
 
 And Adam Smith, immediately after this account 
 of unproductive labour, hastens to explain that the 
 labour of some of the " most respectable orders in 
 the society" is unproductive of any value "fixed and 
 embodied in a vendible object." Their labour is 
 technically unproductive, " because their service how 
 honourable, how useful, or how necessary soever 
 produces nothing for which an equal quantity of 
 service can afterwards be procured." 
 
 In accordance with this view Adam Smith says 
 that the sovereign, with all the ofiicers of justice and 
 war, who serve under him, the whole army and navy 
 are "unproductive" labourers. And yet, according 
 to the same Adam Smith such labour is essential 
 to the very existence of the state. Unproductive 
 
26 A PROJECT OF EMPIRE chap. 
 
 labour of this kind, in general, has a money value 
 Ur'^ itself (though it does not create a value), and one 
 of the great merits of Adam Smith is that he applies 
 his theory of wages to "unproductive" as well as 
 to "productive" labour, as, for example, when he 
 compares the wages of the curate with those of the 
 journeyman ; and considers the connection between 
 efficiency and reward in the case of education, the 
 church, and the various learned professions. 
 
 Adam Smith is always intensely realistic, and the 
 nations with which he deals are not composed only 
 of " productive " labourers in the technical sense, but 
 of other orders and sorts and conditions of men, who 
 are at least of equal importance to the full national 
 life. 
 
 Adam Smith's broad use of the term labour may 
 be further illustrated by his application of the 
 principle of division of labour to the class of men 
 who are called philosophers or men of speculation. 
 
 " In the progress of society philosophy or specula- 
 tion becomes like every other employment the 
 principal or sole trade and occupation of a particular 
 class of citizens. Like every other employment it 
 is subdivided into a great number of different 
 branches, each of which affords occupation to a 
 peculiar tribe or class of philosophers." 
 
 It follows, at once, from this analysis of labour 
 that the welfare of the nation as a whole is not to be 
 considered solely from the point of view of ** pro- ^ 
 ductive labour " in the narrow sense of the term. 
 Still less is it to be considered solely from" the point 
 
.1, LABOUR AND CAPITAL 27 
 
 of view of *' accumulated values," which is the 
 principal criticism so perversely and unjustly directed 
 by List against Adam Smith. In his treatment of 
 labour of every kind, Adam Smith is always a 
 humanist ; never a materialist. 
 
 § 4. Cajntal — Sustaining and Auxiliary. 
 
 Although, as already stated, the dominant con- 
 ception in the Wealth of Nations is labour, it is 
 also shown that, from the beginnings of society, 
 labour has required the aid of capital. 
 
 Many thousands of pages have been written on 
 the meaning of capital, and even now new definitions 
 are being attempted and new criticisms directed 
 against the old. The main result of all this con- 
 troversy seems to be that the term capital covers 
 different ideas, both in economic theory and in the 
 language of the market-place. Accordingly in using 
 the term capital it is most important to take care 
 that by the context, or by special use of adjectives, 
 any ambiguity should be avoided. 
 
 Adam Smith, as usual with him in dealing with 
 complex conceptions that have varied in the course 
 of economic development, applies the historical 
 method. His meaning becomes perfectly clear be- 
 cause he appeals to real nations in different stages of 
 development in all periods and all the world over. 
 
 Capital is treated in the first place from the point 
 of view of the assistance it affords to labour. Capital 
 is required to sustain labour during the period of 
 " waiting" for the results. 
 
28 A PROJECT OF EMPIRE chap. 
 
 Not only must labour wait for the action of the 
 forces of nature to have their efifect, but whenever 
 division of labour is adopted and extended it takes 
 time before the parts of the processes can be assembled 
 and the complete product sold and exchanged for the 
 means of subsistence. Accordingly, a stock of con- 
 sumable goods is required to enable labour of all 
 kinds to wait. 
 
 But capital is equally required to assist labour in 
 the actual processes of production. From the earliest 
 times capital becomes of increasing importance as 
 auxiliary to labour. With the progress of society, 
 the forms of capital — the "capital goods" of the 
 modern economist — become more and more complex 
 and varied. Corresponding to division of labour 
 there is a division of capital. 
 
 § 5. The Relations of Capital and Mo7iey. 
 
 So long as we are simply considering the technical 
 processes of production in the narrow sense of the 
 term, as, for example, in the case of tilling land and 
 waiting for the harvest, there is not much difficulty 
 in realising the nature of the forms of sustaining and 
 auxiliary capital. 
 
 But the act of production is not complete till the 
 commodity is in the hands of the consumer. 
 
 Accordingly, trade is logically a part of production, 
 if by production we mean the adaptation of material 
 afforded by nature to the satisfaction of human 
 wants. 
 
 With the progress of society, as Adam Smith 
 
LABOUR AND CAPITAL 29 
 
 showed with an abundance of historical references of 
 the most important character, exchange becomes of 
 more and more importance. At the outset we are 
 told that division of labour is limited by the extent 
 of the market ; and we cannot have markets, except 
 of the most rudimentary kind, without the use of 
 money. 
 
 One of the great merits of Adam Smith compared 
 with his successors and also with his predecessors, is 
 that he realises better than they do the uses and 
 functions of money, both in practice and in theory. 
 He attacked the mercantilists because, as the basis of 
 their commercial policy, they had come to attach too 
 much importance to the inflow of actual treasure 
 into a country ; and because in their theories, although 
 they niight begin with the real constituents of 
 national wealth, in the course of their reasonings they 
 forgot the things for the money measure. But one 
 consequence of the success of this attack on a de- 
 generate mercantilism was, as so often happens, that 
 inferior writers carried the attack to an extreme. 
 They seemed to imagine that unless they were always 
 thinking with ideas of " things " they must be think- 
 ing with all the old fallacies about money. Accord- 
 ingly, it became the fashion to speak of money as a 
 mere medium of exchange, and mere measure of 
 value, and of gold as a commodity like other com- 
 modities. One consequence of this neglect of the 
 special attributes of money was that too little atten- 
 tion was given to markets, and the organisation 
 of trade. It seemed to be taken for granted that 
 
so A PROJECT OF EMPIRE 
 
 " once the things were there," once the technical 
 processes were complete, the things would exchange 
 themselves. Quite recently this maladjustment of 
 emphasis has been corrected to some extent, but even 
 now the appreciation of markets, and of the money- 
 power as the basis of i^roduction, is not so clearly- 
 realised as it was by Adam Smith. 
 
 On his view money is of fundamental importance, 
 not only in connection with exchange and markets, 
 but equally in the creation and the application of 
 capital. 
 
 V Capital is required to carry on both wholesale and 
 retail trade ; and wholesale and retail traders are 
 both classed as productive labourers, even in the 
 narrow sense of the term. They add to the value of 
 the vendible commodities by increasing their utility 
 in time or place. 
 
 § 6, Increasing Importance of the Mo7iey Attribute 
 of Capital. 
 
 In tracing the historical development of capital 
 we observe the changes in the forms of " capital 
 ofoods" of all kinds, but we also observe that the 
 money attribute becomes of greater importance. 
 This fact is made prominent by Adam Smith in his 
 very definition of capital. Capital is that part of a 
 man's wealth which is employed so as to yield him a 
 revenue, as distinct from that part which is devoted 
 to immediate consumption. But this revenue comes 
 to him in the form of money (or credit which 
 commands money). In a nation with a developed 
 
Ill LABOUR AND CAPITAL 31 
 
 money economy, the profit on capital can only be 
 reckoned in terms of money. If the money valua- 
 tion of the capital depreciates, although the machinery 
 or building or whatever material form the capital 
 may assume, remains as good as ever, the capital 
 itself is so far depreciated. The forms of capital are 
 continuously being consumed and reproduced, but 
 they are only reproduced by passing through a money 
 transformation. The products must be sold for 
 money, and the money directed to the acquisition of 
 the capital forms required. This is the reason why 
 in speaking of any vendible commodity Adam Smith 
 constantly uses the expression — the subject, or what 
 is the same thing, the price of it. 
 
 § 7. Circulating and Fixed Capital. 
 
 Capital can only obtain its revenue by being 
 employed. Circulating capital yields its profit or 
 revenue by changing hands or circulating. " The 
 goods of the merchant yield him no revenue or profit 
 till he sells them for money, and the money yields 
 him as little till it is again exchanged for goods. His 
 capital is continually going from him in one shape and 
 returning to him in another." The fixed capital — 
 e.g. machinery, improvements in lands, etc. — yields 
 its revenue without changing hands, but here again it 
 only yields a revenue by the sale of the product, and 
 the wear and tear can only be made good also by the 
 sale of the product. 
 
 The money attribute of capital is also manifest 
 when we consider the special case of capital lent at 
 
32 A PROJECT OF EMPIRE 
 
 interest. " The stock which is lent at interest is 
 always considered as a capital by the lender. He 
 expects that in due time it will be restored to him, 
 and that in the meantime the borrower will pay him 
 a certain annual rent for the use of it. The borrower 
 may use it either as a capital or as stock reserved for 
 immediate consumption." Here it is plain that the 
 capital must be lent, and returned in the form of 
 money in the first place, and also that in general the 
 interest is also paid in the form of money. 
 
 § 8. Mental or Immaterial Capital. 
 
 One of the most notable features of Adam Smith's 
 treatment of fixed capital is that he includes under 
 it " the acquired and useful abilities of all the 
 inhabitants and members of the society." Such 
 talents can only be acquired by the maintenance of 
 the acquirer during his education, study, or apprentice- 
 ship, and this involves a real expense which is a 
 capital fixed and realised as it were in the person. 
 This inclusion of mental or personal capital is in 
 many ways interesting, and especially as showing 
 Adam Smith's grasp of the principle of continuity, 
 which we are apt to look on as a modern discovery. 
 The conception of capital fixed and embodied in 
 persons serves to show the continuity between pro- 
 ductive and unproductive labour. Labour is pro- 
 ductive (in the narrow technical sense) if it is used to 
 make some vendible commodity which will command 
 at least an equal quantity of labour. It is easy to 
 see that the people of a country can only be kept up 
 
m LABOUR AND CAPITAL 33 
 
 from generation to generation, with all the qualities 
 which differentiate civilised man from the lowest 
 savages, if the labour of the parents or the elders is 
 fixed and embodied in the children or the younger. 
 The importance of this continuity in the mental 
 capital of the human race was justly emphasised by 
 List, and he only weakened his case by supposing he 
 was contradicting instead of developing the ideas of 
 Adam Smith. Even amongst savages, as a recent 
 American writer has forcibly pointed out, the very 
 existence of a tribe of wandering Indians depends on 
 the stores of mental capital in the shape of know- 
 ledge of natural conditions locked up in the minds of 
 the squaws. But in nations with a money economy 
 the continuance of this mental capital is only possible 
 (as in the case of material capital) through the 
 continuous intervention of money. The enormous 
 increase in recent years in national expenditure on 
 elementary and secondary education is an illustration 
 so large that it may well be called proof. 
 
 D 
 
CHAPTER IV 
 
 OF THE RELATIONS OF LABOUR AND CAPITAL 
 
 § 1. Labour and Capital in Relation to the 
 Annual Produce. 
 
 The relations of labour and capital, on the view of 
 Adam Smith, are best seen if we consider, as he does, 
 the relation of both to " the annual produce of the land 
 and labour of the society," or " the great revenue of 
 the body of the people," another substitute for our 
 modern " national dividend." 
 
 The leading ideas may first be stated in Adam 
 Smith's own words : " Though the whole annual 
 produce of the land and labour of every country is no 
 doubt ultimately destined for supplying the consump- 
 tion of its inhabitants ; yet when it first comes either 
 from the ground or from the hands of productive 
 labourers, it naturally divides itself into two parts. 
 One of them, and frequently the largest, is in the first 
 place destined for replacing a capital or for renewing the 
 provisions, materials, and finished work which had been 
 withdrawn from a capital ; the other for constituting 
 a revenue either to the owner of this capital as the 
 profit of his stock or to some other person as the rent 
 of his land. . . . That part of the annual produce of 
 
 34 
 
CHAP. IV LABOUR AND CAPITAL 35 
 
 the land and labour of a country wbicli replaces a 
 capital never is immediately employed to maintain 
 any but productive hands. It pays the wages of 
 productive labour only. . . . Whatever part of his 
 stock a man employs as a capital he always expects it 
 to be replaced to him with a profit. He employs it 
 therefore in maintaining productive hands only ; and 
 after having served in the function of a capital to him 
 it constitutes a revenue to them. Whenever he 
 employs it in maintaining unproductive hands of any 
 kind that part is from that moment withdrawn from 
 his capital and placed in the stock reserved for 
 immediate consumption. . . . Unproductive labourers, 
 and those who do not labour at all, are all maintained 
 by revenue." 
 
 This view is essentially also the modern view 
 which emphasises the conception of a great stream 
 or flow of national wealth which is used partly for 
 keeping up and adding to the " productive powers " 
 of the society and is partly used for immediate 
 consumption or gratification. It is to be noted 
 carefully that Adam Smith always draws a dis- 
 tinction between unproductive labourers and those 
 who do not labour at all. And following up his 
 conception of capital fixed in the natural and 
 acquired abilities of the inhabitants of the country 
 we see that a large part of productive labour 
 may be regarded as employed in maintaining and 
 adding to these forms of "living" capital. Tested 
 either by cost of production or by earning capacity 
 this living capital is of far greater value in any 
 
36 A PROJECT OF EMPIRE chap. 
 
 modern civilised society than the dead or material 
 capital.^ 
 
 Again, if in the same way we develop the content 
 of the phrase "the annual produce of the land and 
 labour," we should arrive at the definition of 
 " produce " given by Henry Sidgwick when he was 
 searching for a term wider than the popular concep- 
 tion of wealth, which in general has an implied 
 reference to material. 
 
 § 2. Meaning oj Parsimony or Saving. 
 
 There are, no doubt, expressions in Adam Smith 
 which, taken without the context, and with all the 
 reminiscences of fallacies born after his death, suggest 
 false ideas of capital and of the relations of capital to 
 labour. Take, for example, the sentence : " Parsimony 
 and not industry is the immediate cause of the 
 increase of capital." In the next sentence, however, 
 we are told that " industry, indeed, provides the 
 subject which parsimony accumulates"; and a little 
 lower down we read : " AVhat is annually saved is as 
 regularly consumed as what is annually spent, and 
 nearly in the same time too ; but it is consumed by a 
 different set of people." Adam Smith constantly uses 
 the term fund where a modern writer (mindful of the 
 pitfalls of the wages fund theory) would use the term 
 " How " or introduce in brackets a number of qualifica- 
 tions. But when we look beneath the surface — to the 
 ideas the words stand for — it is plain tliat when he 
 
 ' Cf. Essay ou tlie " Living C;i|iit.il oC the United Kingdom " in Strikes and 
 Social Problems, by the present writer. 
 
LABOUR AND CAPITAL 37 
 
 speaks of " parsimony increasing the fund destined 
 for the maintenance of productive hands" he only 
 means foresie^ht directino- the flow of wealth to the 
 satisfaction of future needs. " Both productive and 
 unproductive labourers, and those who do not labour 
 at all, are all equally maintained by the annual 
 produce of the land and labour of the country." Here, 
 at any rate, there is no suggestion of a fund put aside, 
 and stored up for the future payment of the real 
 wages of labour. 
 
 And when we examine Adam Smith's definite 
 treatment of the wages of labour and the profits of 
 capital, and of the relations of capital to labour, we 
 also find that the ideas are what we are pleased to 
 call modern and not early or mid- Victorian. 
 
 § 3. The Dependeyice of Labour on Capital. 
 
 To begin with, Adam Smith points out that even 
 in his day the cases are not very frequent in which 
 a single independent workman would have a stock 
 sufficient to purchase the material of his work 
 and to maintain himself till it is completed. 
 On the contrary, " in every part of Europe twenty 
 workmen serve under a master for one that is in- 
 dependent." 
 
 That is to say, the command of capital is necessary 
 to enable labour to work, and in general this command 
 of capital is not in the power of the workmen 
 themselves. 
 
 Capital and labour both being necessary for the 
 annual production of the revenue out of which both 
 
38 A PROJECT OF EMPIRE chap. 
 
 are paid, what are the principles which determine the 
 distribution of the joint earnings? "What are the 
 common wages of labour depends everywhere upon 
 the contract usually made between those two parties 
 (namely the masters and men) whose interests are by 
 no means the same. The workmen desire to get as 
 much, the masters to give as little, as possible. The 
 former are disposed to combine in order to raise, the 
 latter in order to lower the wages of labour." 
 
 He then goes on to show that in making the 
 contracts or bargains as a rule the masters have the 
 advantage. They can combine more easily, and the 
 law authorises or at least does not prohibit their 
 combinations, while it prohibits those of the workmen. 
 It took the nation a century to recognise the essential 
 truth of these positions, which in the meantime were 
 obscured by crude theories of wages and of the 
 relations of capital to labour. 
 
 § 4. Resume of Adam Smith's Ideas on Labour 
 and Capital. 
 
 The main object of the present inquiry, as already 
 explained, is not to justify the opinions of Adam 
 Smith, or to make a comparison of his opinions with 
 those of recent writers, but to apply some of his ideas 
 to our actual problems, and especially to the problems 
 connected with foreign trade and foreign investment 
 of capital. For this purpose it is not necessary to 
 give a summary of all Adam Smith's views on labour 
 and capital, but it is necessary to understand his 
 fundamental positions. And these, so far as yet 
 
IV LABOUR AND CAPITAL 39 
 
 examined, are in accord with the latest developments. 
 The annual produce of the land and labour — the great 
 revenue of the body of the people — corresponds to 
 the "national dividend." To keep up the dividend, 
 the labour and the capital must also be kept up or 
 continued in the same degree of efficiency. And in 
 a healthy progressive society much more is produced 
 than is requisite for this purpose; population increases 
 and capital increases, and the wealth available for 
 immediate consumption by the inhabitants of the 
 country also increases. From the national point of 
 view " the first object of political economy considered 
 as a branch of the science of a statesman or legislator 
 is to provide a plentiful revenue or subsistence for the 
 people, or more properly to enable them to provide 
 such a revenue or subsistence for themselves." 
 
 The distribution of the annual produce between 
 the great social orders depends on their relative 
 strength or on their power of making contracts. This 
 again depends partly on the causes which may be 
 brought under the terms demand and supply, and 
 partly on the influence of law and custom with the 
 force of law, which again depend largely on historical 
 causes which go far back in their origins. 
 
 But though, in a sense, the interests of masters 
 and men (or of capital and labour) are opposed, from 
 another -point of view they are in harmony. Both 
 are interested in the increase of the joint product of 
 their co-operation. And looking to the actual pro- 
 o-ress of nations Adam Smith arrives at the conclusion : 
 " The wages of labour do not sink with the profits of 
 
40 A PROJECT OF EMPIRE chap. 
 
 stock. The demand for labour increases with the 
 increase of stock whatever be its profits ; and after 
 these are diminished stock may not only continue to 
 increase but to increase much faster than before. . . . 
 A great stock, though with small profits, generally 
 increases faster than a small stock with great 
 profits " ^ 
 
 Under any system in which private property and 
 individual liberty are the essential bases of society 
 — however much they may be modified by various 
 moral or political ideals — capital and labour are 
 mutually necessary and interdependent. The capital 
 within any country, in order to preserve its existence, 
 must be continuously restored and reproduced by 
 labour. And equally under modern conditions labour 
 can find no employment without the aid of capital. 
 
 Even supposing the socialist state were established 
 there must be a reservation of stock for capital 
 purposes, or the land would be afflicted with famine 
 and misery." / 
 
 sj 5. Complexity of Industrial Relations. 
 
 It is equally obvious that under actual conditions 
 {i.e. as contrasted with the socialist ideal) the direc- 
 tion of industry is in the hands of those who control 
 the capital. Those again who control the capital look 
 to profit as the guide, and profit again depends largely 
 on the price to be obtained for the product and that 
 again on the demand of the consumers. The con- 
 
 ' Book I. chap. ix. 
 * Cf. I'lireto, Coiirs d'iconouiie j)oli(iquc, vol, ii. p. 3G6 sq. 
 
LABOUR AND CAPITAL 41 
 
 sumers in the last resort are all who have any share 
 in the great revenue of the society. With such a 
 complex interaction of economic forces, it seems 
 prima facie that it is extremely improbable that 
 the national interests will be promoted simply b 
 leaving individuals to do as they please. 
 
 § G. Conflict possible between Individual ayid 
 Public Interests. 
 
 5 
 
 This possible conflict of the interests of the indi- 
 vidual and the nation is always recognised and 
 emphasised by Adam Smith. He does not take it 
 for granted that, owing to a beneficent providence, the 
 pursuit of self-interest naturally in all circumstances 
 promotes the public good. To attain to that misty 
 summit of optimism was left to the followers of 
 Ricardo. The following passage from M'Culloch's 
 Introduction to the Wealth of Nations (revised in 
 1838) shows very clearly the opposition between 
 Adam Smith and the greatest and most extreme of 
 the Ricardians. " But however excellent there are 
 errors, and those, too, of no slight importance, even 
 in those parts of the Wealth of Nations which treat 
 of the production of wealth. So long as Smith 
 confines himself to a statement of the advantages, 
 resulting from the freedom of industry, and of the 
 mischiefs occasioned by the frequent attempts to fetter 
 its operations and to force it into certain channels in 
 preference to others, his principles and reasonings are 
 equally sound and conclusive ; but they are less so in 
 other instances. He does not say that those branches 
 
42 A PROJECT OF EMPIRE 
 
 of industry which are found to be most for the 
 advantage of individuals are necessarily also most 
 for the advantage of the public. His leaning to the 
 system of the Economists — a leaning perceptible in 
 every part of his work — made him so far swerve from 
 his own principles as to admit that individual and 
 public advantage do not always coincide. He con- 
 tends that agriculture, though not the only productive 
 employment, is more productive than any one else ; 
 that the home trade is more productive than a direct 
 foreign trade ; and the latter than the carrying trade. 
 It is clear, however, that these distinctions are entirely 
 imaginary. A state being notliing but a collection of 
 individuals, whatever is most advantageous to them 
 individually must be so also to the collective body ; 
 and it is obvious that the interest of the parties will 
 always prevent them from engaging in manufactures 
 and commerce unless they yield as large profits and 
 are consequently as publicly beneficial as agriculture." 
 
 § 7. Weakness of Dogmatic Free Trade owing to 
 Neglect of Adam SmitJis Distinctions. 
 
 These distinctions which M'Culloch regards as 
 imaginary are with Adam Smith of vital importance. 
 And when allowance is made for Adam Smith's use 
 of popular language with ambiguities that must 
 be interpreted Ijy the context, they are seen to 
 be reasonable and to point to important matters 
 of fact. 
 
 In the opinion of the present writer, it is owing to 
 the neglect of these distinctions that the theory of 
 
UNIViiKbH T 
 
 OF 
 
 LABOUR AND CAPITAL 
 
 43 
 
 " free trade " assumed a dogmatic simplicity and 
 universality not recognised by Adam Smith ; and it 
 is the popular recognition of the reality of these 
 distinctions that gives strength to the present attack 
 on " free trade." ^ 
 
 1 See next chapter. 
 
CHAPTER V 
 
 OF THE DIFFERENT EMPLOYMENTS OF CAPITALS^ 
 
 § 1. Four Modes of Employing Capital. 
 
 Under the above title Adam Smith first of all 
 discusses the different employments of capital in 
 the home country. Four methods are cited. First, 
 capital may be applied to agriculture and the 
 extractive industries for the production of food 
 and the raw materials of manufacture ; secondly, 
 to manufactures in the widest sense of 'the term 
 implying the adaptation of these materials for con- 
 sumption ; thirdly, the capital may be applied to the 
 distribution of these finished products by wholesale 
 trade ; and lastly, capital may be devoted to the 
 retail trade. 
 
 " Each of these four methods of employing a 
 capital is essentially necessary, either to the existence 
 or the extension of the other three, or to the general 
 conveniency of society. Unless capital were employed 
 in transporting rude or manufactured produce from 
 places where they abound to places where they are 
 scarce, no more of either could be produced than 
 
 ' This is the title of Book ii. chap. v. of the U'lalth of Nations; and 
 might now be called the " forgotten chiijitcr." 
 
 44 
 
cH.v EMPLOYMENT OF CAPITAL 45 
 
 was necessary for the consumption of the immediate 
 neighbourhood." 
 
 § 2. Trade Part of Production. 
 
 In this way the persons whose capitals are em- 
 ployed in any of these four ways are themselves 
 productive labourers. 
 
 The necessity of trade — both wholesale and retail 
 — for completing the act of production is always 
 emphasised by Adam Smith. He shows in the 
 chapter on division of labour that by means of water 
 carriage trade is carried on more easily than by land, 
 aijd therefore markets grow up on the banks of rivers 
 or on the sea-coast; and with the growth of the markets 
 there is the growth of industry and of towns and cities. 
 One of the best-known generalisations of commercial 
 geography is that the cities of the world have grown 
 up mainly through trade, and since Adam Smith wrote 
 the cities of America have confirmed the induction. 
 The great cities are the great centres of trade. 
 
 At the beginning of the third book he shows that 
 the great commerce of every civilised society is that 
 carried on between the towns and the country, and 
 the gains of both are mutual and reciprocal. The 
 nearer it is to the town so much greater is the 
 improvement of the country ; and that, in general, 
 the improvement of the commerce of the towns has 
 led to the improvement of the country, is the 
 main argument of one of the best chapters in the 
 Wealth of Nations} 
 
 1 Book III. chap. iv. 
 
46 A PROJECT OF EMPIRE chap. 
 
 In the chapter ^ on rent we read : " Good roads, 
 canals, and navigable rivers, by diminishing the ex- 
 pense of carriage put the remote parts of the country 
 more nearly upon a level with those in the neighbour- 
 hood of the town. They are upon that account the 
 greatest of all improvements." They are advantageous 
 both to the towns and to the country ; even to the 
 country near the towns in spite of the increased 
 competition. 
 
 § 3. Capital employed in Agriculture most 
 advantageous to the Society. 
 
 It seemed desirable to notice once more Adam 
 Smith's views on the importance of trade in order to 
 put in a proper perspective his views on agriculture. 
 No proposition has been more criticised than that in 
 which he says that "of all the ways in which a 
 capital can be employed, the employment in agriculture 
 is by far the most advantageous to the society." - And 
 most of all objection is raised to one of the principal 
 reasons assigned. " ^^Do— ^ual capital puts into 
 motion a greater quantity of productive labour than 
 that of the farmer. Not only his labouring servants 
 but his labouring cattle are productive labourers. In 
 agriculture, too, nature laboui'S along with man; and 
 though her labour costs no expense its produce has 
 its value, as well as that of the most expensive work- 
 men." But with Adam Smith, as so often pointed 
 out already, we ought always to apply the test of 
 experience and not to consider how far his reasoning 
 
 ' Book I. chap. xi. '^ Book ii. chap. v. 
 
V EMPLOYMENT OF CAPITAL 47 
 
 may conform to later abstract propositions carefully 
 guarded by hypotheses. The main contention is 
 true not only of agriculture but of all the extractive 
 industries in which "nature labours with man," and 
 confirmation is found in the progress of the United 
 States and the more recent expansion of Canada. In 
 the controversy on the relative merits of the policy 
 of the United Kingdom and the United States, we 
 are always told to remember that the latter has the 
 immense advantage of superior natural resources 
 which is only another way of saying that in America 
 nature labours with man to a greater extent than in 
 England. And even as regards Great Britain the 
 labour of nature or the aid of nature is one of the 
 main causes of our industrial prosperity. 
 
 § 4. Other Social Advantages of Agriculture. 
 
 Adam Smith, however, considered agriculture to 
 be of special advantage to the nation on several other 
 grounds, all of which seem reasonable and have 
 weight in the present policy of various nations. He 
 bestowed the liighest praise on the qualities of 
 labour that are called forth by agriculture. "After 
 what are called the fine arts and the liberal pro- 
 fessions, however, there is perhaps no trade which 
 requires so great a variety of knowledge and experi- 
 ence." He refers to the innumerable volumes which 
 have been written in all languages as well as to the 
 knowledge that must be possessed by the common 
 farmer. And recent experience confirms the view 
 that of all the practical sciences that of agriculture 
 
48 A PROJECT OF EMPIRE chap. 
 
 presents the greatest difticulties. Adam Smith also 
 gives the highest praise to the ordinary agricultural 
 labourers as compared with those of the towns. " How 
 much the lower ranks of people in the country are 
 really superior to those of the town, is well known to 
 every man whom either business or curiosity has led 
 to converse much with both." 
 
 If they had their deserts the labourers in the 
 country would be paid much more highly than those 
 in the towns, and it is worth noting that the main 
 reason assigned for the lower remuneration of those 
 engaged in agriculture is the greater power of com- 
 bination possessed by the traders in the towns. 
 
 In making a bargain between the towns and the 
 country, for the division of the gross produce of the 
 two, the former have the greater bargaining power. 
 In recent years the increased mobility of labour has 
 raised the rates of wages in agriculture relatively, and 
 no doubt the rise will be continued. 
 
 Adam Smith also commends ao;riculture from the 
 national point of view because the capital that is 
 acquired to any country by cominerce and manu- 
 factures is always a very precarious and_ uncertain 
 possession till some part of it has been seciired and 
 realised in the cultivation and improvement of its 
 lands. 
 
 This last reason naturally leads to the consideration 
 of the other differences in the employments of capital 
 from the point of view of national advantage. 
 
EMPLOYMENT OF CAPITAL 49 
 
 § 5. Distinction between Profit and Advantage. 
 
 And in the first place we must realise that Adam 
 Smith does not suppose that the advantage of the 
 employment of capital is to be measured simply by 
 the profit that is earned. 
 
 Throughout the Wealth of Nations profit and 
 national advantage are distinguished, and very often 
 indeed they are definitely opposed. In dealing, for 
 example, with the monopoly of the colonial trade, 
 the central point of the attack is that the monopoly 
 of this trade had unduly raised the rate of profit, not 
 only in that trade but in the country generally, and 
 this rise in the rate of profit is shown to be a national 
 disadvantage, and especially a disadvantage to labour. 
 The argument will be examined later on, but, in the 
 meantime, it is an excellent example of the distinc- 
 tion in idea, at any rate, between profit and advantage. 
 
 " The difi'erence [in the advantage of the employ- 
 ment of capital] is very great according to the 
 different sorts of wholesale trade in which any part 
 of it is employed." 
 
 § 6. Home Trade more advantageous than 
 Foreign Trade. 
 
 All wholesale trade may be reduced to thr 
 diff"erent sorts : the home trade, the foreign trade of 
 consumption, and the carrying trade. 
 
 The greatest national advantage is obtained by the 
 employment of the capital in the home trade. The 
 distinction turns on the fact of the employment of 
 
50 A PROJECT OF EMPIRE 
 
 the capital witliiu the country and the encourage- 
 ment of productive labour in the home country. 
 The advantage is distinctly and emphatically a 
 national advantage. The position is best illustrated 
 by a concrete case. " The capital which sends Scotch 
 manufactures to London and brings back English 
 corn and manufactures to Edinburgh necessarily 
 replaces by every such operation two British capitals 
 which had both been employed in the agriculture 
 and manufactures of Great Britain. The .capital 
 employed in purchasing foreign goods for home 
 consumption, when this purchase is made with the 
 produce of domestic industry replaces, too, by every 
 such operation two distinct capitals ; but one of 
 them only is employed in supporting domestic 
 industry. The capital which sends British goods to 
 Portuoral and brings back Portuo-uese oroods to Great 
 Britain replaces by every such operation only one 
 British capital. The other is a Portuguese one. 
 Though the returns, therefore, of the foreign trade 
 of consumption should be as quick as those of the 
 home trade the capital employed in it will give but 
 one-half of the encouragement to the industry or 
 productive labour of the country. ^But the returns' 
 of the foreign trade of consumption are very seldom 
 so quick as those of the home trade. The returns of 
 the home trade generally come in before the end 
 of the year, and sometimes three or four times in the 
 year. The returns of the foreign trade of consumption 
 \ seldom come in before the end of the year and 
 sometimes not till after two or three years. A 
 
V EMPLOYMENT OF CAPITAL 51 
 
 capital^ therefore employed in the home trade will 
 sometimes make twelve operations, or be sent out and 
 returned twelve times before a capital employed in 
 the foreign trade of consumption has made one. If 
 the capitals are equal, therefore, the one will give four- 
 and-twenty times more encouragement and support 
 to the industry of the country than the other." 
 
 This passage has been quoted at length in order 
 to show that in Adam Smith's opinion the first test 
 of the national advantage in the employment of 
 capital is that the capital should be employed within 
 the country. It is not a question of profit. Foreign 
 employment of the capital may give greater profit. 
 The advantage to the country itself, or the greater 
 part of the advantage, consists in the consumption 
 and reproduction of the capital by the productive 
 labour of the country itself, and not by that of some ' 
 other country. 
 
 § 7. Imports paid for hy Exports. 
 
 And it must not be supposed that Adam Smith 
 w^as not perfectly aware of the elementary fact that 
 (other items of international indebtedness being 
 omitted) imports must be paid for by exports. This 
 is clearly brought out in the passage following that 
 just quoted. " The foreign goods for home con- 
 sumption may sometimes be purchased not with the 
 produce of domestic industry but with some other 
 foreign goods. These last, however, must have been 
 purchased either immediately with the produce of 
 domestic industry pr with something else whicli had 
 
52 A PROJECT OF EMPIRE chap. 
 
 been purchased with it ; for, the case of war or 
 conquest excepted, foreign goods can never be 
 acquired but in exchange for something that "had,, 
 ])een produced at home, either immediately or after 
 two or more different exchanges." 
 
 § 8. Varieties of Foreign Trade and their 
 Relative Advantages. 
 
 He goes on to say that the effects of such a round- 
 about trade of consumption are exactly the same as 
 those of the direct foreign trade, except that the 
 final returns are likely to be still more distant, as 
 they must depend on the returns of two or three 
 distinct foreign trades. 
 [(. A roundabout foreign trade of consumption is 
 therefore in general less advantageous to the nation 
 than a direct trade, on the ground that the capital 
 is kept longer out of the country. }\ 
 
 Precisely the same principle is applied in determin- 
 ing the relative advantages of other kinds of foreign 
 trade. The near trade, e.g. trade with France, is more 
 advantageous than the distant trade, e.g. with India 
 or America. And finally the pure carrying trade in 
 which the capital of the country is employed in 
 carrying between two foreign countries, and in its 
 services is kept out of the home country altogether, 
 is the least advantageous of all modes of the employ- 
 ment of capital. "That part of the capital of any 
 country which is employed in the carrying trade is 
 altogether withdrawn from supporting the productive 
 labour of that particular country to support that of 
 
V EMPLOYMENT OF CAPITAL 53 
 
 some foreign countries. Though it may replace by 
 every operation two distinct capitals, yet neither of 
 them belongs to that particular country. The capital 
 of the Dutch merchant which carries the corn of 
 Poland to Portugal and brings back the fruits and 
 wines of Portugal to Poland replaces by every such 
 operation two capitals, neither of which had been 
 employed in supporting the productive labour of 
 Holland ; but one of them in supporting that of 
 Poland and the other that of Portugal." ^ 
 
 And here again it must not be supposed that 
 Adam Smith did not realise that the ships of a 
 country are part of its capital and the crews of those 
 ships part of its productive labour. For he goes on 
 to say : " When indeed the carrying trade of any 
 particular country is carried on with the ships and 
 the sailors of that country that part of the capital 
 employed in it which pays the freight is distributed 
 among and puts in motion a certain number of 
 productive labourers of that country. It does not, 
 however, seem essential to the nature of the trade that 
 it should be so." In our own times one of the most 
 frequent complaints against our merchant shipping 
 
 ^ The passage which immediately follows also illustrates very forcibly the 
 distinction between profits and advantage. "The profits only return regularly 
 to Holland and constitute the whole addition which this trade necessarily 
 makes to the annual produce of the land and labour of that country." 
 
 A good example of the difference between profit and advantage is given in 
 the chapter on Colonies (Bk. iv. oh. vii.). "In the trade, therefore, to 
 which these regulations confine the merchant of Hamburg his capital can 
 keep in constant employment a much gi-eater quantity of German industry 
 than it possibly could have done in the trade from which he is excluded." 
 [The reference is to the exclusion from the distant trade of the British 
 colonies.] "Though the one employment, therefore, may perhajis be to him 
 less profitable than the other, it cannot be less advantageous to his country.' 
 
54 A PROJECT OF EMPIRE chap. 
 
 generally is that it employs a large amount of non- 
 British labour ; and that British merchants may send 
 goods between foreign countries in foreign ships. 
 
 It must be remembered also that Adam Smith 
 gave great praise to the Navigation Laws on the 
 ground that they gave encouragement to British ships 
 and British shipping. In treating of the pure 
 carrying trade he deals wdth the point that to Britain 
 the carrying trade is of peculiar advantage, because 
 " its defence and security depend upon the number of 
 its sailors and shipping." But he replies the same 
 capital may employ as many sailors and shipping 
 either in the foreign trade of consumption or even in the 
 home trade when carried on by coasting vessels as it 
 could in the carrying trade. Then again he observes 
 that the number of sailors and shipping which any 
 particular capital can employ does not depend on the 
 nature of the trade, but partly on the bulk of the 
 goods in proportion to their value and partly on the 
 distance of the ports between which they are to be 
 carried ; chiefly on the former of these two cir- 
 cumstances. " The coal trade from Newcastle to 
 London, for example, employs more shipping than all 
 the carrying trade of England, though the ports are 
 at no great distance." He concludes, therefore, that 
 " to force by extraordinary encouragements a larger 
 share of the capital of the country into the carry- 
 ing trade than would naturally go into it wall not 
 always necessarily increase the shipping of that 
 country." 
 
V ^ EMPLOYMENT OF CAPITAL 55 
 
 § 9. General Summary. 
 
 The national point of view is made prominent in 
 
 the general summary of the argument. " The^gapital 
 employed in the home trade of any country will 
 genenilly give encouragement and support to a 
 greater quantity of productive labour in that country 
 and.jncrease the value of its annual produce more 
 than an equal capital employed in the foreign trade 
 of consumption ; and a capital employed in this 
 latter trade has a still greater advantage over an equal 
 capital employed in the carrying trade." The 
 question is looked at from the standpoint of the 
 particular country concerned. " The riches and, so 
 far as power depends upon riches, the power of every 
 country must always be in proportion to the value of 
 its annual produce, the fund from which all taxes 
 must ultimately be paid. It ought, therefore, to give 
 no preference or superior encouragement to the 
 foreign trade of consumption above the home trade, 
 nor to the carrying trade above either of the other 
 two." At the time when Adam Smith wrote it was 
 an essential part of the mercantile system to 
 encourage exports. Such encouragement was given 
 by treaties of commerce, by the monopoly of the 
 colonial trade, and especially by the method of 
 bounties on exports. 
 
 In our own day there has been a recrudescence of 
 the idea that the prosperity of a country is to be 
 measured by the growth of the export trade. Adam 
 Smith's insistence on the importance of the employ- 
 
56 A PROJECT OF EMPIRE chap^ 
 
 ment of capital at home is aimed at this policy wh(m 
 he says that no artificial encouragement ought to be 
 given to the foreign trade. 
 
 Again, in his view all foreign trade — except in the 
 case where a country was purely passive — involved 
 the export of part of the capital of the country, at any 
 rate for a time. In proportion to the length of the 
 time the capital was kept out of the country was the 
 measure of its disadvantage. 
 
 The importance of the employment of capital at 
 home is also shown in his estimate of the distribution 
 of the advantaore of foreign trade between different 
 countries.^ That country gains the greatest advantage 
 in whose exports there is the largest proportion of 
 native produce and the least of mere re-exports. 
 
 § 1 0. Importayice of the Home Market. 
 
 In considering generally the relations of the in- 
 dustr}^ of the towns and that of the country — " the 
 greatest and most important branch of the commerce A , 
 of every nation is that which is carried on between J 
 the inhabitants of the town and those of the country y 
 — a passage occurs of singular significance : " What- 
 ever tends to diminish in any country the number of 
 artificers and manufacturers tends to diminish the 
 home market, the most important of all markets, for 
 the rude produce of the land, and thereby still further 
 to discouraore agriculture." ^ Adam Smith's criticism 
 
 ' Book IV. chap. iii. part ii. 
 
 '^ Book IV. cliaj). ix. Tliis passage anticipates the main arrjuinent of 
 Alexander Hamilton for the policy of protection of manuracturers in tlie 
 United States, viz., that towns (with manufactures) must he developed in 
 order to encourage agriculture. 
 
EMPLOYMENT OF CAPITAL 57 
 
 of Muu, the great mercantilist, illustrates very 
 forcibly the point in dispute : " The title of Mun's 
 book, England! s Treasure hy Foreign Trade, became 
 a fundamental maxim in the political economy not of 
 England only, but of all other commercial countries. 
 The inland or home trade the most important of all, 
 the trade in which an equal capital affords the 
 greatest revenue, and creates the greatest employment 
 Jbr the people of the country, was considered as sub- 
 sidiary only to foreign trade. It neither brought 
 money into the country it was said nor carried any 
 out of it. The country, therefore, could never become 
 either richer or poorer by means of it, except so far as 
 its prosperity or decay might indirectly influence the 
 state of foreign trade." ^ 
 
 § 11. Export Duties on Wool and Coal. 
 
 Not only did Adam Smith maintain that the 
 home employment of capital was generally more 
 advantageous than any kind of foreign employment, 
 but he accepted the principle that certain forms of 
 capital should be retained specially for home use. 
 Thus, for example, although he did not approve of 
 the absolute prohibition of the export of wool (as 
 enforced in his day), he approved of a very heavy 
 export duty partly for the revenue to be obtained 
 and partly on account of the encouragement given to 
 the manufacture by the check imposed on the export 
 and the consequent fall in the price. The whole 
 passage is worth quoting as bearing on the very 
 
 ^ Book IV. chap. i. 
 
58 A PROJECT OF EMPIRE chap. 
 
 similar case of the export duty ou coal under present 
 conditions. " Every different order of citizens is 
 bound to contribute to the support of the sovereign 
 or commonwealth. A tax of five or even ten shillings 
 upon the exportation of every tod of wool would 
 produce a very considerable revenue to the sovereign. 
 It would hurt the interest of the growers somewhat 
 less than the prohibition, because it probably would 
 not lower the price of wool quite so much. It would 
 afford a sufficient advantage to the manufacturer 
 because, although he might not buy his wool alto- 
 gether so cheap, he would still buy it at least five or 
 ten shillings cheaper than any foreign manufacturer 
 could buy it, besides saving the freight and insurance 
 which the other would be obliged to pay. It is 
 scarce possible to devise a tax which could produce 
 any considerable revenue to the sovereign and at 
 the same time occasion so little inconveniency to 
 anybody." ^ 
 
 It w^ould be easy to multiply instances of the 
 importance assigned by Adam Smith to the employ- 
 ment of capital for the support and encouragement of 
 
 ' Book IV. chiip. viii. The avura;^e price of wool 1703-1790 was 8id. 
 per lb. (highest 13d., lowest 6il.), or about 20s. per tod of 28 lbs. (highest 
 30s. U\. and lowest 14s.). 
 
 When Adam Smith made the final revision of his work (17S3) the duty 
 on the export of coal was .'is. per ton, in most cases more than the value 
 at tlie pithead or even at the port. A duty was also imposed on tlie coal 
 carried castwise between English ports. To this Adam Smith strongly 
 objects as burdensome to consumers and detrimental to manufactures ; 
 and lie says that " if a bounty could in any case be reasonable it might 
 perhaps be so upon the transportation of coals from those parts of the 
 country in which thoy abound to those in wliich they are wanted" (Bk. v. 
 ch. ii.). This passage shows very clearly the importance, in his view, of 
 using the natural resources of the country for the development of the home 
 industries. 
 
EMPLOYMENT OF CAPITAL 59 
 
 the productive labour of the home country, insteacT\ 
 of that of foreign countries, but further elaboration' 
 seems needless in view of the passages already citedy 
 
 § 12. How can Adam Smith's Vieivs on the Superior 
 Advantage of Home Trade he reconciled with 
 his advocacy of Free Trade f 
 
 But at this point the question naturally arises : 
 If in general the employment of capital at home is 
 more advantageous to the nation than its employment 
 in any form abroad, why should the nation or the 
 sovereign power in the state not give particular 
 encouragement to its own productive labour ? 
 
 And in particular, if the employment of capital 
 in agriculture is of all employments the most 
 advantageous, why should a nation not give particular 
 encouragement to that form of industry ? The answer 
 to these questions is of peculiar interest at the 
 present time. Many of those who advocate the 
 adoption by this country of differential duties in 
 favour of home industries seem to think they have 
 proved their case if they show that capital employed 
 in home industries is more advantageously employed 
 than if it is sent abroad, and that trade, for 
 example, between Edinburgh and London is of^^ 
 more advantage to Britain than trade betweei 
 London and Lisbon, or trade between Edinburgh ai 
 Hamburg. They do not appear to know that Adam 
 Smith gave this illustration, and not only recognised 
 generally the superiority in advantage of the home 
 trade and of the home employment of capital, but 
 
6o A PROJECT OF EMPIRE 
 
 elaborated the distinction in a great variety of forms. 
 Their arguments may be valid against some of the 
 successors (in time) of Adam Smith, but they are 
 worse than irrelevant as against Adam Smith 
 himself. The nationalism of Adam Smith was much 
 more robust than that of the present day, and as 
 will be shown later, so was his imperialism. 
 
 The real difficulty as regards Adam Smith is this : 
 Why, holding these very strong national and imperial- 
 ideas, did he destroy the old system in which these 
 ideas had also been advanced ? The answer is that, 
 in bis view, protection to the home market was in 
 general either hurtful or useless, and that the 
 monopoly of the colonial trade was injurious to the 
 economic interest of landlord, capitalist, and labourer, 
 and a source of national weakness instead of being 
 a source of strength. 
 
 Those who perverted Adam Smith's system of 
 natural liberty into the simple negative dogma of 
 Icdsse r^ /air e got rid of the difficulty of answering 
 these questions by saying that the great master was 
 wrong in thinking there could ever be any other test 
 of the advantage of employing capital than the test 
 of profit; that. in_ all cases egun] profi t gnve equal 
 advantage and greater profit greater advantage. 
 Those, on the other hand, who accepted Adam 
 Smith's ideas on the employment of capital rejected 
 his ideas on freedom of trade, and argued in effect 
 that he ought never to have destroyed the old 
 system. 
 
EMPLOYMENT OF CAPITAL 6i 
 
 § 13. Bearing of the Answer on the Present 
 Controversy. 
 
 The consistency or the reverse of Adam Smith's 
 arguments may perhaps appear to be a matter of 
 historical interest only. But that is not so. The 
 truth is that no great writer has taken so complete 
 a survey of the complexity of the questions involved. 
 He seems to be inconsistent, because people only 
 take account of the parts of his argument which 
 happen to suit their own narrower view. 
 
 An examination of his work in all its aspects 
 ought to be the best introduction to an understand- 
 ing of our present policy and of the value of the 
 changes that are proposed. 
 
 It may happen that such an examination will 
 show that the ideas with which Adam Smith 
 destroyed the old system are no longer applicable 
 to present conditions ; and that if his views on 
 nationalism and imperialism are to be effectually 
 realised some parts of the old system must be 
 restored, e.g. a certain moderate amount of protection 
 must be given to home industry and a certain amount 
 of preference to the colonies. 
 
 Or, it may happen, that in the course of economic 
 development it is of even greater importance now than 
 it was in the time of Adam Smith that in order to 
 promote the real interests of the nation and the 
 empire no restraints should be imposed or preferences 
 given. 
 
 One thing at least ought to be abundantly clear. 
 
62 A PROJECT OF EMPIRE chap. 
 
 AVhether we look to Adam Smith's arguments in 
 support of the general policy of freedom from 
 restraints, or to his arguments in support of the 
 important exceptions which he approves of, he 
 certainly did not imagine that in all cases the 
 interests of individuals are always in accord with 
 those of the nation, or that national interests are 
 always in harmony with those of the world. Crucial 
 instances to the contrary have already been given, 
 and the number might be indefinitely extended. 
 
 It is highly probable that such an examination of 
 Adam Smith's reasons may give us ideas applicable 
 to the present time. It may be that other ideas 
 must also be introduced, and that the old ideas must 
 be applied to new facts, but in the search for truth 
 one great aid is to have guiding ideas. And whether 
 true or false the ideas of Adam Smith have had atV 
 greater effect on the actual making of economicy 
 history than those of any other writer. / 
 
 Note on Byles's " Sophisms of Free Trade." 
 
 The failure to distinguish (from the national stand 
 point) between profit and advantage has been curiously 
 persistent. In 1849 John Barnard Byles (later the author of 
 the standard work on Bills of Ex'change, and a justice in the 
 Court of Common Pleas) published a book on the Sophisms of 
 Free Trade. At the time (1849 being the year of the comple- 
 tion of the repeal of the Corn Laws) this work was remarkable 
 for many acute criticisms of extreme laisscr faire. But, perhaps, 
 the most remarkable feature was the insistence on the position 
 of Adam Smith that in general the home trade was,_more_ 
 advantageous than the foreign, and bringing out as Adam Smith 
 had done the difference between profit and advantage. Tlii.s 
 
EMPLOYMENT OF CAPITAL 63 
 
 work of Byles has recently been rediscovered and republished 
 with notes and comments. The editors, W. S. Lilly and C. S. 
 Devas, two well-known writers on political and economic science, 
 and strong supporters of protection, throughout describe this 
 position of Adam Smith (endorsed by Sir John Byles) as the 
 Home Trade Fallaaj. In commenting on Chapter IV. of Byles's 
 book they say : " This chapter repeats the error of Adam Smith 
 that home trade is ipso facto more profitable (^/t;) to a nation than 
 foreign trade. It is Byles's main mistake, and exposed him to 
 scornful refutation by Bowring and Lord Hobart. For purposes 
 of reference we will label it the Ilome Trade Fallacy, and Ave will 
 proceed to expose it. Adam Smith's remarks, then, which 
 Byles quotes on the quicker returns and greater profits of the 
 home trade are doubly incorrect." But neither Adam Smith 
 nor Byles (in this matter his disciple) said that the home trade 
 was more p7vJitabW, their contention is that it is more 
 advanta,geous, and the terms are by no means synonymous. 
 
 Byles quotes at length the passage from Adam Smith given 
 above, and restates the position in clear and vigorous language 
 of his own, concluding with the reflection : " These observations 
 of Adam Smith derive additional weight from the quarter from 
 which they come. They are the admissions of the founder of 
 the existing school of political economists on a point of vital 
 importance, so vital that it affects the entire theory of free 
 trade." Although Byles had already stated the argument very 
 clearly and emphatically, he continues : " At the risk of being 
 charged with prolixity and repetition I venture to invite the 
 candid and serious attention of the reader to a further considera- 
 tion of it." And he gives another rendering. 
 
 Other writers of the present day seem to think that if the 
 home trade fallacy is not a fallacy, then, free trade must 
 ipw facto be a fallacy. They accept the authority of Adam 
 Smith on the advantage of home trade over foreign, but they 
 never consider the arguments by which he , tries ta^how Jhat 
 the national advantage is in general attained by freedom, and 
 not by restraints on foreign trade. These arguments are 
 examined in the foHowihg chapters. 
 
\y 
 
 CHAPTER VI 
 
 THE REAL ADVANTAGES OF FOREIGN TRADE 
 
 § 1. Critique of Old Ideas of Advantages of 
 Foreign Trade. 
 
 The Qiercantilists, whose maxims in political economy 
 were accep^d and acted on by all the nations of 
 Europe up to the time of Adam Smith, laid an 
 exaggerated stress on the value to a nation of its 
 foreign trade. In opposition to this view Adam 
 Smith insisted on the greater advantage in itself of 
 the home trade, and showed that some of the principal 
 advantages claimed for foreign trade were illusory, 
 e.g. the acquisition of gold and silver by means of a 
 favourable balance of trade. The refutation of the 
 favourable balance theory — that the advantage of 
 foreign trade was to be measured by the money 
 balance due for the excess of exports over imports — 
 was so complete that its success has been admitted 
 by the strongest writers on the protectionist side 
 (e.g. Cournot).^ 
 
 So insistent indeed is Adam Smith on the 
 
 ' " l{y ail adinirablo picue of diak-ctics, full of vigour and flexibility, Smith 
 utterly ruined tlie system known as the balance of trade which can no longer 
 be sustained." — Cournot, Mathematical Principles of the Tluorij of H'eaith, 
 p. 164 (translation). 
 
 64 
 
CHAP. VI FOREIGN TRADE 65 
 
 advantages of the employment of the capital of a 
 nation at home that it might be thought the logical 
 outcome of his argument would be a kind of Chinese 
 isolation. 
 
 Apart from other reasons, however, he was well 
 aware from the teachings of history, that England 
 had gained enormously by the expansion of foreign 
 trade, and he never held any theory which would not 
 bear the test of experience. 
 
 It is true that all foreign trade involves the export 
 of a certain amount of capital, but Adam Smith tried 
 to show that if such export took place under natural 
 conditions — that is to say, without any artificial 
 encouragement as by bounties or monoplies of various^^ 
 kinds — the resulting trade would in general be of 
 advantat>;e to the nation. 
 
 § 2. The Natural Preference of Home to 
 Foreign Trade. 
 
 The fundamental position in this proof is that 
 capital naturally seeks employment at home in 
 preference to any foreign employment, and that it 
 is only when the home channels are filled up that 
 there will be an overflow of the surplus abroad. 
 " Each of these different branches [of foreign trade] 
 is not only advantageous but necessary and un- 
 avoidable, when the course of things, without any 
 constraint or violence, naturally introduces it." 
 The term "naturally" is suggestive of an a jjviori 
 appeal to the system of natural liberty, but Adam 
 Smith does not rely on any such appeal ; he 
 
66 A PROJECT OF EMPIRE chap. 
 
 advances purely economic arguments founded on 
 experience. 
 
 § 3. Export of Surplus Produce Advantageous. 
 
 "When the produce of any particular branch of 
 industry exceeds what the demand of the country 
 requires, the surplus must be sent abroad, and ex- 
 chanored for somethino; for which there is a demand 
 at home. Without such exportation, a part of the 
 productive labour of the country must cease, and the 
 value of its annual produce diminish. The land and 
 labour of Great Britain produce generally more corn, 
 woollens, and hardware than the demand of the home 
 market requires. The surplus part of them, there- 
 fore, must be sent abroad and exchanged for some- 
 thing: for which there is a demand at home. It is 
 only by means of such exportation that this surplus 
 can acquire a value sufficient to compensate the 
 labour and expense of producing it. The neighbour- 
 hood of the sea-coast and the banks of all navigable 
 rivers are advantageous situations for industry only 
 because they facilitate the exportation and exchange 
 of such surplus produce for something else which is 
 more in demand there." ^ In this way arises the direct 
 foreign trade of consumption. 
 
 Again : " When the foreign goods which are thus 
 purchased with the surplus produce of domestic in- 
 dustry exceed the demand of the home market, the 
 surplus part of them must be sent abroad again and 
 exchanged for something more in demand at home."^ 
 
 ' Book II. chap. v. - Ibkl, 
 
vr FOREIGN TRADE 67 
 
 England, for example, it is shown, imports from 
 Virginia and Maryland about seven times as much 
 tobacco as there is a demand for in the English 
 markets. If, then, the six-sevenths could not be sent 
 abroad and exchanged for something more in demand 
 at home, the importation of that part must cease, and 
 with it the productive labour of all the people of 
 Great Britain who are employed in making the goods 
 to pay for the tobacco imported. " The most round- 
 about foreign trade of consumption, therefore, may 
 upon some occasions be as necessary for supporting 
 the productive labour of the country and the value of 
 its annual produce as the most direct." 
 
 Finally, we have the advantage, admitted under 
 natural conditions, of the development of the carrying 
 trade. "When the capital stock of any country is 
 increased to such a des^ree that it cannot be all 
 employed in supplying the consumption and sup- 
 porting the productive labour of that particular 
 country, the surplus part of it naturally disgorges 
 itself into the carrying trade, and is employed in 
 performing the same offices to other countries." 
 
 The carrying trade that arises in this way under 
 natural conditions is the natural effect and symptom 
 of great national wealth ; but it does not seem to be 
 the naturcJ cause of it. Those statesmen who have 
 been disposed to favour it with particular encourage- 
 ment seem to hj^ve mistaken the effect and symptom 
 for the cause. " Holland, in proportion to the extent 
 of the land and the number of its inhabitants by far 
 the richest country in Europe, has, accordingly, the 
 
68 A PROJECT OF EMPIRE 
 
 greatest share of the carrying trade. Enghind, 
 perhaps the second richest country in Europe, is also 
 supposed to have a large share in the carrying trade, 
 though probably some of it is more properly regarded 
 as a roundabout trade of consumption." ^ 
 
 § 4. Export of Surplus Capital Advantageous. 
 
 The example of Holland shows that capital may 
 accumulate so rapidly and to such an extent that all 
 the channels of trade are filled (even those of the 
 carrying trade), and the country is obliged to export 
 part of its capital abroad for foreign investment. 
 "In the late war," says Adam Smith, "Holland 
 gained the whole of the carrying trade of France," and 
 yet the Dutch had such a redundancy of capital that 
 they advanced loans to states and to private people 
 in foreign parts at a rate of interest higher than 
 that obtainable in Holland.^ Adam Smith points 
 out that some people in his day argued that the trade 
 of Holland was decaying because the rate of profit 
 was falling, but the true cause he suspected lay in the 
 abundance of its capital. It was said that the Dutch 
 at the time held forty millions of the English funds. 
 
 The case of Holland at the time of Adam Smith 
 is very similar to that of England under present 
 conditions. A large part of our capital is engaged in 
 shipping, and a considerable amount in the pure 
 carrying trade. But a still larger part is invested 
 abroad or lent to foreign countries in public and 
 private loans. 
 
 ' Book II, chap. v. - Book I. chap. ix. 
 
VI FOREIGN TRADE 69 
 
 The fact that the rate of interest is lower in this 
 country than in these foreign countries is at the same 
 time the efficient cause of the export of our capital, 
 and also a symptom that the capital exported is of 
 the nature of a surplus. The profit that is obtained 
 on these foreign investments is so much addition to 
 the national revenue or dividend, and being redis- 
 tributed in the country increases the demand for 
 labour including productive labour. 
 
 Holland, in Adam Smith's day, had made the 
 nearest approach to free trade (though still very 
 remote from it), and not only derived its whole 
 wealth, but a great part of its necessary subsistence 
 from foreign trade including these foreign invest- 
 ments. As illustrating his breadth of view it may 
 be mentioned that Adam Smith asserts that the 
 republican form of government seems to be the 
 principal support of the grandeur of Holland. The 
 great mercantile families, the owners of great capitals, 
 have some share or influence in the government, and 
 are thereby induced to live in a country in which less 
 profit is to be obtained. "The residence of such 
 wealtliy people necessarily keeps alive, in spite of all 
 its disadvantages, a certain degree of industry in the 
 country. Any public calamity which should destroy 
 the importance of these wealthy merchants would 
 make them remove their residence and their capital 
 to some other country, and the industry and commerce 
 of Holland would soon follow the capitals which 
 supported them." ^ 
 
 ^ Book V. chap. ii. part ii. art. iv. 
 
70 A PROJECT OF EMPIRE chap. 
 
 § 5. General Resume of the Argument. 
 
 To resume the main argument : Under natural 
 conditions the capital of a country is first of all 
 devoted to those industries in that country, especially 
 agriculture, in which " nature labours with man," and 
 there is a surplus value in the form of rent. The 
 extent of the home trade (i.e. trade as distinct from 
 industry or production in the narrow sense) is limited 
 by the value of the surplus produce of the distant 
 places within the country which have occasion to 
 exchange their products. The foreign trade of con- 
 sumption is limited by the value of the surplus 
 products which can be exported to pay for the foreign 
 goods. The extent of the carrying trade is only 
 limited by the value of the surplus produce of all 
 the countries in the world ; and, accordingly, this 
 branch of trade is capable of indefinite expansion 
 as compared with the other two. We may place 
 on the same footing as the carrying trade the 
 investment of capital in foreign nations for all sorts 
 of purposes, and compared with any one country the 
 field for investment of the whole world is practically 
 infinite. 
 
 At this point, however, a difficulty arises which 
 has been generally overlooked, through the neglect of 
 Adam Smith's distinctions on the different advantages 
 of the employment of capitals. 
 
 After considering, in the way already explained, 
 these relative advantages, Adam Smith concludes 
 with the foUowinor remarkable statement of the 
 
 o 
 
VI FOREIGN TRADE ' 71 
 
 possible conflict of the actual interests of individuals 
 with national interests. 
 
 § 6, The Employment of Capital hy Individuals 
 depends on Profit not on Advantage. 
 
 " The consideration of his own private profit is the 
 sole motive which determines the owner of any capital 
 to employ it either in agriculture, in manufactures, or 
 in some particular branch of the wholesale or retail 
 teade. The different quantities of productive labour 
 which it may put in motion, and the different values 
 which it may add to the annual produce of the land 
 and labour of the society, according as it is employed 
 in one or other of these different ways never enter 
 into his thoughts." ^ Taking a broad historical 
 survey, Adam Smith finds that the policy of Europe 
 — under which is included the influence of laws 
 and customs of all kinds — has greatly interfered 
 with the natural order in the progress of opulence. 
 In particular agriculture, which is naturally the 
 most advantageous of all employments of capital, 
 has been discouraged to such a degree that " private 
 persons frequently find it more for their advantage 
 {i.e. as measured by the profit to be got) to employ 
 their capitals in the most distant carrying trades of 
 Asia and America, than in the improvement and 
 cultivation of the most fertile lands in their own 
 neighbourhood." ^ 
 
 ^ Book II. chap. v. " Ihid. 
 
72 A PROJECT OF EMPIRE chap. 
 
 § 7. Influence of the Policy of Europe. 
 
 Of such importance is this difference between 
 national and private interests considered to be that 
 Adam Smith devotes the two following books (namely 
 the third and fourth) to the examination of the his- 
 torical causes which have interfered with the natural 
 order of progress. 
 
 The general result of this historical examination is 
 that the policy of Europe has favoured the towns at 
 the expense of the country. People in the towns 
 have been enabled to get better profit than people in 
 the country, mainly because the law has given them 
 privileges of all kinds which are of the nature of 
 monopolies, and it is against monopolies of all kinds 
 that Adam Smith's attack is mainly directed. The 
 position, so far, is precisely the same as that now 
 prevailing in the United States and Canada. 
 
 The towns and cities, throuo^h the asrencies of 
 trusts, which have grown up under the protection of 
 a tariff, are able to get the advantage in the general 
 exchange of their produce with that of the country. 
 The farmers, through this policy, pay more for their 
 materials, and for their consumable commodities, and 
 the towns pay less for the products of agriculture. 
 That is the general complaint of the agricultural 
 interests, both in the United States and in Canada. 
 And, just as in the time of Adam Smith, the main 
 cause is that the people in the towns can, and those 
 in the country cannot, make effective combinations. 
 
 As regards the United Kingdom, since Adam 
 
FOREIGN TRADE 73 
 
 Smith wrote, most of the particular abuses which 
 interfered with wliat he considered the natural distri- 
 bution of capital, have been destroyed, and there has 
 been a closer approximation to freedom in the appli- 
 cation of capital apart from the direction of the state 
 than he had deemed possible. Under these condi- 
 tions 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. Sup- 
 posing 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 develop- 
 ment 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 
 jiation. If left to themselves, without any artificial 
 system of preference or restraint, they would be 
 
74 A PROJECT OF EMPIRE chap. 
 
 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 ? 
 
 " 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 posi- 
 tion. 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 
 
 ' Book III. chap. i. - Hook iv. chap. ii. 
 
VI FOREIGN TRADE 75 
 
 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 invest- 
 ment 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 attrac- 
 tion 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 
 
76 A PROJECT OF EMPIRE chap. 
 
 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 advan- 
 tageous employments offer considerably higher profits ? 
 The individual thinks nothing of the national ad- 
 vantage 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 tlie circumstances 
 of the society this high price for the colonial produce 
 shows that the trade is understocked. If, then, under 
 
 ' See below, Chapter XIII. § \b, on the advantage to the colonies. 
 
VI FOREIGN TRADE ^-^ 
 
 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 manu- 
 facturer, 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 influ- 
 enced 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. Owing 
 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.^ 
 
 ^ Op. cit. vol. ii. p. 495. 
 
 2 September 1909, plantation rubber sold at 9s. 7d. per lb., the average 
 cost being reckoned at Is. 6d. to 2.s 
 
78 A PROJECT OF EMPIRE 
 
 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 Advaritages of Foreign 
 Trade. 
 
 To summarise the aro;ument : 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 over- 
 flow 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 sur- 
 plus 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 arc the two great real 
 advantages of foreign trade. 
 
FOREIGN TRADE 79 
 
 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 exports — 
 open 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 SmitK 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. 
 
8o A PROJECT OF EMPIRE 
 
 "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." ^ 
 
 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 imper- 
 fections of the statesmen to whom the negotiations 
 must of necessity be entrusted. If, how^ever, 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." 
 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 w^ill be 
 shown in detail later on Adam Smith was not only 
 a nationalist but an imperialist.^ 
 
 It is only the natural development of his central 
 
 1 See below, Chapter XI. § 14. "^ Ibid. 
 
 » See Chapter XIV. 
 
VI FOREIGN TRADE 8i 
 
 idea to say that the employment of capital within 
 the empire is more advantageous than its employ- 
 ment in foreign states. From this point of view 
 exports to the British dominions and possessions are j 
 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 unpro- 
 ductive 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 
 amnion 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. 
 
82 A PROJECT OF EMPIRE chap.vi 
 
 § 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 inHustries ; 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. 
 
CHAPTER VII 
 
 MEANING OF PROTECTION TO NATIVE INDUSTRIES 
 
 § 1. The term Protection not used hy Adam S7nith. 
 
 Just as the expression "free trade" is often used 
 as equivalent to " natural liberty " or laisser Jaire, 
 so also the term protection is often used to cover all 
 the artificial encouragements or hindrances that may 
 be adopted by the state for the regulation of trade, 
 especially foreign trade. 
 
 Such a vague usage is unhistorical, and can only 
 lead to confusion. As it happens the term " protec- 
 tion " is not used by Adam Smith at all, except in 
 the sense of military defence, and the provision of 
 security to life and property. He constantly uses the 
 term " free trade," but he has no single expression 
 which can be considered as the antithesis. The 
 mercantile system which he attacked, as the dominant 
 commercial policy of his day, was highly complex, and 
 neither the original aims nor the methods by which 
 they were to be attained could be summarised under 
 the term " protection." The term which Adam 
 Smith most generally uses as the opposite of free 
 trade is " monopoly " ; e.g. he says that " monopoly of 
 one kind or another seems to be the sole engine of 
 
 83 
 
84 A PROJECT OF EMPIRE chap. 
 
 the mercantile system." The centre of his attack 
 is certainly monopoly ; but he also attacks other 
 mercantilist ideas that are not covered by the term 
 monopoly ; e.g. the undue importance attached to 
 money, and the consequential ideas of a favourable 
 balance of trade ; ideas which led to peculiar com- 
 mercial treaties in which the leading idea was neither 
 protection to the home producer nor reciprocity. 
 
 § 2. Used in narroiv Sense hy Alexander 
 Hamilton. 
 
 The term protection (with its corresponding adjec- 
 tive protectionist) was used by Alexander Hamilton 
 (1791) in a narrow sense. The object of his Report 
 on Manufactures was to show, first, that it would be 
 of immense advantaije to the United States to become 
 a great manufacturing nation, and, secondly, to 
 indicate the methods by which this end might be 
 attained. In this second part of his task he appeals 
 to the experience of other nations which have suc- 
 ceeded in manufacturing industries. In discussing 
 these methods adopted by other countries he puts 
 first " Protectionist duties — or duties on those foreign 
 articles which are the rival ones of the domestic ones 
 intended to be encouraged." ^ 
 
 But besides this method he discusses ten others, 
 e.g. prohibitions of rival articles or duties equivalent 
 to prohibitions ; prohibitions of the export of the 
 materials of manufacture ; bounties ; premiums ; 
 exemption of raw material of manufacture from taxa- 
 
 ^ Hamilton's Works (Federal edition), vol. iv. p. 143. 
 
MEANING OF PROTECTION 85 
 
 tion, etc. ; some of these other methods being ex- 
 plicitly approved of by Adam Smith. 
 
 § 3. Meaning depends on Correlation. 
 
 Protection is one of those terms so common in 
 economics in which the meaning depends on the 
 correlative term with which they are associated. If 
 we interpret the term to mean the support or en- 
 couragement of native industries (and native labour) 
 by the employment of capital within the home 
 country instead of in foreign countries, then we may 
 say that the object of protection was approved of by 
 Adam Smith. As already shown the test of economic 
 advantage, to which he constantly appeals, is the 
 employment of the productive labour of the country 
 within the country. To keep capital in existence (as 
 measured by the practical test of the continuance of 
 its own value) it must be continuously reproduced 
 after being consumed, and it is this reproduction of the 
 forms by which the value is continued which gives 
 employment to the productive labour. This produc- 
 tive labour keeps up the auxiliary capital in a state 
 of efficiency, replaces the sustaining capital, and also 
 assists in turning out the great stream of consumable 
 things which Adam Smith speaks of as the annual 
 produce of the land and labour. 
 
 With Adam Smith the local habitation of the 
 capital during the process of consumption and repro- 
 duction is of fundamental importance. The employ- 
 ment of a given amount of capital in home trade or 
 industry is so far directly more advantageous than 
 
86 A PROJECT OF EMPIRE 
 
 its employment in foreign trade or industry, although 
 the latter may yield equal or even greater profit. 
 This idea of national advantage is not only admitted 
 by Adam Smith, but is developed to an extent that 
 has never been approached by any subsequent writer. 
 If this is protection Adam Smith is the blackest of 
 all protectionists. 
 
 Conversely, however, it may be presumed that if 
 on balancing the arguments for and against restric- 
 tions on foreign imports, Adam Smith was satisfied 
 that the interests of the home producers were best 
 promoted by freedom from restraints, he is a free trader 
 against whom the usual protectionist arguments are 
 simply irrelevant. Or putting it otherwise, the 
 difference between " protection " and " free trade " 
 becomes a difference not of principles but of methods ; 
 and in this case a reconciliation ought to be possible 
 on an appeal to the facts. 
 
 As will appear in the chapter on the exceptions to 
 free trade admitted by Adam Smith, these are in 
 themselves of vast importance ; but apart from these 
 definitely stated exceptions his whole treatment de- 
 pends not on the reiteration of a simple dogma (or 
 assumption), but on a careful balancing of opposing 
 considerations. 
 
 § 4. Distinction between Objects and Methods of 
 Protection. 
 
 The distinction between the ultimate objects of 
 any commercial policy and the methods by which that 
 policy may be achieved is of vital importance. If 
 
MEANING OF PROTECTION 87 
 
 the objects are fundamentally different, if they appeal 
 to different ideals, to different standards of morality, 
 or to different prejudices of race or nationality and 
 the like, reconciliation is not possible until the 
 ideals and prejudices are altered. But if there 
 is no such fundamental opposition in ideals, if the 
 dispute is only as regards methods, then a reconcilia- 
 tion ought to be possible after a scrutiny of the 
 facts by impartial authority {e.g. in this country a 
 Royal Commission). Adam Smith treats of what is 
 now commonly called protection to native industries 
 under the title : ^ "Of restraints upon importation 
 from foreign countries of such goods as can be pro- 
 duced at home." 
 
 § 5. Taxes for " Revenue" and for " Monopoly" 
 distinguished. 
 
 And it should be carefully observed that in dealing 
 with this question he does not consider the general 
 policy of taxes on imports. At the conclusion of the 
 chapter he says : " How far it may be proper to 
 impose taxes upon the importation of foreign goods in 
 order not to prevent their importation, but to raise 
 a revenue for Government, I shall consider hereafter 
 when I come to treat of taxes." ^ Adam Smith 
 certainly approved of custom duties as a source of 
 revenue, although he showed that the revenue might 
 be increased by a better system, and he suggested 
 reforms which were afterwards adopted with great 
 advantage by the United Kingdom. So far from 
 
 ' Book IV. chap. ii. - See Book v. chap. ii. 
 
88 A PROJECT OF EMPIRE chap. 
 
 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.^ 
 
 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 
 
 ' See below, Chapter XIV. " See below, Chapter XVI. 
 
MEANING OF PROTECTION 89 
 
 and others a very inconsiderable one might afford a 
 very great one." ^ 
 
 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 1/ 
 duties yielded a considerable revenue ; if they di^, 
 yield such a revenue they could only do so by entering A 
 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 fronl, 
 foreign countries as can be produced at home thei 
 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 
 
 ^ Book V. chap. ii. art. iv. 
 
90 A PROJECT OF EMPIRE chap. 
 
 of monopoly — restraints on imports lose one of their 
 worst effects.^ 
 
 § 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 
 cure 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 J 
 effective exclusion of rival commodities from thje 
 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 
 
 ' Cf. Hamilton, quoted below, Chapter XVI. 
 - Princijdes of Political Economy, chap. xxvi. 
 
VII MEANING OF PROTECTION 91 
 
 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 
 
92 A PROJECT OF EMPIRE chap. 
 
 party has more political power, attempts have been 
 made in recent legislation to secure the advantages 
 of protection directly to labour. 
 
 ij 8. Profit on Capital requisite for the Employ- 
 ment 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. 
 
VII MEANING OF PROTECTION 93 
 
 This again reduces the price below the level of decent 
 remuneration (to the capital), and the natural remedy- 
 is the creation of a definite monopoly in the form of 
 a trust.^ In this way protection leads to monopoly 
 and monopoly in general to permanently higher 
 prices. We are accustomed to think that monopoly 
 is a modern result of production on a large scale ; 
 but monopoly " against their own countrymen" per- 
 vaded the whole commercial system attacked by 
 Adam Smith. 
 
 If it is said that protection (i.e. the exclusion of 
 foreign goods), may be aftbrded without raising prices 
 then the difiiculty is to see how capital can be induced 
 to give more employment. If capital is being already 
 exported (as at present from the United Kingdom) in 
 large masses, how can it be induced to remain unless 
 prices rise to a remunerative height ? 
 
 § 9. New Theory of Protection. 
 
 The development of the idea that in order to 
 encourage home labour by protection the profit on 
 capital must first of all be increased, leads to a new 
 theory of protection ; a theory quite in accordance 
 with the most recent modes of presenting economic 
 principles. 
 
 National production in all its branches requires 
 the co-operation of the three great agents — land 
 (typical of nature), labour, and capital. The land is 
 always there even if derelict ; the labour, like the 
 poor, is also always there ; but the floating capital 
 
 ^ Of. The Trust Problem, by J. W. Jenks, chap. iii. 
 
94 A PROJECT OF EMPIRE chap. 
 
 is liere to-day and gone to-morrow as profit calls, and 
 the fixed capital wastes away, unless it can be replaced 
 with a profit. Profit or no profit the proletariate 
 will increase, but unless the capital can be retained 
 at a profit the labour cannot find employment./' 
 Accordingly it may be maintained that in order to 
 increase "the aggregate satisfaction" of the com- 
 munity capital ought to be induced to stay — for a 
 consideration. 
 
 Such a consideration might take one of two forms ; 
 a bounty or a protective duty. 
 
 "I love to see the tall chimneys smoke "is still 
 the best apology for a bounty. It is true that a 
 bounty can only be raised by taxation. If, however, 
 the taxation is levied on the richer classes, the 
 " aggregate satisfaction " is increased by making- 
 some of their superfluous wealth wander, state-directed, 
 to the poor. And it may be argued that on this plan 
 the poor are twice blessed ; for the wealth diverted 
 instead of ojivins; a small relief to a small number of 
 unemployed causes capital to stay in the country and 
 to give employment at fair wages to a far greater 
 number. 
 
 A protective duty by the exclusion of foreign 
 competition enables the home producers to raise their 
 prices, and in that way their profit. The protective 
 duty is equivalent to a bounty obtained by the taxa- 
 tion of the consumer. If the consumers are relatively 
 wealthy and the producers relatively poor, there is 
 again an increase of the " aggregate satisfaction " and 
 a double blessing of the poor. 
 
MEANING OF PROTECTION 95 
 
 If the articles protected (and raised in price) are 
 consumed by the poor, in effect they themselves pay 
 the bounty which bribes capital to stay. But on the 
 theory of " aggregate satisfaction " the payment may 
 be to their advantage, because even in this case they 
 gain the employment ; it is as if they paid something 
 by way of insurance against unemployment. 
 
 It may be contended that the same result might 
 be obtained by a natural fall in the wages of the 
 industry affected by the foreign competition. But 
 such a fall might be prevented by the action of trade 
 unions ; and in any case to be permanent it must be 
 part of a general fall, i.e. particular wages are adjusted 
 to the general level. 
 
 § 10. Protection and Socialism. 
 
 It follows from the argument of the last two 
 sections that protection logically carried out leads 
 to socialism. Socia lism, is a term of vague import, 
 but for the present purpose it may be taken to mean 
 the control of the capital and labour by the state. 
 If the state intervenes, under present conditions, to 
 give artificial profit to some favoured industry on the 
 ground that it will give advantageous employment to 
 labour, surely it may be said that the state ought to 
 see that the industry selected is the best, and that 
 the ultimate object is secured. The people of the 
 United States are in many respects, owing to a 
 variety of causes, the least socialistic of modern 
 nations, and yet the cry that the nation ought to 
 own the trusts is quite popular, and will only be 
 
96 A PROJECT OF EMPIRE chap, vn 
 
 stilled if some effective means of control is invented. 
 The national ownership of the trusts is described 
 as the natural result of evolutionary socialism. 
 The experience of continental nations is equally 
 apposite. Socialism is much more widely prevalent in 
 protectionist countries than in the United Kingdom. 
 And the reason is that the monopoly of capital is 
 more obvious and is apparently more detrimental 
 to labour. 
 
 If the ideal of socialism is once approved it may 
 be approached by other avenues. The method of 
 aiding the poor by first raising the profits of the rich 
 does not appeal to the average socialist ; his method 
 is direct taxation and direct management of land and 
 the instruments of production ; he would gladly show 
 the protectionist a more excellent way if the employ- 
 ment of the poor is the goal. 
 
 Adana_Smitli^ however, considered the question of 
 protection from the point of view of a society in 
 which capital is owned and managed by individuals 
 -who are guided by profit and not by ideas of pro- 
 moting the " aggregate satisfaction." And society is 
 still so constituted that if we wish to be practical we 
 must follow his example. 
 
CHAPTER VllI 
 
 PROTECTION TO NATIVE INDUSTRIES 
 
 § 1. Difficulty of the greater Advantage of Employ- 
 ment of Capital in Home Trade. 
 
 In dealing with " protection to native industries," in 
 the sense of " restraints upon importation from foreign 
 couiitries of such goods as can be produced at home, 
 Adam Smith has to meet the difficulty that on his 
 view capital employed in home industries or in home 
 trade is prima facie more advantageously employed 
 than when devoted to any kind of foreign trade or 
 investment — that is to say, with his usual proviso, 
 " upon equal or nearly equal profits." 
 
 If capital is employed in some home industry that 
 has reached the limits of expansion imposed by the 
 demand in the home market, it is advantageous that 
 an export trade should be developed so that the 
 industry may be conducted on a larger and more 
 economical scale, and also by naturaL expansion give 
 additional employment to home labour. The surplus 
 is exported and exchanged for something for which 
 there is a demand. 
 
 In this case the country employs more capital at 
 home so far as that particular industry is concerned, 
 
 97 H 
 
98 A PROJECT OF EMPIRE chap. 
 
 and any growth of the export trade under the condi- 
 tions assumed, gives, in general, more employment to 
 home labour and capital.^ 
 
 § 2. Possible Displacement of Home Industries by 
 Foreign Imports. 
 
 But when we consider imports made into a 
 country it does not follow on Adam Smith's principles 
 that the expansion of the import trade will necessarily 
 mean a corresponding increase in home industry. It 
 is quite possible that the new import may displace 
 the product of some old industry instead of being 
 exchanged against a surplus that would naturally be 
 exported. 
 
 Suppose, for example, that before the trade is 
 opened, a million pounds worth of English manu- 
 factures were exchanged against a million pounds 
 worth of English corn. If a million pounds worth of 
 corn are now imported (at a cheaper rate per unit), 
 the English manufactures formerly given in exchange 
 to the English producers of corn will now be given to 
 the foreigner. 
 
 In this case it is not the surplus of an expanding 
 manufacture that is exchanged for foreign goods that 
 cannot be produced at home. On the contrary, ci\ 
 foreign trade displaces a home trade. And the 
 immediate effect on Adam Smith's views is 9/ 
 disadvantage. 
 
 That the immediate effect would be a disad- 
 vantage (measured by the test of the employment 
 
 1 See Chapter VII. 
 
viH PROTECTION 99 
 
 within the country of capital and labour) is confirmed 
 from other cases taken by Adam Smith. 
 
 If, for example, an industry has been dependent 
 on protection, then he argues that the freedom of 
 trade should only be restored by slow gradations. 
 The implication, of course, is that the displaced labour 
 and capital can only gradually find other employment. 
 In the same way Adam Smith's support of retaliation 
 depends on the idea that the recovery of a great market 
 is worth the cost of the temporary inconvenience. It 
 is assumed that the check given to the export trade 
 by the foreign duties cannot be met at once by the 
 opening up of new markets, or by the application of 
 the productive power to other industries. Indeed, in 
 this case, the implication as regards the emj)loyment 
 of capital goes farther, and the recovery of the great 
 market is supposed to be a permanent advantage. If 
 another foreign market could always be obtained, 
 why submit to the losses of retaliation ? 
 
 And when a foreign import displaces some home 
 product, it is plain that in the normal case another 
 market cannot at once be found for that particular 
 product, and the capital and labour must be diverted 
 into a new industry. But in general the transfer 
 oannot be made immediately, nor can it be made 
 without a loss of the capital already specialised.^ 
 
 ^ "If the free importation of foreign manufactures were permitted, several 
 of the home manufactures would probably suffer, and some of them perhaps 
 go to ruin altogether, and a considerable part of the stock and industry 
 employed in them would be forced to find out some other employment. 
 [But the freest importation of the rude produce of the soil could have no 
 such eifect upon the agriculture of the country.]" Book iv. Chap. ii. The 
 sentence in [ ] is noticed below. 
 
loo A PROJECT OF EMPIRE 
 
 It is clear that Adam Smith did not hold, the 
 opinion that it was in all cases an immediate 
 advantage to the nation if a new import displaced 
 some old home product from home consumption. 
 
 It is, however, also equally clear from the 
 conclusions of his argument that he did not think 
 it was generally desirable to prevent the import of 
 foreign goods in order to preserve the home market 
 for the home producer. He notices, indeed, some 
 very important exceptions, but these very exceptions 
 may be used so far to prove the rule. 
 
 What, then, are the reasons which at the time 
 convinced Adam Smith that " restraints upon the 
 importation from foreign countries of such goods as 
 can be produced at home " were in general not 
 desirable from the national point of view ? 
 
 These reasons are o;iven at length in the second 
 chapter of the fourth book of the Wealth of Nations. 
 Under present conditions this cha^^ter deserves a 
 careful critical examination. 
 
 § 3. Protection in Great Britain in Time of 
 Adam Smith. 
 
 To begin with, he shows that at the time by. far \ 
 the greater part of the industries of the country were \ 
 actually protected '* by high duties or absolute J 
 prohibitions" against foreign competition in the home/ 
 markets. The importation of live cattle and salt 
 provisions was prohibited, so that the graziers had 
 a monopoly of the market for butcher's meat. The 
 high duties on corn in times of moderate plenty also 
 
vni PROTECTION loi 
 
 amounted to a prohibition. With regard to manu- 
 factures, the importation of foreign woollens and of 
 silks was prohibited, linen was making great strides 
 towards the same privilege, and many other sorts 
 of manufactures had obtained in Great Britain 
 " altogether, or very nearly, a monopoly against their 
 countrymen." " The variety of goods of which the 
 importation into Great Britain is prohibited, either 
 absolutely or under certain conditions greatly exceeds 
 what can easily be suspected by those who are not 
 well acquainted with the laws of the customs." ^ 
 
 He admits that this monopoly of the home 
 market frequently gives great encouragement to \ 
 the particular species of industry that enjoys it, 
 and also that frequently a greater amount of the 
 labour and stock of the society is turned to this 
 industry than otherwise would have gone to it. 
 
 But he goes on to say : " Whether this monopoly 
 tends either to increase the general industry of the 
 society or to give it the most advantageous direction 
 is not perhaps altogether so evident." ^ 
 
 § 4. Protection of Advantage to Particular 
 Industries. 
 
 It is absolutely necessary to see clearly the 
 difference between the interests of particular in- 
 dustries and the interests of the nation at large. 
 
 It cannot be doubted — that is Adam Smith's own 
 
 ^ On the number of duties and prohibitions which survived in 1842 see the 
 famous report of that year. 
 
 " In the first edition " certain " is used in place of *' evident," as pointed 
 out in Dr. Cannan's edition. 
 
I02 A PROJECT OF EMPIRE chap. 
 
 expression — that frequently tke particular industries 
 -may, under such protection, grow to larger dimen- 
 sions than otherwise would be the case, and attract 
 to themselves a larger amount of labour and capital 
 than if they were subject to foreign competition in 
 the home market. 
 
 In the light of recent history this is an admission 
 of serious importance. In all the great staple indus- 
 tries the tendency has been towards production on a 
 larger and larger scale ; and for large-scale i)roduction 
 in highly developed countries it is contended that the 
 possession of the home market — in Adam Smith's own 
 words "the most important of all markets" — is an 
 immense advantage. 
 
 Again, it is contended by modern supporters of 
 protection that the great staple industries, that can 
 be carried on on a large scale, from the nature of the 
 case, and the very meaning of the terms, arc limited 
 in number ; this is not a matter of opinion but a 
 matter of arithmetic. Accordingly, if the principal 
 staples of a country are benefited by protection — if 
 they become larger than otherwise would be the case 
 — that means, it is argued, that the greater part of 
 the industries of the country are also benefited. 
 
 This expansion, which is rendered possible by the 
 possession of the home market, also gives — it is 
 maintained — encouragement to the expansion of 
 foreign trade ; and no one has shown more clearly 
 than Adam Smith that the natural exports from a 
 country are the surplus products of the home indus- 
 tries. With the augmentation of industry and the 
 
v.ii PROTECTION _io3 
 
 extension of division of labour — Adam Smith's ter- 
 minology for our law of increasing return — such sur- 
 pluses naturally arise, and unless they are exported 
 the growth of the industry must be checked. 
 
 § 5. Adam Smith's first Answer : Industry limited 
 hy Capital. 
 
 Adam Smithy however, tries to show that, although 
 particular species of industry are encouraged by pro- 
 tection against foreign competition in the home market 
 the general industry of the society is prejudiced.^ 
 
 His first argument is that which has become so 
 familiar to students through the expression and 
 expansion it has received in John Stuart Mill's four 
 fundamental propositions on capital. 
 
 Adam Smith's own statement is, however, per- 
 fectly clear, and is free from the paradoxes which led 
 Mill to assert that " demand for commodities is not 
 demand for labour," and that the demand for labour 
 is " the wages fund." 
 
 " The general industry of the society," says Adam 
 Smith, " can never exceed what the capital of the 
 society can employ. As the number of workmen that 
 can be kept in employment by any particular person 
 must bear a certain proportion to his capital, so the 
 number of those that can be continually employed by 
 all the members of a great society must bear a certain 
 proportion to the whole capital of the society, and 
 never can exceed that proportion. No regulation of 
 commerce can increase the quantity of industry in 
 any society beyond what its capital can maintain. 
 
 ^ 
 
I04 A PROJECT OF EMPIRE chap. 
 
 It can only divert a part of it into a direction into 
 which it might not otherwise have gone ; and it is by 
 no means certain that this artificial direction is likely 
 to be more advantageous to the society than that into 
 which it would have gone of its own accord." 
 
 The relations between capital and labour, or, more 
 generally, the relations of capital to industry, have 
 already been examined.^ All experience shows that 
 one necessary condition of the existence and the 
 expansion of any particular industry is the command 
 of the necessary capital ; and in the same way capital 
 is necessary for the continuance and development of 
 the general industry of the society. There are other 
 requisites and other equally necessary conditions, e.g. 
 land and labour, but Adam Smith, at this stage, con- 
 fines himself to the influence of capital. 
 
 It is one thing, however, to admit that capital is 
 one of the superior limits to the expansion of industry, 
 or the employment of labour, and quite another to say 
 that the amount of capital available for the industry 
 of any society is itself always limited — in the sense, 
 namely, that any increase of employment at one place 
 or in one industry can only mean a diminution else- 
 where. Mill himself pointed out that though industry 
 is always limited by capital it does not always come 
 up to that limit, although he seems to have forgotten 
 the qualification when he came to consider the influ- 
 ence of demaikd and the relations of capital to labour. 
 In the passage quoted Adam Smith only says that it 
 is "by no means certain" that the artificial direction 
 
 1 See Chapter VI. 
 
VIII 
 
 PROTECTION 105 
 
 given to industry by the commercial regulations of 
 the state are more advantageous than the natural 
 distribution. 
 
 And if we look to his general treatment of capital 
 we see that he never takes it for granted that the 
 amount of capital available for home industry in any 
 society is always limited. On the contrary, his central 
 position is that, under natural conditions, it is only 
 when the home industries have got all they require 
 that the surplus overflows into the less adv;intageous 
 channels of foreign trade. 
 
 It is quite certain that the United Kingdom, under 
 present conditions, has at its command a far larger 
 amount of capital than can be profitably employed in 
 home industries and trade. Recent estimates ^ show 
 that we have already three thousand millions of 
 capital invested abroad ; and apart from this there is 
 the large amount involved in carrying on our foreign 
 trade. The rate of export of capital also seems to be 
 increasing, and yet there appears to be no diminution 
 in the amount that is retained at home. That is to 
 say the capital exported directly and indirectly is of 
 the nature of a surplus. 
 
 Under these conditions, then, it cannot be said 
 that the amount of capital available for home industry 
 is limited, and that an artificial expansion of one 
 industry (by means of protection) can only mean the 
 abstraction of capital from some other home industry ; 
 
 ^ "Great Britain's Capital Investments in other Lauds," by G. Paish, 
 Journal of Royal Statistical Society, September 1909. 
 
 The market value of the public securities negotiable on the Paris Bourse 
 at the end of 1908 was £2,629,520,000 French, and £2,705,800,000 foreign 
 {Economist, August 21, 1909). 
 
io6 A PROJECT OF EMPIRE chap. 
 
 it may come from what would otherwise have been 
 exported. 
 
 7 
 
 § 6. Second Answer \ Home Industries f ^ 
 naturally ^protected. . 
 
 Here Adam Smith intro duces the argument thatjix) 
 artificial encouragement of home industries is needed, 
 because under natural conditions e very incHvi dual 
 endeavours to employ his capital as near home as he 
 ,can, and consequently as much as he can in the 
 support of domestic industry. To this statement is 
 added the condition that is always assumed as essential, 
 namely, "provided always that he can obtain the 
 ordinary or not a great deal less than the ordinary 
 profits of stock." The arguments already noticed 
 are advanced to show why the individual has this 
 preference for the employment of capital as near home 
 as possible. The different cases are examined Mith 
 the result that : " Home is the centre round which 
 the capitals of the inhabitants of every country are 
 continually circulating, and towards which they are 
 always tending, though by particular causes they 
 may sometimes be driven off and repelled from it 
 towards more distant employments.^ But a capital 
 employed in the home trade, it has already been 
 shown, necessarily puts into motion a greater quantity 
 of domestic industry, and gives revenue and employ- 
 ment to a greater number of the inhabitants of the 
 country than an equal capital employed in the foreign 
 trade of consumption ; and one employed in the 
 
 * See above, Chapter I., on the inlhionco of Newton. 
 
vm PROTECTION 107 
 
 foreign trade of consumption Las the same advantage 
 over an equal capital employed in the carrying trade. 
 Upon equal or only nearly equal profits, therefore, 
 every individual naturally inclines to employ his 
 capital in the manner in which it is likely to afibrd 
 the greatest support to domestic industry, and to give 
 employment and revenue to the greatest number of 
 people of his own country." 
 
 This passage is remarkable for the insistence on 
 two points : first, that for capital to be employed at 
 home it must obtain the ordinary or nearly the 
 ordinary rate of profit ; and secondly, that the em- 
 ployment of capital at home is most advantageous. 
 
 And here the difficulty arises. Suppose the 
 introduction of some foreign import takes away the 
 profit of the home producer may this not lead to a 
 diminution of domestic industry ? Before the foreign 
 trade was opened there was an interchange of products 
 and a replacement of capitals within the country ; 
 but after the foreign trade is established one of the 
 caj)itals is a foreign capital, as in the example already 
 noticed of the trade between Edinburgh and London 
 compared with that between London and Portugal. 
 
 § 7. Tliird Answer :■ Effect of Protection on " Tlie 
 Annual Produce of the Land and Labour of 
 the Society.'' 
 
 This difficulty is met by Adam Smith by taking 
 account of the eff'ect on the national dividend or the 
 annual produce of the land and labour. And this 
 brings to the surface the arguments that at present 
 
io8 A PROJECT OF EMPIRE chap. 
 
 are most used in support of free trade, and which 
 historically had most inliuence. 
 
 The test of the relative advantages of different 
 modes of employing an equal amount of capital is not 
 merely the quantity of productive labour that is put 
 in motion ; but " likewise the value which that 
 employment adds to the annual produce of the land 
 and labour of the country." ^ 
 
 On Adam Smith's view of national advantage it is 
 true that the labour of the country should be as fully 
 employed as the amount of capital will allow ; but 
 it is equally true also that this labour should be 
 employed in the most economical or most effective 
 manner. 
 
 If we look merely to the employment of labour we 
 fall at once into the popular fallacy of " making work," 
 which, if acted on, except in temporary emergencies, 
 is always prejudicial to the interests of labour as a 
 whole. There are endless examples of the evil effects 
 of this most popular of all fallacies : the " work made " 
 by the old Poor Law for the unemployed and the 
 partial recrudescence of a similar remedy in our own 
 times; the "work made" by some of the old 
 regulations of Trade Unions ; the opposition to the 
 introduction of machinery on account of the displace- 
 ment of labour — these are illustrations on a large scale 
 of the national loss involved in " making work " ; 
 which in other words in general means " wasting 
 labour." 
 /''^ Adam Smith disposes of the " making work " fallacy 
 
 ' Book II. cliap. v., first sentence. 
 
VIII PROTECTION I09 
 
 by taking account of the whole productive forces of 
 the society which are engaged in getting the great 
 annual revenue for the people. And his argument 
 here gives what is still the best presentation of the 
 most popular argument for free trade, the argument, 
 namely, from cheapness. " If a foreign country can 
 supply lis with a commodity cheaper than we ourselves 
 can make it, better buy it of them with some part of 
 the, produce of our own industry, employed in a way 
 in which we have some advantage. The general 
 industry of the country being always in proportion to 
 the capital which employs it will not thereby be 
 diminished no more than that of the above-named 
 artificers ; but only left to find out the way in which 
 it dan be employed with the greatest advantage. It 
 is certainly not employed to the greatest advantage 
 when it is thus directed towards an object which it 
 can_buy cheaper than it can make. The value of its 
 annual produce is certainly more or less diminished 
 when it is thus turned away from producing 
 commodities evidently of more value than the com- 
 modity which it is directed to produce. According 
 to the supposition that commodity coidd he pwxhased. 
 from foreign countries cheaper than it can he made 
 at home ; it could therefore have been purchased ivith^ 
 a part only of the commodities, or what is the samj 
 thing with depart only of the price of the commodities, 
 which the industry employed by an equal capital 
 would have produced at home, had it been left to 
 follow its natural course. The industry of the country, 
 therefore, is thus turned away from a more to a less 
 
no A PROJECT OF EMPIRE 
 
 advantageous employment ; and the exchangeable 
 value of its annual produce instead of being increased 
 according to the intention of the lawgiver must 
 necessarily be diminished by every such regulation." 
 
 The. WKrds italicised .suggest the usscucl' of the 
 argument, and it will be observed that even in this, 
 the most familiar of all the free trade arguments, the 
 popular interpretation is generally more simple than 
 that of Adam Smith himself. Adam Smith does not 
 content himself by saying that it is best for the 
 consumer to buy in the cheapest market. In this 
 passage he does not even mention the consumer.^ As 
 always, labour is made fuudamental ; labour .an4^i5ie 
 reward of labour. If we take account of the whole 
 labour of the country there is an advantage to that 
 labour if we import goods that can be bought at a 
 cheaper price than we can make them ; because in this 
 indirect way we employ less labour in making the 
 particular things in question, that is to say, we avoid 
 " making work " by prohibitions ; and with the labour 
 set free we make " something else " instead of " work." 
 The argument is clenched by the famous illustration 
 of the wine made from Scottish grapes. " By means 
 of glasses, hotbeds, and hot-walls very good grapes can 
 be grown in Scotland, and very good wine can be made 
 of them, too, at about thirty times the expense for 
 which at least equally good can be brought from foreign 
 countries. Would it be a reasonable law to prohibit 
 the importation of all foreign wines merely to encourage 
 the making of claret and Burgundy in Scotland 1 " 
 
 ^ See next chapter. 
 
PROTECTION III 
 
 In an extreme case like this — or that of Bastiat's 
 candlemakers' petition against the sun, perhaps 
 suggested by it — every one would probably admit 
 that making work by artificial restraints would not 
 increase employment and its reward, when the question 
 is regarded from the national point of view and 
 not from the point of view of particular interests. 
 
 § 8. Fourth Ans^ver : Displaced Labour and 
 Capital icilljind Einployment at Home. 
 
 In economics the principle of continuity warns us 
 that a difference in degree may often amount, for 
 practical purposes, to a difference in kind. In other 
 words, the argument from extreme cases is often 
 fallacious. 
 
 Adam Smith, however, in this case pushes the 
 argument of the grapes to the extreme limit. " But 
 if there would be a manifest absurdity in turning 
 towards any employment thirty times more of the 
 capital and industry of the country than would be 
 necessary to purchase from foreign countries an equal 
 quantity of the commodities wanted, there must be 
 an absurdity, though not altogether so glaring, yet 
 exactly of the same kind, in turning towards any 
 such employment a thirtieth, or even a three- 
 hundredth part more of either." But as the follow- 
 ing sentences show, this argument implies (as in 
 the former extreme case) that the displaced capital 
 an.d labour,^caJi--^nd--Qtli££_a^nd_ more ad vantageous 
 
 employment. For he continues : " Whether the 
 
 advantage wliich one- '^^^intr}^ hr^'r f^v^r nn other be 
 
112 A PROJECT OF EMPIRE chap. 
 
 natural or acquired is in this respect of no conse- 
 quence. As long as the one country has those 
 advantages, and the other wants them, it will always 
 be more advantageous for the latter to buy of the 
 former rather than to make. It is an acquired 
 advantage only which one artificer has over bis- 
 neighbour who exercises another trade ; and yet they 
 both find it more advantageous to buy of one another 
 than to make what does not belong to their particular 
 trades." ^ 
 
 It is clear that Adam Smith's argument in favour 
 of free imports can only be reconciled with his posi- 
 tion on the relative advantage of the home employ- 
 ment of capital and labour, if it is proved that in fact 
 (and not merely as an assumption) the capital and_^ 
 labour displaced by the foreign import. will -itnd 
 employment at home. If the result were that 
 the capital would be sent abroad, or if it would 
 not be replaced as it gradually was worn out, and 
 if labour was unemployed or forced to emigrate, 
 the efi'ect on the total of home industry would 
 in general be disadvantageous, according to Adam/ 
 Smith's ideas of advantage, i.e. from the uatiouiu 
 standpoint. 
 
 In this connection it is noteworthy that Adam 
 Smith states that "in manufactures a ve ry s mall 
 advantage will enable foreigners to undersell our 
 own workmen, even in the home market." ^ And 
 accordingly he argues that it is merchants and manu- 
 facturers (as contrasted with agriculturists) who 
 
 ' Book IV. cliap. ii. ^ Ibid. 
 
PROTECTION 113 
 
 derive the greatest advantage from the monopoly 
 of the home market. 
 
 It must be repeated that the guide to the employ- 
 ment of capital is always profit. If, then, a foreign 
 import cuts away profit, the home industry is checked 
 or stopped, and what becomes of the capital displaced 
 depends on the profit to be obtained in other things. 
 It is quite possible that with an old country the 
 natural opening would be found in some other place. 
 And that is, from Adam Smith's point of view, a 
 most important consideration. As well as a " some- 
 thing else" there is always a "somewhere else." 
 And for the nation the place is of vital importance. 
 
 § 9. Appeal to Experience necessary. 
 
 Adam Smith, looking always to facts, makes it an 
 essential condition for the retention of capital in the 
 home country that it should obtain equal, or very 
 nearly equal, profits as compared with employment 
 elsewhere. It might, no doubt, be an advantage to 
 the country if it were retained, and merely continued 
 its own existence (as is the case with a good deal of 
 the capital sunk in landed estates). But in the 
 normal case, apart from social considerations, it is 
 commercial considerations, measured in terms of 
 profit, which determine the retention or migration 
 of capital. 
 
 If, then, by a small duty the home market can be 
 retained for our own workmen, — if the small duty 
 gives enough profit to retain the capital — the duty 
 would, on his principles, be an advantage, unless it 
 
114 A PROJECT OF EMPIRE chap. 
 
 can be shown that the capital, if displaced, would find 
 at least equally advantageous employment at home 
 in something else. 
 
 And here the importjint point to observe is that 
 we cannot escape from the appeal to experience. We 
 must look for confirmation of the general principle to 
 the actual history of the development of home in- 
 dustries in competition with foreign imports ; and 
 for the support of our present policy we must appeal 
 to present facts. If official statistics do not suffice, a 
 special Royal Commission should be appointed. 
 
 If by such an appeal to present experience we 
 should find that, as the result of foreign competition, 
 our home industries were decaying and capital being 
 exported, or that the higher forms of industry were 
 being displaced by the lower, or that industries 
 necessary to social welfare or to national power were 
 discouraged, whilst those which ultimately would 
 prove detrimental were stimulated ; in these and 
 similar circumstances, according to the principles of 
 Adam Smith, it might be the duty of the state to 
 " direct private people how they should employ their 
 capitals," and to that end to interfere, by means of 
 protective duties, or bounties, or other aids and 
 restraints. But before such intervention could be 
 approved on his principles we should have to show 
 that the state could by the means suggested remedy 
 the evils complained of without bringing in greater 
 evils. And this consideration brinsfs into view the 
 strength of the negative argument for natural 
 liberty. 
 
PROTECTION 115 
 
 And it is evident that Adam Smith laid quite 
 as much stress on the weakness of state control as on 
 the benefits of individual freedom (see Chapter X. ). 
 
 In the meantime, however, the relation of the 
 consumer to the producer is of so much importance 
 that a somewhat more elaborate treatment seems 
 desirable than was possible in the general survey- 
 undertaken in the present chapter (see next chapter). 
 
CHAPTER IX 
 
 THE PRODUCER AND THE CONSUMER 
 
 § 1. That Cheapness is a Benefit and Employment 
 a Necessity to the Consume^' : both Truisms. 
 
 To those who accept the popuLar dogma that under 
 all conditions it is advantageous for a nation to buy- 
 in the cheapest market, whether that market be in 
 the home country or elsewhere, Adam Smith's treat- 
 ment of protection to native industries will seem 
 needlessly elaborate. And to the same people an 
 appeal to experience in the form of economic history 
 and statistics (or the Report of a Royal Commission) 
 will also appear to be as superfluous as in the case of 
 a proposition of Euclid. 
 
 It is, indeed, a truism that if any number of people 
 have a certain definite amount of money to spend 
 they will get more commodities exactly in proportion 
 to their cheapness ; but it is equally a truism that if 
 they have no money they will get no things at all 
 except in the way of charity. And as Adam Smith 
 observed : " It is not from the benevolence of the 
 butcher, the brewer, or the baker that we expect our 
 dinner, but from their regard to their own interest. 
 
 Ii6 
 
cH.ix PRODUCER AND CONSUMER 117 
 
 We address ourselves, not to their humanity, but to 
 their self-love ; and never talk to them of our own 
 necessities, but of their advantages." ^ But to get any- 
 thing by way of exchange something must be given, 
 and in any modern society that something is money 
 (metallic or representative) ; and the money can only 
 be obtained in the ordinary case by some form of 
 employment. Employment, then, is a pre-requisite 
 of consumption. He that will not work neither shall 
 he eat, said the apostle of charity ; and he that has no 
 work shall have no meat, is the variant of our modern 
 man of business. 
 
 Accordingly, the dogmatic popular argument of 
 cheapness is countered by the protectionist argument 
 of employment. The one is as much a truism as the 
 other ; and as every one knows general truisms, like 
 the axioms and postulates of Euclid or the common 
 law, are quite useless until they are combined with 
 particulars ; and in the combination lies the practical 
 difficulty. 
 
 Adam Smith looks at the problems of foreign 
 trade from the point of view of the producer as 
 well as from that of the consumer, and applies 
 equally the test of employment and the test of 
 cheapness. 
 
 There are, indeed, certain passages in the Wealth 
 of Nations which have often been quoted to show 
 that, in his opinion, it was only requisite to look 
 to the interests of the consumer. A passage very 
 frequently extracted and interpreted without reference 
 
 ^ Book I. chap. ii. 
 
ii8 A PROJECT OF EMPIRE 
 
 to the context occurs in the general summary of the 
 attack on the mercantile system. 
 
 §2. " Consumption the sole End and Purpose of all 
 Production" : Critical Examination of. 
 
 " Consumption is the sole end and purpose of all 
 production ; and the interest of the producer ought 
 only to be attended to only so far as it may be neces- 
 sary for promoting that of the consumer. The 
 maxim is so perfectly self-evident that it would be 
 absurd to attempt to prove it. But in the mercantile 
 system the interest of the consumer is almost con- 
 stantly sacrificed to that of the producer ; and it seems 
 to consider production and not consumption as the 
 ultimate end and object of all industry and com- 
 merce." ^ That the very meaning of production is 
 the adaptation of things to the wants of man — the 
 putting utility into things or adding to the utility — 
 and that utility itself means the power to satisfy a 
 want — have long since become the commonplaces of 
 political economy. But Adam Smith's reference to 
 the interest of the producer as entirely subordinate 
 to that of the consumer has been altogether mis- 
 understood and misapplied. 
 
 The term " producer " has been interpreted to 
 mean the "productive labourer," and it has been 
 supposed that Adam Smith meant by this assertion 
 that so long as commodities were produced as cheaply 
 as possible the conditions under which the work was 
 done by labour might be disregarded ; that in the 
 
 ' Book IV. chap. viii. 
 
IX PRODUCER AND CONSUMER 119 
 
 interest of the consumer labour itself was to be made 
 as cheap as possible, and if, for example, the labour 
 of little children was cheaper than that of men it was 
 to be preferred. In this way, out of the perversion 
 of maxim, a maxim so self-evident that it came 
 very near the explication of a definition, there arose 
 the opposition to all the long series of reforms for the 
 improvement of the conditions of labour which have 
 marked the economic progress of the nineteenth 
 century. 
 
 But, as so often pointed out, the teaching of the 
 Wealth of Nations cannot be understood from a few 
 isolated sentences. And with Adam Smith there is 
 the less justification for this perversion of popular 
 dogmatism, because he always makes his meaning 
 perfectly clear by a context illuminated by facts. 
 The sentence under examination follows immediately 
 on a passage in which he severely condemns the laws 
 which prohibited the emigration of skilled workmen : 
 " It is unnecessary to observe how contrary such 
 regulations are to the boasted liberty of the subject, 
 of which we affect to be so very jealous ; but which 
 in this case is so plainly sacrificed to the futile 
 interests of our merchants and manufacturers," who 
 in effect wanted a buyer's monopoly of labour, to 
 use the modern term. And after a summary of the 
 modes in which, under the mercantile system, the 
 interests of the consumer have been sacrificed to 
 those of the producer, we have as the conclusion : " It 
 cannot be very difiicult to determine who have been 
 the contrivers of this whole mercantile system ; not 
 
I20 A PROJECT OF EMPIRE chap. 
 
 the consumers we may believe, whose interest has 
 been entirely neglected ; but the producers, whose 
 interest has been so carefully attended to ; and 
 among the latter class our merchants and manu- 
 facturers have been by far the principal architects. 
 In the mercantile regulations which have been 
 taken notice of in this chapter^ the interest of our 
 manufacturers has been most peculiarly attended to : 
 and the interests, not so much of the consumers as 
 that of some other sets of producers, has been 
 sacrificed to it." 
 
 Again, in describing the essential features of the 
 system of natural liberty the first sentence runs : 
 "Every man, as long as he does not violate the 
 laws of justice, is left perfectly free to pursue his 
 own interest his own way." But it is plain, from 
 the whole trend of the argument, in which the 
 mercantile system is attacked that, in Adam Smith's 
 opinion, the interests of the productive labourers had 
 been sacrificed to the interests of monopolies,^ and 
 that the whole body of consumers had suff'ered by 
 the reduction in the produce of the land and labour 
 of the society consequent on these same monopolies. 
 
 § 3. Taxes on Consumable Commodities : Effect 
 on Labour. 
 
 The same ideas are evident in the treatment of 
 
 -^the taxes on consumable commodities. A distinction 
 
 is drawn between the taxes which are intended 
 
 ' Book IV. chap. viii. The producers sacrificed are the poor spinners, the 
 artisans, etc. See below Chapter X. § 1, i)p. 141-4. 
 ■•* See next cliapter. 
 
PRODUCER AND CONSUMER 121 
 
 primarily for revenue and those the object of which is 
 to secure the monopoly of the home market. " Taxes 
 imposed with a view to prevent or even to diminish 
 importation are evidently as destructive of the 
 revenue of the customs as of the freedom of trade." 
 A passage already quoted deserves requotation for 
 emphasis at this point. " The greater part of the 
 taxes have 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 aflforded from each article 
 the greatest revenue to the public, our own workmen 
 miorht still have a considerable advantag;e in the home 
 market ; and many articles, some of which at present 
 afford no revenue to the government and others a 
 very inconsiderable one, might afford a very great 
 one." ' 
 
 This passage is so liable to misquotation that it is 
 well to point out that in the account which follows 
 of the advantages of this proposed reform of the 
 customs duties the phrase occurs, " taxation being 
 always employed as an instrument of revenue and 
 never of monopoly." It is often forgotten by those 
 who imagine that Adam Smith advocated free im- 
 portation under all conditions of all things, that one 
 of his greatest contributions to practical finance was 
 in the improvements he suggested in the customs 
 duties considered as sources of revenue. His lead- 
 
 ^ Book V. chap. ii. 
 
122 A PROJECT OF EMPIRE 
 
 ing ideas were : that the number of such duties 
 should be very greatly reduced ; that the rate should 
 be lowered so that the revenue might be increased 
 by the extension of demand ; and that the indirect 
 expense should be diminished by more efiective 
 administration and by the provision of bonded 
 warehouses. "If by such a change in system the 
 public revenue suffered no loss the trade and 
 manufactures of the country would gain a very 
 considerable advantage. The trade in the com- 
 modities not taxed, by far the greatest number, 
 would be perfectly free and might be carried on to 
 and from all parts of the world with every possible 
 advantage. Amonoj those commodities would be 
 comprehended all the necessaries of life, and all 
 the materials of manufacture. ... It must always 
 be remembered, however, that it is the luxuries and 
 not the necessary expense of the inferior ranks of the 
 people that ought ever to be taxed." 
 
 § 4. Taxation of Necessaries : Reasons against} 
 
 And here it must be observed that Adam Smith 
 did not insist on the exemption of necessaries simply 
 on the ground of inequality of sacrifice and the 
 burden on the poor of such taxes. He did not 
 regard the question simply from the point of view 
 of the consumer. On the contrary, he held that as 
 regards the lowest classes of labour who lived very 
 near the minimum of subsistence, any tax on neces- 
 saries must be transferred to the employers of labour, 
 
 ' See also below, Chapter XI. § 10, i>. 163. 
 
PRODUCER AND CONSUMER 123 
 
 and that any rise iu the cost of the lowest sorts of 
 labour must also indirectly raise the cost of the 
 higher grades ; so that taxes on necessaries in the end 
 meant a oreneral rise in the cost of labour in the 
 
 o 
 
 country concerned. If, then, conversely, such taxes 
 were taken off, there would be a reduction in the cost 
 of labour. Money wages would be less (so far as 
 dependent on the cost of necessaries),^ but real wages 
 indirectly would be raised. This argument is of 
 historical importance, as it had great influence with 
 the manufacturers who advocated the repeal of the 
 corn laws. The benefit to the consumer qua con- 
 sumer was an afterthought. 
 
 The point of importance in the present argument 
 is that Adam Smith does not look on the reduction 
 or abolition of customs duties only from the point of 
 view of the consumer, but he always traces the effect 
 on labour. The labourers, no doubt, gain as consumers, 
 unless their money wages are reduced precisely in 
 proportion to the fall in the articles freed from taxes. 
 But money wages are not on balance reduced so much 
 — they may not even fall at all — because there is an 
 improvement in the demand for labour. The two 
 sources of gain are well brought out in the summary 
 of the advantages to be derived from a reduction in 
 the national debt. " The people might be relieved 
 from some of the most burdensome taxes ; from those 
 which are imposed either on the necessaries of life or 
 upon the materials of manufacture. The labouring 
 
 ^ ' ' The reduction in the money price of labour would necessarily he 
 attended with a proportionable one in that of all home manufactures, which 
 would thereby gain some advantage in all foreign markets " (Bk. v. oh. ii.). 
 
124 A PROJECT OF EMPIRE 
 
 poor would thus be enabled to live better, to work 
 cheaper, and to send their goods cheaper to market. 
 The cheapness of their goods would increase the 
 demand for them, and consequently for the labour of 
 those who produced them. The increase in the 
 demand for labour would both increase the numbers 
 and improve the circumstances of the labouring poor. 
 Their consumption would increase, and together with 
 it the revenue arising from all those articles of their 
 consumption upon which the taxes might be allowed 
 to remain." ^ 
 
 § 5. Mr. Gladstone on Cheapness and Employment. 
 
 There is a famous passage in Mr. Gladstone's 
 financial statement of 1860, in which he replies to 
 the ultra-orthodox Free Traders who tried to show that 
 the commercial treaty with France was an infringement 
 of their dogma. The main point is a reassertion of 
 Adam Smith's position on the employment of produc- 
 tive labour (p. 128). " It is a mistake to suppose 
 that the best mode of giving benefit to the working 
 classes is simply to operate on the articles consumed 
 by them. If you want to do them the maximum of 
 good you should operate on the articles which give 
 them the maximum of employment." ^ He illustrates 
 by reference to the Corn Laws. He says it is doubtful 
 if the repeal up to that time had made bread cheaper ; 
 but the trade in corn had developed a corresponding 
 export trade with a rise in wages, and it is " the 
 enhanced price their labour thus brings even more 
 
 ' Book V. cliap. iii. - Gladstone's Fiiuincial Slatcmnits, ]). 128. 
 
PRODUCER AND CONSUMER 125 
 
 than the cheapened price of commodities, that forms 
 the main benefit they receive. That is the principle 
 of a sound political economy applicable to commercial 
 legislation." 
 
 § 6. ''All Taxes on Commodities tend to reduce 
 Employment." 
 
 One more sentence may be given from Adam 
 Smith : " All taxes on consumable commodities 
 tend to reduce the quantity of productive labour 
 below what it otherwise would be, either in pre- 
 paring the commodities taxed if they are home 
 commodities, or in preparing those with which they 
 are purchased if they are foreign commodities." 
 Curiously enough,, the illustration given of the last 
 case is that of the hardware trade of Birmino-ham 
 and the producer who is adversely affected is not 
 directly the common artisan but the manufacturer 
 himself. " The dearer the Birmingham manufacturer 
 pays for his foreign wine the cheaper he necessarily 
 sells that part of his hardware with which, or what 
 comes to the same thing, with the price of which he 
 buys it. That part of his hardware, therefore, becomes 
 of less value to him, and he has less encouragement 
 to work at it." And then follows the general prin- 
 ciple that is fundamental in all foreign trade : " The 
 dearer the consumers in one country pay for the 
 surplus produce of another, the cheaper they neces- 
 sarily sell that part of their own surplus produce with 
 which, or what comes to the same thing with the 
 price of which, they buy it. That part of their own 
 
126 A PROJECT OF EMPIRE 
 
 surplus produce becomes of less value to them, 
 and they have less encouragement to increase its 
 quantity." ^ 
 
 § 7. The Masses of the People are the Masses of 
 Consumers and Producers. 
 
 In dealing with taxes on consumable commodities 
 Adam Smith brings out very clearly the funda- 
 mental idea that the masses of the consumers are 
 also the masses of the producers of the country. 
 " The whole consumption of the inferior ranks of 
 people or of those below the middling rank, it must be 
 observed, is in every country much greater not only 
 in quantity but in value than that of the middling 
 and of those above the middling rank. The whole 
 expense of the inferior is much greater than that of 
 the superior ranks. In the first place, almost the 
 whole capital of every country is annually distributed 
 among the inferior ranks of people as the wages of 
 productive labour." But apart from the wages of 
 productive labour paid out of capital (or rather from 
 the continuous reproduction of capital), a great part 
 of the revenue that arises from the rent of land and 
 the profits of stock is spent in the wages of servants 
 and other unproductive labourers. And besides, the 
 inferior ranks themselves own a certain amount of 
 land and capital from which they receive revenue 
 directly. 
 
 The actual statistics of consumption confirm this 
 view. Production on a large scale means also con- 
 
 ' IJook V. chap. ii. 
 
PRODUCER AND CONSUMER 127 
 
 sumption ou a large scale. When Adam Smith wrote 
 he included under the foreign luxuries, — taxes on 
 which fell principally upon the middling or superior 
 ranks of the people, — coffee, chocolate, tea,^ sugar, etc., 
 which are all now regarded as necessaries. 
 
 The taxes which fall on articles of general con- 
 sumption are always much more productive than those 
 which fall on the luxuries consumed by the richer 
 classes. It follows, then, that odIjt- a relatively small 
 part of the total revenue of a country can be obtained 
 from taxes on foreign imports that are luxuries in the 
 sense that they do not enter into the general con- 
 sumption of the masses of the people. And con- 
 versely if a large revenue is to be obtained from 
 taxes on imports, such taxes must be imposed on 
 things that directly or indirectly affect the consum- 
 ing power of the masses of the people. But a re- 
 duction in the consuming power of the people is the 
 same thing as a falling off in the aggregate annual 
 produce of the land and labour of the country, and 
 that again means that for a given amount of labour a 
 less real reward is forthcoming. 
 
 § 8. Adam Smith always considers the Producer as 
 well as the Consumer. 
 
 There can be no question that Adam Smith always 
 considered the effects of foreign trade not merely 
 from the point of view of the consumer but also from 
 that of the producer. Comparing his treatment with 
 
 ^ " Tea was a drug very little used in Europe before the middle of last 
 century." — Book i. chap. xi. 
 
128 A PROJECT OF EMPIRE chap. 
 
 that of his successors, it may be said, generally, that 
 they lost sight of the importance of the employment 
 of productive labour, and fixed the attention almost 
 entirely on the importance of cheapness to the con- 
 sumer. To begin with, the ultra-orthodox economists 
 of the first half of the nineteenth century, in the 
 interests of cheapness, overlooked the conditions of 
 employment under which the cheapness was attained. 
 Gradually, however, public opinion was aroused and 
 the regulation of the conditions of labour was en- 
 forced by manifold legal enactments, and by the 
 visitations of a multitude of inspectors. 
 
 In our own days public attention has been turned 
 to the provision of remedies against unemployment 
 of various kinds, and to the organisation of markets 
 for labour. This consideration of the real interests 
 of labour is only a reassertion and a development of 
 the principles of Adam Smith. The experience of 
 Australia, however, shows that this reaction may be 
 carried too far, and that the interests of the consumer 
 may be unduly neglected. The actual method 
 adopted by Adam Smith was to look at the people of 
 a nation as both consumers and producers. He was 
 not content to look only to cheapness ; he considered 
 the reactions of cheapness on the employment and 
 conditions of labour. And in the same way he was 
 not content to look on the mere exclusion of foreign 
 goods as necessarily involving an increase in the 
 employment of home labour ; he took account of 
 the direct and indirect effects of the monopoly of 
 the home market. The importance of cheapness to 
 
IX PRODUCER AND CONSUMER 129 
 
 " the great body of the people " — or the interest of 
 the " consumer " — is perhaps most emphasised by 
 Adam Smith in the chapter in which he attacks 
 the mercantilist policy of imposing " extraordinary 
 restraints on the importation of goods of almost all 
 kinds from those countries with which the balance of 
 trade is supposed to be unfavourable." ^ 
 
 The idea is still popular that we should give 
 special advantages to those countries which take 
 most of our exports, and Adam Smith did good 
 service in showing that even on the principles of the 
 mercantilist system — i.e. on the idea that the ad- 
 vantage of trade is to be measured by the excess of 
 the money value of the exports over the imports — it 
 is best for a country to buy in the cheapest and sell 
 in the dearest market, regardless of the particular 
 balances. The argument really makes the same 
 assumption as in the modern pure theory, in which 
 the rest of the commercial world is regarded, relatively 
 to any one country as the "other country" — the 
 theory being worked out on the hypothesis of two 
 nations only trading together. It is quite clear 
 that if the object is to have a favourable balance 
 on the whole of the trade of any country, we 
 must look to the aggregate of the exports and the 
 imports. 
 
 But having disposed of the mercantilist fallacy, 
 " even on their own principles," he goes on to show 
 the unreasonableness of these restraints on other 
 principles. 
 
 2 
 
 ' Book IV. chap. iii. - Book iv. chap. iii. part ii. 
 
 E 
 
I30 A PROJECT OF EMPIRE 
 
 It is in this part that are found tlie passages so 
 often quoted which seem to support the simple 
 dogmatic position that in foreign trade only the 
 interests of the consumer need be regarded. " In 
 every country it always is, and always must be, the 
 interest of the great body of the people to buy 
 whatever they want of those who sell it the cheapest. 
 The proposition is so manifest that it seems ridiculous 
 to take any pains to prove it ; nor could it ever have 
 been called in question had not the interested 
 sophistry of merchants and manufacturers confounded 
 the common sense of mankind. Their interest is in 
 this respect directly opposite to that of the great 
 body of the people. As it is the interest of the 
 freemen of a corporation to hinder the rest of the 
 inhabitants from employing any workmen but them- 
 selves, so it is the interest of the merchants of every 
 country to secure to themselves the monopoly of the 
 home market. Hence in Great Britain and in most 
 other European countries the extraordinary duties 
 upon almost all goods imported by alien merchants. 
 Hence the high duties and prohibitions upon all those 
 foreign manufactures which can come into competi- 
 tion with our own. Hence, too, the extraordinary 
 restraints upon the importation of almost all sorts of 
 iroods from those countries with which the balance of 
 trade is supposed to be unfavourable ; that is, from 
 those against whom national animosity happens to be 
 most violently intlamed." 
 
 Adam Smith, in this place, also introduces his 
 leading principle tliat a nation which would enrich 
 
PRODUCER AND CONSUMER 131 
 
 itself with foreign trude i.s certainly most likely to do 
 so when its neighbours are all rich, industrious, and 
 commercial nations. " The wealth of neisfhbourinor 
 nations, though dangerous in war and politics, is 
 certainly advantageous in trade." The richer the 
 neighbours the richer the state : the gain of one 
 nation is not the loss of another, but all trade is of 
 advantage to both parties (though the advantage 
 may not be equal). 
 
 There can be no doubt, both from the passages 
 cited and from the context, that here as throughout 
 his work Adam Smith is attacking monopoly and 
 monopolists ; " the mean rapacity, the monopolising 
 spirit of merchants and manufacturers who neither are 
 nor ought to be the rulers of mankind." Here, as else- 
 where, the consumer is identified with the great body of 
 the people, and from this point of view the interest of 
 the monopolist is opposite to the interest of the public. 
 
 " The interest of the dealers in any particular 
 branch of trade or manufactures, is always in some 
 respects different from, and even opposite to, that of 
 the public. To widen the market, and to narrow the 
 competition, is always the interest of the dealers. 
 To widen the market may frequently be agreeable 
 enough to the interest of the public ; but to narrow 
 the competition must always be against it, and can 
 only serve to enable the dealers, by raising their 
 profits above what they naturally would be, to levy, 
 for their own benefit, an absurd tax upon the rest of 
 their fellow-citizens. The proposal of any new law 
 or regulation of commerce which comes from this 
 
132 A PROJECT OF EMPIRE chap. 
 
 order, ought always to be listened to with great pre- 
 caution, and ought never to be adopted till after 
 having been long and carefully examined not only 
 with the most scrupulous, but with the most sus- 
 picious attention."^ 
 
 When the interest of the consumer {i.e. of the 
 masses of the people) in cheapness is weighed against 
 the interest of the monopolist in artificial dearness 
 it is quite clear that "those who first taught it 
 [i.e. the mercantilist doctrine of monopoly] were by 
 no means such fools as they who believed it." 
 
 In spite, however, of the vigour of the rhetoric and 
 of the apparent simplicity of the principles laid down 
 it would be a great error to suppose that the passages 
 quoted can be taken as giving a fair summary of the 
 teachinof of the Wealth of Nations on the national 
 policy that ought to govern foreign trade. 
 
 The question must be regarded not only from the 
 point of view of the " consumer " but from that of the 
 "producer." And if the "consumer" is interpreted 
 to mean the " great body of the people " the 
 " producer " also must bear the same interpretation ; 
 the great body of the people, as is now evident from 
 the reports of the census, is occupied in various forms 
 of " production " ; and for the most part in order to 
 consume, a man must first produce something to sell, 
 just as in the simplest barbarism, as a rule, in order to 
 eat, a man must toil. 
 
 It would be quite easy to quote from Adam Smith 
 passages equally emphatic on the superior advantage 
 
 ' This passage is part of the general conclusion of Hook i. 
 
IX PRODUCER AND CONSUMER 133 
 
 to labour of home over foreign trade, and of the 
 differences in advantage of various kinds of foreign 
 trade. Indeed, such passages have already been cited ; 
 to neo^lect them is to overlook at least half of the 
 fundamental principles of the Wealth of Nations and 
 considerably more than half of the difficulties. Those 
 who rely only on the argument from cheapness to the 
 consumer are met by arguments from Adam Smith 
 himself, stated with equal vigour, on the advantage of 
 the employment of home labour — and Adam Smith 
 the free trader is confronted by Adam Smith the pro- 
 tectionist. Obviously one of the Adam Smiths must 
 be silenced or the two must be reconciled. The real 
 Adam Smith flattered himself he had efiected a 
 reconciliation ; he did not feel the discomfort of 
 struggling contradictions. He set himself to prove 
 by an elaborate investigation that the various forms 
 of protection to labour were either useless or hurtful ; 
 the great body of the people gained on his view not 
 only as consumers but as producers from the freedom 
 o: trade. But as already shown this latter position 
 (and though to a less extent the former also) needs 
 the verification of experience, and from generation 
 to generation experience changes or may change. 
 What we have to show is that in our day, as Adam 
 Smith showed was the case in his day under freedom 
 of trade, the productive powers of the nation (not of 
 the world) will be used to the greatest advantage; 
 that as great a quantity of capital as possible will be 
 employed within the country ; that the land will be 
 used to the best advantage ; and that the various 
 
134 A PROJECT OF EMPIRE 
 
 forms of labour will be employed iii the best manner 
 from the national point of view. And we have to 
 consider also what is the effect on our arguments if 
 for the nation we substitute the empire. In this 
 demonstration no repetition of postulates and axioms 
 can dispense with the appeal to experience. 
 
 The monopoly of the home market is only 
 possible through a number of restraints and restric- 
 tions imposed by the state. And before an opinion 
 can be formed of the general advantages of inter- 
 vention, account must be taken of difficulties involved. 
 These difficulties may be summarised under the ex- 
 pression the negative argument for freedom — the 
 subject of the next chapter. 
 
 § 9. Peel and Cohden on Consumers and Producers. 
 
 Before proceeding to this topic, the general argu- 
 ment of this present chapter that the interests of 
 both consumers and producers must be considered, 
 may be enforced and illustrated by reference to the 
 two statesmen who had the greatest influence in 
 Parliament and in the country in carrying the repeal 
 of the Corn Laws, namely, Sir Robert Peel and 
 Richard Cobden. The fact that had most influence 
 with Peel was the discovery that for a very long 
 period the agricultural labourer w^as interested in the 
 price of corn not as a producer but as a consumer.' 
 Peel was a model landlord — his yearly tenants 
 refused to accept leases — most interested in the 
 conditions of the people on his estate. Cobden, on 
 
 * See ITislonj of the EnciUsh Com Lajcs, by the present writer, p. 101. 
 
IX PRODUCER AND CONSUMER 135 
 
 the other hand, said of Peel that he took " the least 
 comprehensive and statesmanlike view of his measures 
 when he proposed to lower prices instead of aiming 
 to maintain them by enlarging the circle of ex- 
 
 change." ^ 
 
 Morley's Life of Cohden, vol. i. p. 322. 
 
CHAPTER X 
 
 THE NEGATIVE ARGUMENT FOR FllEEDOM OF TRADE 
 
 § 1. Sidgwick's Critique of Popular Ideas on Free 
 Trade and Protection. 
 
 The subject of this chapter may be introduced by 
 a passage from Henry Sidgwick, who could divide a 
 hair between south and south-west side with greater 
 nicety than any Greek sophist or mediaeval casui st 
 In his chapter on Protection ^ he states that " the 
 ordinary moderate view on the subject — held by 
 practical persons who wish to avoid both extremes 
 — is a curious perversion of the truth, at least on the 
 practical issue most commonly raised. The moderate 
 view is that all protection is theoretically wrong, so 
 far as purely economic considerations are concerned ; 
 but that practically a little protection here and there 
 does more good than harm to industry, owing to 
 influences which abstract theory overlooks. I hold, 
 on the contrary, that when the matter is considered 
 from the point of view of abstract theory it is 
 easy to show that protection, under certain not im- 
 probable circumstances, would yield a direct economic 
 gain to the protecting country : but that from the 
 
 * Principles of Political Economy, Book in. cliap. v. 
 136 
 
L. 
 
 cHAP.x THE NEGATIVE ARGUMENT 137 
 
 dilHculty of securing, in any actual government, 
 sufficient wisdom, strength, and singleness of aim to 
 introduce protection only so far as it is advantageous 
 to the community and withdraw it inexorably so 
 soon as the public interests require its withdrawal, 
 it is practically best for a statesman to adhere to 
 the broad and simple rule of 'Taxation for revenue 
 only,' — at any rate in a free community where habits 
 of commercial enterprise are fully developed." 
 
 § 2. Adam Smith on Statesmen and their Advisers. 
 
 It is clear from the importance assigned by 
 Adam Smith to the employment of labour and 
 capital in the home country that he, at any rate, 
 cannot proceed at once from the cosmopolitan to 
 the national point of view. More than any other 
 economist, he recognised the supreme importance of" 
 national interests ; and the exceptions to freedom of 
 importation which he explicitly admits may be easily 
 exte-nded to cover a number of theoretical cases. ^ 
 
 But before putting theory to practice he took 
 account of the elements conveniently summarised 
 under the modern expression, the negative argument 
 forjreedonj. Influenced by the appeal to experience 
 lie_ distrusted the wisdom, the strength, and the 
 singlemindedness of the statesman, and still more he 
 distrusted the guidance of those who advised the 
 statesman in matters in which they themselves were 
 interested. His attitude will be at once clear from 
 the following significant passages, some of them 
 
 ^ See below, Chapter XI. 
 
13S A PROJECT OF EMPIRE 
 
 familiar from frequent quotation, but essential to 
 the understanding of bis general position. " I bave 
 never known mucb good done by tbose wbo affected 
 to trade for tbe public good, it is an affectation 
 indeed not very common among merchants, and 
 very few words need be employed in dissuading them 
 from it." ..." The^ statesman who should attempt 
 to direct private people in what manner they ought 
 to employ their capitals would not only load himself 
 with a most unnecessary attention, but assume an 
 authority which could safely be trusted not to no 
 single person but to no council or senate whatever, 
 and which would nowhere be so dancrerous as in the 
 hands of a man who had folly and presumption 
 enough to fancy himself fit to exercise it." , . . "To 
 judge whether such retaliations are likely to produce 
 such an effect does not perhaps belong so much to 
 the science of the legislator whose deliberations ought 
 to be governed by general principles which are 
 always the same, as to that insidious and crafty 
 animal vulgarly called a statesman or politician, whose 
 councils are directed by the momentary fluctuations 
 of affairs." 
 
 But if Adam Smith distrusted the wisdom and 
 powers of statesmen he distrusted still more their 
 advisers. " That foreign trade enriched the country, 
 experience demonstrated to the nobles and country 
 gentlemen, as well as to the merchants ; but how 
 or in what manner none of them well knew. The 
 merchants knew perfectly in wliat manner it enriched 
 themselves. It was their l)usiness to know it. But 
 
THE NEGATIVE ARGUMENT 139 
 
 to know in what manner it enriched the country 
 was no part of their business. This subject never 
 came into their consideration but when they had 
 occasion to apply to their country for some change 
 in the laws relatino- to foreio-n trade. Jt then became 
 necessary to say something about the beneficial effects 
 of foreign trade, and the manner in which those 
 effects were obstructed by the laws as they then 
 stood." In this connection the remark of Dr. Johnson 
 may be recalled, who replied when some one asserted 
 that Adam Smith was not qualified to write about 
 trade because he had never been in trade: "He is 
 mistaken, sir, there is nothing which requires more 
 to be illustrated by philosophy than trade does." 
 
 § 3. 2'he Evils of Monopoly. 
 
 It must not be supposed that Adam Smith's 
 severe strictures on the merchants and manufacturers 
 were called forth simply as a rhetorical support of the 
 system of natural liberty. His attitude is explained 
 in the first place by reference to underlying economic 
 principles. Individuals naturally seek to attain the 
 best profit on their capital ; but for this purpose a 
 combination or monopoly will often be more effective 
 than competition. On the whole, however, the public 
 interest is promoted by competition and injured by 
 monopoly. Profit realised under natural conditions, 
 that is to say, without the aid of monopoly, Adam 
 Smith thinks is, in general, conducive to the national 
 advantage ; but as soon as monopoly enters in, the 
 nation suffers for the benefit of a class. 
 
I40 A PROJECT OF EMPIRE 
 
 The centre of his attack on the old mercantile 
 system is that it was based on monopoly. " Mono- 
 poly of one kind or another seems to be the sole 
 engine of the mercantile system." ..." Merchants 
 and manufacturers are the people who derive the 
 greatest advantage from this monopoly of the home 
 market." ..." Country gentlemen and farmers are, 
 to their great honour, of all people the least 
 subject to this wretched spirit of monopoly." The 
 following passage shows the wide application made of 
 this fundamental difference. " The_suj)orioritv which 
 the industry of the towns has everywhere in Europe 
 over that of the country is not altogether owing to 
 corporations and corporation laws.^ It is supported 
 by many other regulations. The high duties upon 
 foreign manufactures and upon all goods imported 
 by alien merchants all tend to the same purpose. 
 Corporation laws enable the inhabitants of the towns 
 to raise their prices without fear to be undersold by 
 the free competition of their own countrymen. Those 
 other regulations secure them equally against that 
 of foreigners. The enhancement of price occasioned 
 by both is everywhere finally paid by the landlords, 
 farmers, and labourers of the country who have 
 seldom opposed the establishment of such monopolies. 
 They have commonly neither inclination nor fitness 
 to enter into combinations ; and the clamour and 
 sophistry of merchants and manufacturers easily 
 persuade them that the private interest of a part, and 
 
 ' The reference is to tlie exclusive regulations adopted by the niedia'val 
 towns to jtrotect their own burgesses. 
 
X THE NEGATIVE ARGUMENT 141 
 
 of a subordinate part of the society, is the general 
 interest of the whole." ^ 
 
 As already indicated, and as will be shown in 
 detail later on, Adam Smith was not only a national 
 but^aji^ijnperiaL economist, and the centre of this 
 attack on the imperial policy of the mercantilists was 
 that it was based on monopoly. Alike in the British 
 colonies of North America and in India, the mercan- 
 tile policy failed to realise the larger issues of 
 empire ; and in both cases the reason is the same ; 
 the policy was actuated by the narrow spirit of trade 
 monopoly. " Monopoly is the great engine of both ; 
 but it is a dififerent sort of monopoly." 
 
 Examples might be multiplied from the Wectlth 
 of Nations to show that in every part of the economic 
 system, with few exceptions, monopolies were detri- 
 m^tal to the public interest. If their growth cannot 
 be prevented then they should be mulcted of their 
 gains — " the gains of monopolists, whenever they can 
 be come at, being of all subjects of taxation the most 
 proper." ^ 
 
 § 4. Monopoly and the Interests of Labour. 
 
 The chapter entitled " The Conclusion of the Mer- 
 cantile System " (Bk. iv. ch. viii.)^ gives a good illustra- 
 tion of the way in which the monopoly of the home 
 market was managed merely for profit and not for 
 the increased employment of home labour. To begin 
 with, Adam Smith points out that the raw materials 
 
 ^ Book I. chap. x. part ii. ^ Book v. chap. ii. part ii. art. iv. 
 
 * This chapter was added by Adam Smith to the last edition revised by 
 him (the third in 1784). See Dr. Cannan's edition, Introduction, j). xv. 
 
142 A PROJECT OF EMPIRE chap. 
 
 of manufacture were in many important cases 
 admitted free ; and although these exemptions " may- 
 have been extorted from the legislature by the 
 private interests of our merchants and manufacturers 
 they are perfectly just and reasonable ; and if, con- 
 sistently with the necessities of the State, they could 
 be extended to all the other materials of manu- 
 facture, the public would certainly be a gainer." So 
 far, this is a position which has been generally adopted 
 both in theory and in practice. But the particular 
 example which follows is of the nature of a crucial 
 instance. " The avidity of our great manufacturers, 
 however, has in some cases extended these exemptions 
 a good deal beyond what can justly be considered as 
 the rude materials of their work." The case examined 
 at length is that of linen yarn. At one time this 
 importation had been subject to a high duty, but 
 finally even the surviving small duty of one penny 
 per pound had been repealed. And on this repeal 
 Adam Smith has some very remarkable comments, 
 — remarkable that is to say, in view of the common 
 opinion of his system. " In the different operations 
 which are necessary for the preparation of linen yarn 
 a good deal more industry is employed than in the 
 subsequent operation of preparing linen cloth from 
 linen yarn. To say nothing of the industry of the 
 flaxgrowers and flaxdressers, three or four spinners 
 at least are necessary in order to keep one weaver in 
 constant employment ; and more than four-fifths of 
 the whole quantity of labour necessary for the 
 preparation of linen cloth is employed in that of 
 
X THE NEGATIVE ARGUMENT 143 
 
 linen yarn ; but our spinners are poor people, women 
 commonly scattered about in all different parts of the 
 country, without support or protection. It is not by 
 the sale of their work, but by that of the complete 
 work of the weavers that our great master manu- 
 facturers make their profits. As it is their interest 
 to sell the complete manufacture as dear, so it is to 
 buy the materials as cheap, as possible. By extorting 
 from the legislature bounties on the exportation of 
 their own linen, high duties on the importation of all 
 foreign linen, and a total prohibition of the home 
 consumption of some sorts of French linen, they 
 endeavour to sell their own goods as dear as possible. 
 They are as intent to keep down the wages of their 
 own weavers as the earnings of the poor spinners ; 
 and it is by no means for the benefit of the workmen 
 that they endeavour either to raise the price of the 
 complete work or to lower that of the rude materials. 
 It is the industry that is carried on for the benefit of 
 the rich and powerful that is principally encouraged 
 by our mercantile system. That which is carried on 
 for the benefit of the poor and indigent is too often 
 either neglected or oppressed." ^ It is quite clear 
 from this passage that Adam Smith did not approve 
 of the repeal of the duty on linen yarn, the reason 
 being that the duty so far gave encouragement to the 
 home labour of flaxgrowers and spinners. It is 
 implied that the advantage to the nation is measured 
 by the relative amount of the home labour employed. 
 
 ^ The application of the ideas to the case of ''sweated industries" is 
 obvious. 
 
144 A PROJECT OF EMPIRE 
 
 It is also clear that he considered that the duty was 
 repealed solely in the interests of the profit of 
 the manufacturers of linen cloth who sought to 
 strengthen their monopoly. 
 
 § 5. Protection to Agriculture not based 07i 
 Mo7iopoly 
 
 The negative argument, however, does not depend 
 entirely on the weakness of statesmen, or the self- 
 seeking of their advisers, the traders of all kinds. In 
 the case which from his point of view is by far the 
 most important, namely, that of agriculture, he does 
 not think the landed interests were actuated by the 
 spirit of monopoly. It is noteworthy, in view of the 
 popular sentiment which was aroused by the agitation 
 which led to the repeal of the corn laws, that Adam 
 Smith did not originate nor even share this distrust 
 of the landlord. He generally brackets the country 
 gentlemen, the farmers, and the labourers together, 
 in the consideration of the agricultural interests as 
 compared with those of the towns. It is true that he 
 entirely disapproves of the various artificial devices 
 by which large estates were created and perpetuated 
 — the system of land laws, he maintained, ought to 
 be reformed altogether ; but he did not hold the view 
 that the owners of land possessed and exploited a 
 monopoly. " Country gentlemen and farmers, dis- 
 persed in different parts of the country, cannot so 
 easily combine as merchants and manufacturers who 
 being collected into towns, and accustomed to that 
 exclusive corporation spirit which prevails in them. 
 
THE NEGATIVE ARGUMENT 145 
 
 naturally endeavour to obtain against all their 
 countrymen the same exclusive privilege which they 
 generally possess against the inhabitants of their 
 respective towns. They accordingly seem to have 
 been the original inventors of those restraints upon 
 the importation of foreign goods which secure to 
 them the monopoly of the home market. It was 
 probably in imitation of them, and to put themselves 
 on a level with those who they found were disposed 
 to oppress them, that the country gentlemen and 
 farmers of Great Britain so far forgot the generosity 
 which is common to their station as to demand the 
 exclusive privilege of supplying their countrymen 
 with corn and butcher's meat. They did not, perhaps, 
 take time to consider how much less their interest 
 could be affected by the freedom of trade than that 
 of the people whose example they followed." ^ 
 
 § 6. — and unnecessary on Account of Natural 
 Conditions. 
 
 With regard to agriculture Adam Smith relies 
 mainly on the idea that the industry is suflSciently 
 protected and encouraged by natural conditions. Not 
 only, as already shown, do people prefer to employ 
 their capital in that way, even at a lower profit, but 
 the cost of transport, as compared with that of the 
 finer manufactures in particular, affords a natural 
 protection against foreign competition. After stating 
 that if manufactures were freely admitted some home 
 manufactures might suffer greatly or even be ruined 
 
 ^ Book IV. chap. ii. 
 
146 A PROJECT OF EMPIRE chap. 
 
 he proceeds : " But the freest importation of the rude 
 produce of the soil could have no such effect upon the 
 agriculture of the country." It is not necessary to 
 go into the details of the argument in which he 
 takes separately the importation of live cattle — both 
 fat and lean — of salted provisions, and of grain. It is 
 sufficient to say that the argument remained essenti- 
 ally valid until a hundred years after it was advanced 
 (1776-1876), including the period of thirty years 
 from the repeal of the Corn Laws (1846-1876). And 
 as regards this repeal it must be remembered that 
 the strongest advocates of the repeal relied largely on 
 this argument of natural protection. They supposed 
 that for the most part every country must depend in 
 the main on its own agricultural resources, and at any 
 rate that these resources must be utilised to the full 
 before foreign competition could be effective. The 
 importation of foreign food supplies was regarded as 
 supplementary to the home supplies and not as dis- 
 placing such supplies.^ Adam Smith was able to 
 write : " Even the freest importation of foreign corn 
 could very little affect the interest of the farmers 
 of Great Britain. Corn is a much more bulky com- 
 modity than butcher's meat. A pound of wheat at 
 a penny is as dear as a pound of butcher's meat 
 at fourpence. The small quantity of foreign corn 
 imported even in times of the greatest scarcity may 
 satisfy our farmers that they can have nothing to 
 fear from the freest importation." ^ 
 
 ' Cf. Tlie History of the English Corn Laws, by the present writer, p. 160. 
 '■' Book IV. chap. ii. 
 
X THE NEGATIVE ARGUMENT 147 
 
 But though this argument remained essentially true 
 in fact for a hundred years, during the last genera- 
 tion the reduction of the cost of freights on the one 
 side, and on the other the exploitation regardless of 
 the waste ^ of natural fertility of the soils of new 
 countries have brought about a fundamental change 
 in the conditions. It is quite obvious that, at any 
 rate, this part of the negative argument on which 
 Adam Smith laid such stress is no longer applicable. 
 
 § 7. Import of Food necessary ivith Growth of 
 Population. 
 
 As already observed, Adam Smith not only 
 appealed to actual experience, both past and present^ 
 but he was bold enough to take long views into the 
 future. And although he thought the British farmer 
 could never be injured by natural free importation, 
 he seems to have anticipated a time when the growth 
 of population in this country would depend on the 
 possibility of obtaining food supplies from abroad. 
 " To prohibit by a perpetual law the importation of 
 foreign corn and cattle is in reality to enact that the 
 population and industry of the country shall at no 
 time exceed what the rude produce of its own 
 soil can maintain." 
 
 In effect the surplus population of this country 
 
 ^ "In spite of the marvellous growth of American agriculture and its 
 apparent prosperity it is doubtful if it has ever been self-supporting in any 
 strict sense before the present period. The average farmer had never counted 
 the partial exhaustion of the soil as part of the cost of a crop. Taking the 
 country over it is probable that if the farmers had been compelled to buy 
 fertilizers to maintain the fertility of their soil without depletion, the whole 
 industry would have become bankrupt." — T. N. Carver, Historical Sketch of 
 American Agriculture. 
 
148 A PROJECT OF EMPIRE 
 
 must in the end be fed by the surplus food products 
 of other countries. 
 
 § 8. Failure of Protection to prevent Rural 
 Depopulation. 
 
 The history of the English Corn Laws ^ is full of 
 examples of the negative argument for freedom. The 
 laws affecting imports were ostensibly designed not 
 for revenue but for protection. 
 
 And yet so far as rural labour was concerned they 
 failed to keep up the numbers of labourers engaged in 
 agriculture. " In spite of the high protective duties, 
 the proportion in Great Britain of families engaged 
 in agriculture declined from 35 '2 per cent in 1811 to 
 25*9 per cent in 1841 of the total number of families. 
 Between 1821 and 1831 there was an absolute de- 
 crease in the number of families in agriculture in 
 spite of an increase of about 19 per cent in the 
 aggregfate number of families in Great Britain. ... If 
 we compare 1831 with 1841, with an absolute 
 increase in population of over two millions, there was 
 an absolute decrease in the number of adult males 
 employed in agriculture." ^ 
 
 § 9. Other Means of encouraging AgHculture. 
 
 In the last chapter of his fourth book, Adam 
 Smith deals with the Agricultural System of Political 
 Economy which had been expounded by the French 
 economists with whom he had on the whole great 
 
 1 Cf. ifist., op. cit. pp. Ill, 118. 
 - Porter's Progress of the Nation, pp. tjl, 62. 
 
X THE NEGATIVE ARGUMENT 149 
 
 sympathy. So complete, indeed, is the harmony of 
 views as regards the system of natural liberty in 
 general, that until Dr. Cannan published the notes 
 of the original lectures given by Adam Smith at 
 Glasgow, it was generally supposed that he had 
 derived some of his leading ideas from actual con- 
 versations with Quesnay and others during his visit 
 to France. 
 
 But in spite of his insistence on the fundamental 
 national importance of agriculture, and his partial 
 acceptance of the idea of a net product arising in 
 agriculture over and above the ordinary profits of 
 industry, Adam Smith comes to the conclusion that 
 it is not desirable to attempt artificially to encourage 
 agriculture. " Those systems, therefore, which, pre- 
 ferring agriculture to all other employments in order 
 to promote it, impose restraints on manufactures and 
 foreign trade, act contrary to the very end which 
 they propose, and indirectly discourage that very 
 species of industry which they mean to promote." 
 
 It may be recalled, also, that Adam Smith strongly 
 condemned the bounty on the export of corn, although 
 it was expressly designed to encourage agriculture. 
 It is unnecessary to examine at this place either of 
 these arguments ; it is enough to note that in spite of 
 what are generally considered extravagant eulogies of 
 the employment of capital in agriculture, even in this 
 case Adam Smith does not suppose that the en- 
 couragement of the state would have the results 
 anticipated. And it is not because he is led away by 
 doctrinaire prejudices against the interference of the 
 
I50 A PROJECT OF EMPIRE chap. 
 
 state ; for he admits very large exceptions to the 
 general policy of laisser faire, and the principles at 
 the basis of these exceptions are capable of much 
 wider extension under modern conditions.^ 
 
 Adam Smith sought for the real encouragement to 
 aorriculture in freeing land from the restraints of 
 antiquated laws and customs, improving facilities for 
 transfer and increasing the security for the invest- 
 ment of capital — ideas which have been the leading 
 principles of all the reforms of laws affecting agriculture 
 since his time. 
 
 § 10. Present Importance of the Negative Argument. 
 
 The negative argument for free trade demands 
 special emphasis at the present time. When Adam 
 Smith wrote, and for seventy years afterwards, the 
 people of this country had before their eyes living 
 examples of the difficulties of putting into practice 
 such theories, for example, as the encouragement 
 to native industry by a mass of protective duties ; 
 the eflfective use of retaliation; the adjustment of 
 reciprocity treaties ; the preferential treatment of 
 colonies and other devices of state control. The 
 advocates of free trade could point to the actual 
 inconveniences and imperfections of state interference. 
 The famous report of 1842, on which was based the 
 budget of that year, is in its way as remarkable a 
 document as the report of the poor law commission 
 of 1834. If in either case, owing to change in 
 conditions, we have again to modify the legislation 
 
 ' See next cliaptor. 
 
X THE NEGATIVE ARGUMENT 151 
 
 founded on these reports we ought at any rate to take 
 good care that with new reforms we do not resuscitate 
 old evils. In both cases the fundamental difficulty- 
 was unemployment. The old poor law broke down 
 because, with the best of intentions in the desire to 
 cure unemployment, it aggravated the disorder; in 
 the same way the old protective system, with the 
 laudable idea of giving encouragement to the labour 
 of the country checked the expansion of industry and 
 lowered real wages. Every one who has studied the 
 subject is agreed that such was the result of the " bad 
 old system " ; no practical statesman would dream of 
 proposing to return to such a system, any more than 
 he would propose to restore the old allowance system 
 and other devices of the old poor law. 
 
 The negative argument for free trade founded on 
 history and experience reveals three main dangers in 
 the opposite system. First, there is the danger, so 
 constantly appealed to by Adam Smith, of giving the 
 monopoly of the home market to particular traders 
 against their own countrymen. We think the trusts 
 are wholly modern ; that monopoly is the result of 
 modern conditions summarised under the law of 
 increasing return. In fact, as Adam Smith showed, 
 the whole mercantile system was permeated through 
 and through with monopoly. In any departure from 
 free trade we must guard against the recurrence of 
 monopoly. Secondly, there is the danger that 
 though we visibly encourage one or more industries 
 we may impose greater restraints on the whole in- 
 dustry of the country ; that the aggregate value of 
 
^ /^ 
 
 152 A PROJECT OF EMPIRE chap, x 
 
 the annual produce of the land and labour of the 
 country, including what is got in exchange, mayj3e- 
 come less ; and the consuming power of the masses of 
 the people be diminished. And thirdly, there is the 
 danger of losing the advantages of reciprocity or of 
 the most favoured nation clause by the complications 
 introduced through a network of commercial treaties, 
 and attempts at retaliation. 
 
 But although the negative argument must be 
 fully considered, it does not follow that under ng 
 ■^ circumstances is the state to interfere with the 
 natural course of foreign trade. Adam Smith himself 
 admitted exceptions to free trade which are of the 
 greatest range and importance. An examination of 
 these exceptions will throw light both on the 
 negative and the positive arguments for free trade. 
 (See Chapter XL) 
 
CHAPTER XI 
 
 ADAM smith's EXCEPTIONS TO FREE TRADE 
 
 § 1. Meaning of ** Exceptions to Free Traded ^ 
 
 The term " Free Trade," as already observed, is some- 
 times taken in a wide sense as equivalent to the 
 system of natural liberty in general ; "" but in political 
 controversy, if we look to actual history, the term has 
 a much more restricted meaning. It is used specially 
 in reference to foreign trade, and means the absence 
 of differential duties (or bounties) in favour of the 
 home products ; it is in this restricted sense that 
 Adam Smith's exceptions to free trade are examined. 
 " There seem, however, to be two cases in which 
 it will generally be advantageous to lay some burden 
 upon foreign for the encouragement of domestic 
 industry." 
 
 § 2. First Exception : if the Industry is necessary 
 for Defence ; the Navigation Act. 
 
 " The first is when some particular sort of industry 
 is necessary for the defence of the country. The 
 defence of Great Britain, for example, depends very 
 
 1 Book IV. chap. ii. 
 
 * The general relations of the State to commerce are discussed in the next 
 chapter. 
 
 IS3 
 
154 A PROJECT OF EMPIRE chap. 
 
 much upon the numbers of its sailors and shipping. 
 The Act of Navigation, therefore, very properly 
 endeavours to give the sailors and shipping of 
 Great Britain the monopoly of the trade of their 
 own country, in some cases by absolute prohibition, 
 and in others by heavy burdens upon the shipping of 
 foreisrn countries." 
 
 Then follows the detailed account of the provisions 
 of the Act of Navigation (1660), and the well-known 
 eulogy already quoted on the political ideas on which 
 it was based. 
 
 " It is not impossible that some of the regulations 
 of this most famous Act may have proceeded from 
 national animosity. They are as wise, however, as 
 if they had all been dictated by the most deliberate 
 wisdom. National animosity at that particular time 
 aimed at the very same object, which the most de- 
 liberate wisdom would have recommended, the 
 diminution of the naval power of Holland, the only 
 naval power which could endanger the security of 
 England." On other grounds it was condemned : 
 
 " The Act of Navigation is not favourable to 
 foreign commerce, or to the growth of that opulence 
 which can arise from it. The interests of a nation in 
 its commercial relations to foreign nations is like that 
 of a merchant with regard to the different people 
 with whom he deals, to buy as cheap and to sell as 
 dear as possible. But it will be most likely to buy 
 cheap, when by the most perfect freedom of trade it 
 encourages all nations to bring to it the goods which 
 it has occasion to purchase ; and for the same reason 
 
XI EXCEPTIONS TO FREE TRADE 155 
 
 it will be most likely to sell dear when its markets 
 are thus filled with the greatest number of buyers. 
 The Act of Navigation, it is true, lays no burden on 
 foreign ships that come to export the produce of 
 British industry. Even the ancient aliens duty, which 
 used to be paid upon all goods exported as well as 
 imported, has by several subsequent acts been taken 
 off the greater part of the articles of exportation. 
 But if foreigners, either by prohibitions or high 
 duties are hindered from coming to sell, they cannot 
 always afford to come to buy ; because, coming with- 
 out a cargo, they must lose the freight from their own 
 country to Great Britain. By diminishing the number 
 of sellers, therefore, we necessarily diminish that of 
 buyers, and are thus likely not only to buy foreign 
 goods dearer, but to sell our own cheaper than 
 if there was a more perfect freedom of trade. 
 As defence, however, is of much more importance 
 than opulence, the Act of Navigation is, perhaps, the 
 wisest of all the commercial regulations of England." 
 
 Attempts have often been made in the interests of 
 popular ideas of unrestricted free trade to take away 
 from the significance of this passage. But the mean- 
 ing is absolutely clear, both in general principles and 
 particular instances. The passage gives one of the 
 best statements of the general rule in favour of 
 freedom, and thereby makes all the more forcible the 
 exception. 
 
 The particular reference to the aliens duty is of 
 interest at the present time when the payment of 
 market dues is sometimes advanced as the rationale of 
 
156 A PROJECT OF EMPIRE chap. 
 
 general import duties. The export duties had been 
 already abandoned to a great extent, and the general 
 import duties were finally abandoned by Gladstone on 
 economic grounds, which ought to be studied before 
 the system is reintroduced.^ 
 
 Adam Smith's opinion on the Navigation Act, 
 instead of being inconsistent with his general teach- 
 ing, is in complete harmony with it, as will appear 
 in dealing with his views on national defence and 
 imperial federation." 
 
 It is in the assertion of the subordinate importance 
 of opulence to defence that the real value of the 
 whole argument on this exceptional case is to be 
 found. If the exception is to be applied in our own 
 times, it ought to be applied not in the letter but in 
 the spirit ; and before we seek to apply it at all, we 
 ought to take account of the practical difficulties and 
 of the cost ; and not only of the money or commer- 
 cial cost, but of the cost to the nation in weakening 
 other elements of national strength. 
 
 It is remarkable that this very exception, which is 
 so strongly approved of by Adam Smith on principle, 
 affords one of the best examples of the negative 
 arsfument for free trade. 
 
 'G' 
 
 § 3. Effects of the Navigation Act. 
 
 The better opinion of the author of the standard 
 work on economic history, namely, Dr. Cunningham, 
 
 ' In 1860 Gladstone imposed a duty of one penny per jiacka^t- on all 
 poods exported or imported. It was at lirst estimated to yield £300,000 per 
 annum. His reasons in support are piven in Financial Statemaits, pp. 160, 
 161. His reasons for the repeal in 1863 are given on p. 372. 
 
 2 See Chaiiter XIV. 
 
XI EXCEPTIONS TO FREE TRADE 157 
 
 who, as it happens, is to be classed as sympathetic 
 with the proposed modification of our present system of 
 freedom from differential duties, is that as a matter 
 of history this famous Act failed in its purpose. An 
 interesting detail may be quoted from Dr. Cunning- 
 ham. Commenting on the efi'ects of the Act of 1660, 
 he writes:^ "Indeed, in one branch of trade the 
 measure recoiled upon its authors ; the English had 
 not a sufficient supply of ships of such burden that 
 they could be employed in the Baltic and Scandi- 
 navian trade ; and the restrictions imposed on them 
 forced Eno-lish merchants to abandon this line of 
 commerce altogether. As a consequence, the Dutch 
 obtained a more complete monopoly than before in the 
 Baltic trade, which was the very foundation of their 
 maritime power, and they could afford to relinquish 
 the plantation trade which was at that time a some- 
 what small affair. On the whole, it seems that the 
 Dutch did not suffer perceptibly during the seventeenth 
 century." It is true that Dr. Cunningham also 
 points out that English shipping developed enor- 
 mously during the latter half of the seventeenth 
 century, and "it is of course possible that the 
 Navigation Act contributed along with other causes 
 to this result . . . , but there is no sufficient proof of 
 any direct connection between this celebrated measure 
 and the decline of Holland." It is worth noting that 
 incidentally the decline of Holland is largely attri- 
 buted to the fact that its wealth depended so much 
 on mere trade as distinct from industry, and thus 
 
 1 Vol. ii. p. 212. 
 
158 A PROJECT OF EMPIRE 
 
 affords support to another of Adam Smith's favourite 
 positions.^ 
 
 It is also remarkable that the first part of the old 
 mercantile system to be seriously attacked and modified 
 by British statesmen was this famous Navigation Act, 
 (under Huskisson from 1821 to 1825). Commenting 
 on the final repeal (1854) Dr. Cunningham writes: 
 "It is impossible to say how much of the increased 
 prosperity which has attended British shipping is due 
 to a change of policy, and how much to the application 
 of engineering skill in giving increased facilities for 
 ocean traffic, but the expansion of foreign trade in the 
 twenty years which followed the repeal of the Naviga- 
 tion Laws was unprecedented. The total imports and 
 exports of British and foreign produce almost trebled, 
 and English shipping interest shook off for a time 
 their anxiety as to being outdone by their competitors 
 in the United States." ^ 
 
 It may also be pointed out, as shown by Adam 
 Smith himself in another place, that with the progress 
 of society war becomes more and more expensive,^ and 
 accordingly opulence must itself be considered as one 
 of the chief bulwarks of defence. It is quite possible 
 and, indeed, very probable that the increase of national 
 wealth due to the repeal of the navigation acts may 
 have more than compensated any political loss, either 
 in the way of injury inflicted on our enemies, or in the 
 encouragement given to our own shipping. 
 
 ' Cf. p. 48. On the eflect of the Navigation Act on the British colonies, see 
 two admirable essays on " England and America" and "American Smuggling," 
 by Professor Ashley in Economic Surveys, pp. 310-360. 
 
 - Vol. ii. part ii. p. 833. * See below, Chapter XVI. 
 
XI EXCEPTIONS TO FREE TRADE 159 
 
 § 4. Adam Smith approves of Bounties for Defence. 
 
 It is worth recalling the fact that although, in 
 general, Adam Smith attacked the system of bounties 
 more severely than any other part of the mercantile 
 system he approved of bounties^ on the export of 
 British-made sailcloth and gunpowder, because in this 
 way these industries would be encouraged ; he con- 
 sidered that the nation ought not to rely on foreign 
 sources of supply for such important elements of 
 national defence ; better apparently for our enemies 
 to rely on us. 
 
 § 5. Extension of the Principle of Defence. 
 
 The present writer is not concerned with Adam 
 Smith's work except in so far as the ideas are 
 applicable to actual problems. From this point of 
 view, whether or not the Navigation Act was a success 
 is a matter only of historical interest (except so far as 
 furnishing the negative argument for free trade with 
 striking examples) ; whilst on the other hand the 
 ideas by which Adam Smith justified the policy are 
 of supreme importance at the present time. Pursued 
 to its logical issue Adam Smith's argument leads to 
 the general conclusion that the whole commercial 
 policy of the nation ought to be framed in such a 
 way as to make the defence of the nation abundantly 
 secure. It may be that on the whole it can be shown 
 
 * Book IV. chap. v. : " If any particular manufacture was necessary, indeed, 
 for the defence of the society it might not always be prudent to depend upou 
 our neighbours for the supply." 
 
i6o A PROJECT OF EMPIRE chap. 
 
 that the increase of opulence is the surest safeguard, 
 and that the surest way to the increase of opulence is 
 by unrestricted trade with foreign countries. But 
 the moral of Adam Smith's treatment is that we can- 
 not take it for granted that this simple easy method 
 is also the best for our purpose. To take a living 
 example, the protection afforded by Germany to agri- 
 culture is partly justified at any rate on the ground 
 of imperial defence ; and it is at least theoretically 
 possible that in the interests of defence the British 
 Empire may find it expedient to interfere with the 
 natural course of trade, although it may not be by 
 protection to agriculture any more than by bounties 
 on the export of sailcloth and gunpowder. 
 
 § 6. Second Exception : Import duties to Balance 
 Taxes on Home Products. 
 
 " The second case in which it will generally be 
 advantageous to lay some burden upon foreign for 
 the encouragement of domestic industry is when 
 some tax is imposed at home upon the produce 
 of the latter. In this case it seems reasonable 
 that an equal tax should be imposed upon the like 
 produce of the former. This would not give the 
 monopoly of the home market to domestic industry, 
 nor turn towards a particular employment a greater 
 share of the stock and labour of the country than 
 what would naturally go to it. It would only hinder 
 any part of what would naturally go to it from being 
 turned away by the tax into a less natural direction, 
 and would leave the competition between foreign 
 
XI EXCEPTIONS TO FREE TRADE i6i 
 
 and domestic industry after the tax as nearly as 
 possible upon the same footing as before it." 
 
 This second exception to free trade (or free 
 imports) seems not only a natural corollary of the 
 o;eneral arijument on free trade, but also to be in 
 harmony with common-sense ideas of natural justice. 
 To act otherwise would be to give a bounty to foreign 
 industry and to discourage home labour. In practice 
 the most narrow of popular free traders would admit 
 that to every excise duty there ought to be a 
 corresponding customs duty. The difficulty is as 
 usual not in the acceptance of the principle but in 
 the carrying it out in particular cases. 
 
 § 7. Import Duties if much heavier lead to 
 Monopoly. 
 
 There is, first of all, the danger pointed out by 
 Adam Smith : " In Great Britain, when any such tax 
 is laid upon the produce of domestic industry, it is 
 usual at the same time, in order to stop the clamorous 
 complaints of our merchants and manufacturers that 
 they will be undersold at home, to lay a much heavier 
 duty upon the importation of all foreign goods of 
 the same kind." Whether or not such differential 
 treatment is or is not desirable may be a matter for 
 discussion, but it would certainly not be in accordance 
 with the general principle of free trade, of which a full 
 examination from the point of view of Adam Smith 
 has alreadv been given. If a " much heavier " 
 customs duty is imposed it will give the home 
 producer a monopoly of the home market. It will be 
 
 M 
 
i62 A PROJECT OF EMPIRE 
 
 noticed that as before Adam Smith deals with the case 
 of high duties. But this is not the only difficulty. 
 
 § 8. Meaning of'^ Goods of same Kind." 
 
 What is exactly meant by goods of the same kind ? 
 If the words are taken literally the application of the 
 principle would be so curtailed as to be of little 
 practical importance. The trade between nations 
 does not consist of an exchanore of identical com- 
 modities. Such an exchange would be absurd as a 
 general rule ; the great trades of the world are 
 naturally in dififerent kinds of things. But very 
 different things may satisfy what are for practical 
 purposes the same wants of consumers. One great 
 difficulty in making taxes on commodities productive 
 is that it is necessary to tax all possible substitutes. 
 
 § 9. Taxation of possible Substitutes. 
 
 If the substitutes are not taxed the consumer will 
 abandon the use of the taxed commodities. 
 
 The same principle ought to be applied in the 
 case of the imposition of equivalent customs duties 
 which are meant to balance the excises of the home 
 country. Logically, the foreign substitutes ought to 
 be taxed. Taxes on British beer and whisky, for 
 example, are not fairly balanced by taxes on imported 
 foreign beer and whisky, which would probably be 
 negligible in quantity. Obviously the correspond- 
 ing foreign substitutes are wines, brandies (and now 
 potato spirit), etc. but then the difficulty arises what 
 is to be the test of equivalence ? 
 
XI EXCEPTIONS TO FREE TRADE 163 
 
 it is quite clear that the principle of substitution 
 admits of very wide extension, as Adam Smith him- 
 self observes. 
 
 § 10. Proposed Extension of the Principle 
 to all Home Taxes. 
 
 " This second limitation of the freedom of trade, 
 according to some people, should upon most occasions 
 be extended much farther than to the precise foreign 
 commodities, which could come into competition with 
 those which had been taxed at home." 
 
 The case that he gives by way of illustration is 
 the taxation of necessaries in the home country by 
 which the general cost of labour is raised. At the 
 time there were excises on various necessaries, such as 
 salt, soap, candles, leather, etc. Adam Smith is of 
 opinion (as shown ^ in his treatment of taxation) that 
 such taxes do increase the cost of labour in the 
 home country. But he objects to the extension of 
 the method of countervailing duties of a general 
 character on all foreign imports, so as to balance this 
 increased cost of production on two grounds : first, 
 that the effect cannot be exactly known as in the 
 case of a particular tax ; and secondly because the 
 remedy proposed would probably only aggravate the 
 disorder. Taxes on necessaries, he says, " when they 
 have grown up to a certain height are a curse equal 
 to the barrenness of the earth and the inclemency of 
 the heavens, and yet it is in the richest and most 
 industrious countries that they have been most 
 
 * See above, Chapter X. 
 
i64 A PROJECT OF EMPIRE chap. 
 
 generally imposed. No other countries could support 
 so great a disorder. To lay a new tax upon them, 
 because they are already over-burdened with taxes, 
 and because they already pay too dear for the neces- 
 saries of life ; to make them likewise pay too dear for 
 the greater part of other commodities is certainly a 
 most absurd way of making amends." 
 
 § 11. Difficulties of such Extension, 
 
 At the present time it is often maintained, that 
 the system of taxation in any countr}^' (national as 
 well as local) must be taken account of as an element 
 in the cost of production of all commodities.^ And 
 then it is argued that to put the home producer on a 
 fair footing all foreign imports ought to be taxed. 
 This case is the same in substance as that noted by 
 Adam Smith, and may be met by the same arguments. 
 The first of these as to the precise scale of equivalence 
 brings to the surface a difficulty that is presented by 
 every system of general protection, the difficulty, 
 namely, of an equitable adjustment of a complex 
 system of differential duties. It is properly con- 
 sidered under the negative argument for free trade. 
 
 The second of Adam Smith's objections to the 
 proposed general countervailing system involves the 
 theory of the incidence of taxation. The popular 
 opinion which he is attacking really assumes that the 
 taxes on the foreign imports fall on the foreign pro- 
 ducer ; and Adam Smith, on the other h;ind, really 
 assumes that the taxes fall on the home consumer. 
 
 ' See bolow, Cluii.tor XVI. § 10. 
 
XI EXCEPTIONS TO FREE TRADE 165 
 
 A sreat deal of attention has been devoted to the 
 subject of the incidence of taxes on imports — con- 
 fessedly one of the most difficult in economics ; and 
 the general result appears to be that only in excep- 
 tional cases does the tax fall to an appreciable extent 
 on the foreign producer.^ It may, and if heavy 
 enough surely will, cut off the foreign supply, and in 
 general such a reduction in supply and lessening of 
 competition will raise prices. On the other hand, 
 account must be taken of competition in the home 
 country itself, and the price may not eventually rise 
 to the full extent of the duty. 
 
 § 12. Countervailing Duties on Foreign Bounties. 
 
 Another application may be made of this extension 
 of Adam Smith's second exception. He rests the 
 principle of countervailing taxation on the idea that 
 by such a method trade will be simply restored to its 
 natural channels. Later on he justifies the methods 
 of drawbacks on exportation by a similar argument. 
 If the duty is drawn back, it simply restores trade to 
 its natural channels. 
 
 It seems to the present writer that this general 
 argument of Adam Smith may be applied to the case 
 of the countervailing duties imposed on bounty-fed 
 sugar. Bounties are most severely condemned by 
 Adam Smith as disturbing the natural course of trade, 
 and ostensibly the object of the countervailing duty 
 is simply to bring back the status quo ante. If it be 
 
 1 See Principles of Political Economy, Book v. chap, xiii., by present 
 writer. 
 
i66 A PROJECT OF EMPIRE cap. 
 
 objected that our consumers benefit by the bounty, 
 and that the bounties only injure the foreign coun- 
 tries which grant them, Adam Smith would reply 
 that it is not to our advantage that other nations 
 should adopt bad economic methods, and that the 
 richer its neighbours so much the better for any 
 trading nation ; a principle to which he constantly 
 appeals. We have also to consider the interests of 
 British producers engaged in the sugar industries. 
 In theory, a bounty is a negative tax ; and if the 
 home producer ought to be compensated for an excise 
 duty, he ought similarly to be compensated for a 
 bounty given to his foreign rival. 
 
 If, however, this extension of the exception is 
 admitted, the way is open for a still wider extension. 
 
 5^ 13. Exte7ision of Countey'vailing Duties. 
 
 It may be said that if foreigners impose taxes on 
 our commodities, and in that way divert trade from 
 its natural channels, we are justified in imposing 
 exactly corresponding duties on the similar goods 
 which they send to us. The justice may be admitted, 
 if justice is to be on the simple plan of an eye for an 
 eye. But the case is, in general, to be decided not 
 on primitive notions of justice but on grounds i)f 
 expediency. And we are again confronted by the 
 difficulty of the incidence of the proposed taxes. 
 
 The case is altered if the taxes on the foreign 
 goods are imposed not merely by way of revenge, in 
 which case they may do more harm than good, but 
 with the idea that the foreign nation may be induced 
 
X. EXCEPTIONS TO FREE TRADE 167 
 
 to take oft' the off'ending duties. This leads up to 
 the celebrated exception to free trade that is con- 
 sidered by Adam Smith under retaliation. 
 
 § 1 4. Third Exception : Case of Retaliation. 
 
 " As there are two cases in which it will generally 
 be advantageous to lay some burden on foreign for 
 the encouragement of domestic industry, so there are 
 two others in which it may sometimes be a matter of 
 deliberation ; in the one how far it is proper to con- 
 tinue the free importation of certain foreign goods, 
 and in the other, how far or in what manner it may 
 be proper to restore that free importation, after it has 
 been for some time interrupted." The first is the case 
 for retaliation. 
 
 " The case in which it may sometimes be a matter 
 of deliberation how far it is proper to continue the 
 free importation of certain foreign goods, is when 
 some foreign nation restrains by high duties or pro- 
 hibitions the importation of some of our manufactures 
 into their country. Revenge in this case naturally 
 dictates retaliation, and that we should impose the 
 like duties and prohibitions upon the importation of 
 some or all of their manufactures into ours. Nations 
 accordingly seldom fail to retaliate in this manner." 
 Here, as usual, Adam Smith appeals to history, and 
 shows by important cases the dangers of the plan. A 
 war of tariff's, begun by the great Colbert, led to a 
 real war with Holland, and after six years' fight- 
 ing (1672-1678) there was a mutual reduction of 
 duties. 
 
i68 A PROJECT OF EMPIRE chap. 
 
 About the same time the French and English 
 began mutually to oppress each others industry, and 
 the hostility continued until, under the influence of 
 Adam Smith's teaching, Pitt made the celebrated 
 commercial treaty with France in 1784. 
 
 This is no doubt ancient history, but it is import- 
 ant to notice that the appeal to experience is of the 
 last importance in dealing with the policy of retalia- 
 tion. 
 
 {^ 15. When Justijied. 
 
 " There may be good policy in retaliations of this 
 kind when there is a probability that they will pro- 
 cure 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 for a short 
 time for some sorts of goods." 
 
 There can be no question of the justification by 
 Adam Smith of the principle of retaliation, and the 
 reason assigned is quite in harmony with his general 
 position. The retaliation is only expedient if thereby 
 it is likely tliat the great foreign market may be 
 restored. Retaliation that ffiils is worse than useless. 
 
 ^ \Q>. Diffimdties of. 
 
 "When there is no probability that any such 
 repeal can be procured, it seems a bad method of 
 compensating the injury done to certain classes of 
 our people, to do another injury ourselves, not only 
 to those classes but to almost all the other classes of 
 them. When our neighbours prohibit some manufac- 
 
XI EXCEPTIONS TO FREE TRADE 169 
 
 ture of ours we generally prohibit not only the same, 
 for that alone would seldom alBfect them considerably, 
 but some other manufacture of theirs. This may, no 
 doubt, give encouragement to some particular class of 
 workmen among ourselves, and by excluding some of 
 their rivals may enable them to raise their price in 
 the home market. Those workmen, however, who 
 suffered by our neighbours' prohibition will not be 
 benefited by ours. On the contrary they, and almost 
 all the other classes of our citizens, will thereby be 
 obliged to pay dearer than before for certain goods. 
 Every such law, therefore, imposes a real tax upon 
 the whole country not in favour of that particular 
 class of workmen who were injured by our neighbours' 
 prohibitions, but of some other class." 
 
 Attention has already been called to the danger of 
 the retaliation being initiated by " that insidious and 
 crafty animal vulgarly called a statesman or poli- 
 tician," and the recent history of tariff wars shows 
 that it is very difficult to put the plan of retaliation 
 into effective operation. 
 
 § 17. Retaliation on other Grounds — exami7ied. 
 
 In our own times those who advocate retaliation 
 seem to rely less on the idea of the recovery of a 
 foreign market than on the idea of excluding the 
 foreigner by way of natural revenge from our 
 markets. This, however, is to reduce retaliation to 
 the ordinary case of protection to native industries. 
 It is not the kind of retaliation of which Adam 
 Smith approves, but of the kind which he explicitly 
 
ijo A PROJECT OF EMPIRE 
 
 condemns. By retaliation Adam Smith means fiscal 
 war — war with the ultimate idea of obtaining some 
 advantage to the nation ; the advantage being the 
 recovery of a great foreign market for our exports. 
 Being war it must be carried on for success by the 
 methods of war. A policy of pin-pricks is not war, 
 and may not even lead to war. 
 
 If, under present conditions, England resolves to 
 adopt the method of retaliation, it should be pre- 
 pared to suffer some temporary loss, and strike hard 
 at the most vulnerable part of the enemy's trade. A 
 small ad valorein duty on all imports might possibly 
 be a good source of revenue, and, more probably, a 
 good beginning for a reversion to ordinary protection, 
 but it certainly would not be retaliation in the sense 
 understood by Adam Smith ; for the simple reason 
 that it would have no influence whatever in inducing 
 other nations to take off their duties ; on the contrary 
 it would probably lead most of them to make an 
 increase. Real retaliation would consist in inviting 
 some particular country (say Germany) to take off or 
 reduce objectionable duties, with the indication that 
 if the invitation were declined this country would 
 impose duties which would be intended to be in- 
 jurious to German trade. We might, for example, 
 threaten to renew the old Navioation Act so far as 
 Germany was concerned. Such retaliation, to judge 
 by the history of the past, would be more likely to 
 end in heavier duties being imposed against us, and 
 might eventually end in real w\ir. Retaliation, how^- 
 ever, to be effective, must run risks. 
 
XI EXCEPTIONS TO FREE TRADE 171 
 
 § 18. List on Retaliation. 
 
 It is rather remarkable that List should have 
 brought forward one of the strongest objections to 
 retaliation as advocated by Adam Smith. In com- 
 menting on Adam Smith's position, List says : 
 " The principle of retaliation is reasonable and applic- 
 able only if it coincides with the principle of the 
 industrial development of the nation, if it serves, as 
 it were, as an assistance to this object." His reason 
 is that otherwise the retaliating nation would run the 
 risk of establishing industries unsuited to the country, 
 industries which could only be disestablished at a loss 
 if the retaliation was successful in the way supposed 
 by Adam Smith. 
 
 This consideration naturally leads to the second 
 exception which Adam Smith thinks may be worthy 
 of deliberation ; this may be briefly described as the 
 case of vested interests. 
 
 §19. Fourth Exception : Case of Vested Interests. 
 
 " The case in which it may sometimes be a matter 
 of deliberation how far or in what manner it is 
 proper to restore the free importation of foreign 
 goods after it has been for some time interrupted, 
 is when particular manufactures, by means of high 
 duties or prohibitions upon all foreign goods which 
 can come into competition with them, have been 
 so far extended as to employ a multitude of hands. 
 Humanity may in this case require that the free- 
 dom of trade should be restored only by slow 
 
172 A PROJECT OF EMPIRE 
 
 gradations and with a good deal of reserve and 
 circumspection." 
 
 As already observed, it is in the interests of labour 
 that Adam Smith advocates this cautious restoration 
 of free trade. He gives reasons, however, why it 
 may be supposed that the disorder caused by the 
 abolition of protection would not be so considerable 
 as is commonly imagined. These reasons amount to 
 the assertion that there is always a certain degree of 
 mobility of labour and that other employments will 
 be available. This guarded statement of Adam 
 Smith has been too often converted by popular 
 writers into an axiom, and it has been taken for 
 granted that in all cases there will be available other 
 employment in other things. It is at this point that 
 the famous prophecy occurs on the improbability of 
 the establishment of perfect free trade in Britain. If 
 by free trade is meant the absence of differential 
 duties this prophecy has been completely upset. 
 
 " To expect, indeed, that the freedom of trade 
 should ever be entirely restored in Great Britain is 
 as absurd as to expect that an Oceana or Utopia 
 should ever be established in it. Not only the pre- 
 judices of the public, but what is much more uncon- 
 querable, the private interests of many individuals 
 irresistibly oppose it." 
 
 {^ 20. Extension of the Principle of Vested Interests. 
 
 The princi})le at the basis of this exception may 
 also be extended to other cases. In the first place it 
 may be argued that if an old-established industry 
 
XI EXCEPTIONS TO FREE TRADE 173 
 
 is threatened by the opening up of some new foreign 
 source of supply, temporary protection may be 
 desirable in the interests of the labour that is 
 employed. 
 
 And here we find another justification for the 
 protection afibrded by continental nations against 
 the cheap supplies of food from new countries. As 
 already pointed out England repealed the Corn Laws 
 at a time when every one believed that the country 
 must still rely in the main on her own agriculture. 
 
 §21. Fifth Exception : Case of Infant Industries. 
 
 The other application is to the case of infant 
 industries, the exception to free trade generally 
 associated with the name of John Stuart Mill. Here 
 the practical difiiculty is that the period of infancy is 
 never passed, or vested interests are created which 
 can never be got rid of. The danger is confirmed by 
 the recent history of the United States and Canada. 
 Adam Smith allows that a country by protection may 
 acquire manufactures sooner than it otherwise would 
 do, but he does not suppose that it would make on 
 the whole such rapid progress.^ The labour and 
 capital would not be used in the best manner, and in 
 consequence neither population nor capital would 
 increase so rapidly. The slow progress of the 
 
 ^ This is one of the positions of Aiiam Smith contested by Alexander 
 Hamilton, who emphasised the necessity of the growth of manu- 
 factures (aided by protection) even from the point of view of the growth 
 of capital. In the case of the United Kingdom at present this case is 
 of theoretical interest only. In the case of the British colonies, however, 
 it is of the greatest practical importance, and is examined in detail below 
 (Chapter XVI.), 
 
174 A PROJECT OF EMPIRE chap, x, 
 
 Australasian colonies compared with what might have 
 been expected seems to confirm this view. 
 
 § 22. Significance of the '^ Exceptions" to 
 Free Trade. 
 
 It is a common mistake to look on the exceptions 
 examined in this chapter as of no practical importance, 
 and as having no effect on the general argument in 
 favour of free trade. The truth, as confirmed by 
 history, is that the actual policy of different nations 
 has been determined not by the rule but by the ex- 
 ception. Germany protects her agriculture partly 
 for defence, partly for the sake of the vested interests 
 involved ; all our self-governing colonies insist on the 
 protection of infant industries ; the United States has 
 defended its protective system by all the exceptions 
 in turn, beginning (under Hamilton) with defence. 
 All the protectionist nations make much of the 
 power of retaliation ; and all of them are prevented 
 from lowering their duties by the vested interests of 
 capital. 
 
CHAPTER XII 
 
 THE STATE IN RELATION TO COMMERCE 
 
 § 1. General Vieiv of Economic Functions of 
 the State. 
 
 In his fifth book Adam Smith discusses the expenses 
 of the sovereign or commonwealth in the performance 
 of admitted public duties and the sources from which 
 the necessary revenue may be obtained. A great 
 part of this book deals with topics beyond the scope 
 of the present work, e.g. the expense of the admin- 
 istration of justice, of educational and religious 
 establishments, etc. ; but there are certain leading 
 ideas which throw light on his views on colonial and 
 imperial policy, and form a fitting introduction to 
 that subject. 
 
 § 2. The State and Commerce. 
 
 The first fundamental position of Adam Smith in 
 treating of the relations of the state to commerce is 
 that for the development and maintenance of com- 
 merce certain public works and institutions are 
 necessary which it can never be the interest of any 
 individual or small number of individuals to maintain. 
 
 175 
 
176 A PROJECT OF EMPIRE chap. 
 
 If under natural conditions private enterprise is 
 sufficient, the intervention of the state is worse than 
 useless. But private enterprise presupposes profit, 
 and profit is not always the test of public advantage. 
 The state can undertake works of public utility which 
 not only yield no profit but may be a source of 
 permanent expense. Again, the state can look to a 
 more distant future for a return, and the return need 
 not be measured only in terms of money. Accordingly, 
 the intervention of the state may be justified as 
 supplementary to private eS'ort.^ 
 
 In the second place Adam Smith shows that some 
 commercial undertakings are unsuited for private 
 effort on account of the abuses that are likely to arise. 
 If, for example, any undertaking is likely to acquire 
 a practical monopoly, some kind of state regulation is 
 necessary. And, on the other hand, monopolies 
 may be granted for a limited time, as in the case of 
 patents or copyrights or charters to companies- 
 
 § 3. General Rule : Non-interference still prevails 
 in spite of Extension of State Regulation. 
 
 On the whole, however, apart from such generally 
 admitted cases as the management of the currency, 
 the provision of roads and the like, Adam Smith does 
 not approve of any wide extension of the industrial 
 domain of the state. Commerce should be left to the \ 
 merchants, and the state should only intervene in J 
 case of need or to check abuses. 
 
 ' These are the economic principlos appealed to in support of the Develop- 
 ment Fund of the Budget of 1909. 
 
XII THE STATE AND COMMERCE i-j-j 
 
 And just as the state should not us a rule interfere 
 in the affairs of commerce — but laisser faire laisser 
 passer — so also the merchants should not as a rule 
 interfere in aftairs of the state. Since Adam Smith's 
 time the necessary functions of the state, as regards 
 the regulation of industry and commerce, have been 
 widely extended, and with general approval the in- 
 tervention has gone fiir beyond what may be called 
 necessary. In spite, however, of this wide extension 
 of state management this presumption still sur- 
 vives ; for if it did not, it would mean that state 
 socialism was approved generally as the ideal — which, 
 in regard to British public opinion, as a statement of 
 fact, is of course absurd. In the present work these 
 wider aspects of the relations of the state to industry 
 in general may be passed over ; ^ but some attention 
 must be given to Adam Smith's converse proposition 
 that merchants should not interfere with the proper 
 functions of the state. 
 
 § 4. Merchants not Jit to undertake the Duties of 
 the Sovereign Power. 
 
 It was to enforce this teaching with special refer- 
 ence to the case of India that Adam Smith introduced 
 into his third edition a history of the great foreign 
 trading companies which played such an important 
 part in the expansion of the British Empire.^ 
 
 " The protection of trade in general has always 
 
 1 The subject is treated by tlie present writer in Principles of Political 
 Economy, Book v., and in the Cambridge Modern History, vol. x. chap, xxiv., 
 "On the Britisli Economists." 
 
 2 Book V. chap. i. part iii. art. i. 
 
 N 
 
178 A PROJECT OF EMPIRE 
 
 been considered as essential to the defence of the 
 commonwealth, and upon that account a necessary 
 part of the duty of the executive power. The 
 collection and application of the general duties of 
 customs, therefore, have always been left to that 
 power. But the protection of any particular branch 
 of trade is a part of the general protection of trade ; 
 a part, therefore of the duty of that power ; and if 
 nations always acted consistently the particular duties 
 levied for the purposes of such particular protection 
 should always have been left equally to its disposal. 
 But in this respect, as well as in many others, nations 
 have not always acted consistently ; and in the 
 greater part of the commercial states of Europe 
 particular companies of merchants have had the 
 address to persuade the legislature to entrust to them 
 the performance of this part of the duty of the 
 sovereign, together with all the powers which are 
 naturally connected with it. These companies, though 
 they may perhaps have been useful for the first 
 introduction of some branches of commerce by making 
 at their own expense an experiment which the estate 
 might not think it prudent to make, have in the 
 long run proved universally either burdensome or 
 useless, and have either mismanaged or confined 
 the trade." 
 
 § 5. History and Abuses of Foreign Trading 
 Companies : Regulated Companies. 
 
 This opinion is supported by an appeal to history. 
 An account is given first of the old " regulated " 
 
THE STATE AND COMMERCE 179 
 
 companies, which resembled the corporations of trades 
 which used to be common in all the cities and towns 
 of Europe. The foreign regulated trading companies 
 were fashioned exactly in their likeness. To trade in 
 a certain " sphere " a merchant must be admitted a 
 member of the company, and gradually by raising 
 the fees the entrance was restricted and a partial 
 monopoly created. In these regulated companies, 
 however, the members traded independently, subject 
 to certain general rules and regulations. The con- 
 clusion of the history of these regulated companies 
 is given in the famous verdict : " To be merely useless, 
 indeed, is perhaps the highest eulogy which can ever 
 be justly bestowed upon a regulated company ; and 
 all the three companies above mentioned seem in 
 their present state to deserve this eulogy." 
 
 These regulated companies did not maintain forts 
 or garrisons in the countries to which they traded ; 
 but they sometimes contributed to the expense of 
 maintaining ambassadors or consuls " who, like other 
 public ministers, ought to be maintained altogether 
 by the state and the trade laid open to all His 
 Majesty's subjects. The different taxes levied by 
 the company [the reference is to the Turkey company] 
 for this and other corporation purposes might afford 
 a revenue much more than sufficient to enable a state 
 to maintain such ministers." 
 
 § 6. Joint-Stock Companies — East Bidia Company. 
 
 The joint -stock companies for foreign trade, as 
 the name implies, carried on their operations so that 
 
i8o A PROJECT OF EMPIRE chap. 
 
 each member shared in the profit or loss in proportion 
 to the amount of his shares. 
 
 The most important of these companies was the 
 East India Company, which began (1600) as a 
 regulated company, but after a very short time was 
 converted into a joint-stock company. The history 
 of this company is part, and a very important part, 
 of the general history of the British Empire. In this 
 place it will suffice to quote, as illustrative of his 
 principles, some of the comments of Adam Smith, 
 without the detailed history on which they are based. 
 The company constantly complained of the competition 
 of interlopers. " The miserable effects of which the 
 company complained were the cheapness of con- 
 sumption and the encouragement given to production ; 
 precisely the two effects which it is the great business 
 of political economy to promote. The competition, 
 however, of which they gave this doleful account, had 
 not been allowed to be of long continuance." By the 
 aid of their monopoly the company made a fair 
 profit during the first part of the eighteenth century, 
 but they gradually became involved in the politics of 
 the Indian princes, and with politics came wars. 
 " After many signal successes and equally signal 
 losses they at last lost Madras, at that time their 
 principal settlement in India. It was restored to 
 them by the treaty of Aix-la-Chapelle (1748); and 
 about this time the spirit of war and conquest seems 
 to have taken possession of their servants in India 
 and never since to have left them." After the French 
 war (1755 to 17G2) we are told : " The great increase 
 
THE STATE AND COMMERCE i8i 
 
 of their fortune had, it seems, only served to furnish 
 their servants with a pretext for greater profusion 
 and a cover for greater malversation than in pro- 
 portion even to that increase of fortune. The conduct 
 of their servants in India and the general state of 
 their affairs, both in India and in Europe, became the 
 subject of a parliamentary inquiry ; in consequence 
 of which several very important alterations were 
 made in the constitution of their, government, both at 
 home and abroad." ..." But it seems impossible, by 
 any alterations, to render those courts in any respect 
 fit to govern or even to share in the government of 
 a great empire ; because the greater part of their 
 members must always have too little -interest in the 
 prosperity of that empire to give any serious attention 
 to what may promote it." 
 
 " Frequently a man of great, sometimes even a 
 man of small fortune, is willing to purchase a thousand 
 pound share in India stock merely for the influence 
 which he expects to acquire by a vote in the court of 
 proprietors. It gives him a share, though not in the 
 plunder, yet in the appointment of the plunderers of 
 India. . . . Provided he can enjoy this influence for 
 a few years, and thereby provide for a certain number 
 of his friends, he frequently cares little about the 
 dividend or even about the value of the stock on 
 which it is based. About the prosperity of the great 
 empire in the government of which that vote gives 
 him a share, he seldom cares at all. No other 
 sovereigns ever were or from the nature of things 
 ever could be so perfectly indifi'erent about the 
 
i82 A PROJECT OF EMPIRE chap. 
 
 happiness or misery of their subjects, the improvement 
 or waste of their dominions, the glory or disgrace of 
 their administration, as from irresistible moral causes 
 the greater part of the proprietors of such a mercan- 
 tile company are and necessarily must be." With the 
 mismanagement of sovereign power was associated 
 mismanagement of trade, so that " in consequence of 
 these disorders the company is now (1784, the date 
 of Adam Smith's third edition) in greater distress 
 than ever. . . . Different plans have been proposed 
 by the different parties in Parliament for the better 
 management of its affairs, and all those plans seem to 
 agree in supposing what was, indeed, always abun- 
 dantly evident, that it is altogether unfit to govern 
 its territorial possessions." 
 
 § 7. General View of Relation of Trade to 
 Sovereignty. 
 
 " No two characters seem more inconsistent than 
 those of trader and sovereign. If the trading spirit 
 of the English East India Company renders them 
 very bad sovereigns, the spirit of sovereignty seems to 
 have rendered them equally bad traders." 
 
 The present condition of India under British rule 
 is the best commentary on the soundness of Adam 
 Smith's judgment. The government of the millions 
 of India by a few thousand British civilians is one of 
 the greatest marvels in the history of civilisation ; 
 and one of the essential conditions of success is that 
 the delegates of the sovereign have no share in the 
 profits of the exploitation of the country. Equally 
 
xu THE STATE AND COMMERCE 183 
 
 strong, from the negative standpoint, is the example 
 of the Congo State. The proposition that sovereigns 
 make bad traders is only a variant on the better- 
 known proposition that for the state to direct private 
 people in what manner they ought to employ their 
 capitals must in almost all cases be either a useless or 
 a hurtful regulation. 
 
 § 8. Adam Smith's Appreciation of the Founders of 
 the Indian Empire. 
 
 It must not be supposed that Adam Smith did not 
 appreciate the difficulties and the merits of those 
 who laid the foundations of our Indian empire, as is 
 evidenced by the passage which forms the conclusion 
 of the chapter on colonies and colonial policy.^ 
 " I mean not, however, by anything which I have 
 here said to throw any odious imputation upon the 
 general character of the servants of the East India 
 Company, and much less upon that of particular 
 persons. It is the system of government, the situa- 
 tion in which they are placed, that I mean to censure, 
 not the character of those who have acted in it. They 
 acted as their situation naturally directed, and they 
 who have clamoured the loudest against them would 
 probably not have acted better themselves. In war 
 and negotiation the councils of Madras and Calcutta 
 have upon several occasions conducted themselves with 
 a resolution and decisive wisdom which would have 
 done honour to the Senate of Rome in the best days 
 of that republic. The members of those councils, 
 
 ^ Book IV. chap. vii. 
 
i84 A PROJECT OF EMPIRE chap.xh 
 
 however, had been bred to professions very different 
 from war and politics. But their situation alone, 
 without education, experience, or even example, seems 
 to have formed in them all at once the great qualities 
 which it required, and to have inspired them both 
 with abilities and virtues which they themselves could 
 not well know they possessed." 
 
 But the conclusion of the whole matter is that : 
 " Such exclusive companies are therefore nuisances in 
 every respect ; always more or less inconvenient to 
 the countries in which they are established, and 
 destructive to those who have the misfortune to fall 
 under their government." ^ 
 
 ^ See Principles of Political Economy, vol. ii. Book in. chap. xxiv. on history 
 of chartered companies for fuller treatment of this subject by the author. 
 
CHAPTER XIII 
 
 ADAM SMITH ON COLONIAL POLICY 
 
 § 1. Historical Conditions Affecting the Composition 
 of the " Wealth of Nations.'' 
 
 The first edition of the Wealth of Nations was 
 published on the 9th of March 1776 ; the Declaration 
 of the Independence of the American Colonies was 
 made on July 4 of the same year. This inde- 
 pendence was recognised in 1783 ; and in 1784 the 
 third edition of the Wealth of Nations was published 
 with some considerable additions and alterations by 
 the author, after which he made no more than verbal 
 corrections. 
 
 The composition of the Wealth of Nations was 
 spread over at least the twenty-seven years from 
 1749 to 1776, and from the former date to the death 
 of the author in 1790 occurred the most important 
 events connected with the building up of the British 
 Empire, — on the one side the acquisition of India and 
 on the other the loss of the North American Colonies, 
 both the results of a long series of cumulative causes 
 broken by catastrophic accidents. This was the 
 period also when the storm of ideas was gathering 
 
 which burst in the great French Revolution, and the 
 
 185 
 
i86 A PROJECT OF EMPIRE 
 
 period which in England culminated in what is called 
 the Industrial Revolution. 
 
 § 2. Adam Smith's Appreciation of History and 
 Foresight. 
 
 Adam Smith wrote in the midst of o^reat events, 
 and in the shadows of even greater coming events. 
 " The discovery of America and that of a passage to 
 the East Indies by the Cape of Good Hope are the 
 two greatest and most important events recorded in 
 the history of mankind. Their consequences have 
 already been great ; but in the short period of between 
 two and three centuries which has elapsed since these 
 discoveries were made it is impossible that the whole 
 extent of their consequences can have been seen. 
 What benefits or what misfortunes to mankind may 
 hereafter result from those great events no human 
 wisdom can foresee." 
 
 This passage is immediately preceded by the fore- 
 cast that in little more than a century, judging by the 
 rapid progress already made in wealth, population, 
 and improvement, the American Colonies might surpass 
 Britain ; so that if representation were proportioned 
 to taxation, according to Adam Smith's scheme of 
 imperial federation, "the seat of the empire would 
 naturally remove itself to that part of the empire 
 which contributed most to the general support and 
 defence of the whole." The material progress of the 
 United States has been of the magnitude indicated, 
 though the separation has at any rate deferred the 
 problem of the transfer of the seat of empire. The 
 
COLONIAL POLICY 187 
 
 passage quoted is also immediately followed by a 
 remarkable forecast as to the possible development 
 of the nations of the East. " At the particular time 
 when these discoveries were made, the superiority of 
 force happened to be so great on the side of the 
 Europeans that they were enabled to commit with 
 impunity every sort of injustice in those remote 
 countries. Hereafter, perhaps, the natives of those 
 countries may grow stronger and those of Europe may 
 grow weaker ; and the inhabitants of all the different 
 quarters of the world may arrive at that equality of 
 courage and force which by inspiring mutual fear can 
 alone overawe the injustice of independent nations 
 into some sort of respect for the rights of one another. 
 But nothing seems more likely to establish this 
 equality of force than that mutual communication of 
 knowledge and of all sorts of improvements which an 
 extensive commerce from all countries to all countries 
 naturally or rather necessarily carries along with it." 
 The sudden rise of Japan to a first-class power, the 
 awakening of China, and the unrest in India confirm 
 the soundness of this anticipation. If the " short 
 period " of two or three centuries before 1776 witnessed 
 remarkable changes, a similar short period from our 
 own times is likely to witness changes still more 
 remarkable. 
 
 § 3. Bearing of Argument on Present Situation. 
 
 The treatment by Adam Smith of the fundamental 
 questions of colonial and imperial policy ought to 
 throw light on our present problems. Let those who 
 
i88 A PROJECT OF EMPIRE chap. 
 
 reflect that Adam Smith has been dead more than a 
 hundred years remember that in the life of a nation 
 a hundred years may be a short period. And in the 
 .matter of imperial policy Adam Smith is still in 
 advance of the practical political leaders of our own 
 time. In other matters we have reached or approached 
 the level of Adam Smith's ideals ; we have abandoned 
 prohibitions and high duties for protection and 
 simplified revenue duties ; we have enforced universal 
 elementary education ; we have improved the mobility 
 of labour and are beginning to organise the labour 
 market ; we have reformed the old feudal land laws, 
 some altogether and some j)artially ; we have intro- 
 duced progressive taxation ; and we are beginning to 
 think of the taxation of unearned increments and 
 monopolies ; but we have not yet realised the meaning 
 of Adam Smith's ideas on colonial policy, and seem 
 rather inclined to revert to an older set of ideas which 
 he regarded as worn out. 
 
 § 4. Reasons for Colonisation, Ancient and Modern. 
 
 The chapter on colonial policy ^ is one of the longest 
 in the book, and is supplemented by the chapter which 
 forms the fitting conclusion to the whole work.- 
 
 Before extracting the leading ideas for present use 
 attention may be called to the method of treatment. 
 It is one of the best examples of the application of 
 the historical method. In Part I. of this chapter on 
 Colonies an admirable history is given of the motives 
 for establishing new colonies in ancient and in modern 
 
 ' Book IV. chap. vii. '^ Book v. chap. iii. 
 
COLONIAL POLICY 189 
 
 times. There is the old Greek plan of relieving the 
 population of the cities, with their contracted sources 
 of food-supplies, by organised swarming in the 
 manner of bees, the new colonies being given practical 
 independence. There is the opposite plan which was 
 used to weld together the Roman empire with its 
 intricate military and political organisation and a 
 centralisation which in the end proved fatal. There 
 is the modern European method or (in its origins) want 
 of method with colonies founded partly by private 
 adventurers in search of gain, especially gold and 
 silver, and partly by political and religious outcasts 
 in search of freedom ; all other objects being finally 
 subordinated to the idea of making the monopoly 
 of the colonial trade a perquisite of the mother 
 country.^ 
 
 § 5. Causes of Prosperity of New Colonies. 
 
 In Part IL of this chapter Adam Smith examines 
 the causes of prosperity of new colonies, and the 
 inquiry is extended to ancient as well as to modern 
 times, and illustrations are taken from all parts of 
 the world. 
 
 The general reasons assigned for the rapid progress 
 of the colonies of civilised nations planted in waste or 
 thinly peopled countries are those which have been 
 examined at length in dealing with " the nature and 
 causes of the wealth of nations." The colonists take 
 out with them an advanced knowledge of agriculture 
 
 ^ Cf. Cunningham, vol. ii. p. 119, on the origin of "plantations" due to 
 Englishmen in search of new lands and new homes. 
 
I90 A PROJECT OF EMPIRE chap. 
 
 and other useful arts ; and they carry out with them 
 also more advanced notions of subordination to govern- 
 ment and law. The emphasis by Adam Smith of the 
 importance of law and government is noteworthy. 
 *' Among savage and barbarous peoples the natural 
 progress of law and government is still slower than 
 the natural progress of the arts, after law and govern- 
 ment have been so far established as is necessary for 
 their protection." Next to these various forms of 
 immaterial capital, there is the abundance of un- 
 developed land. " Every colonist gets more land 
 than he can possibly cultivate." With the abundance 
 of land wages are naturally high, and with the high 
 wages there is a rapid increase in population. " In 
 other countries rent and profit eat up wages, and the 
 two superior orders of people oppress the inferior one " ; 
 but in new colonies the interest of the two superior 
 orders obliges them to treat the inferior one " with 
 more generosity and humanity at least where that 
 inferior one is not in a state of slavery." Later on, 
 Adam Smith shows that even as regards the slaves 
 good treatment is good economy ; the French sugar 
 plantations were better, so far, than the English, 
 because their slaves were better treated. 
 
 All new colonies have made rapid progress under 
 good conditions whatever their origins; e.g. the French 
 colony of St. Domingo was established by pirates and 
 freebooters, and when they at last acknowledged the 
 authority of France " these banditti had to be treated 
 with great gentleness," and yet the population and 
 improvement of the colony increased very fast. Other 
 
COLONIAL POLICY 191 
 
 instances of progress are given, " but there are no 
 colonies of which the progress has been more rapid 
 than that of the English in North America. Plenty 
 of good land and liberty to manage their own affairs 
 their own way seem to be the two great causes of 
 the prosperity of all new colonies." 
 
 § 6. S^^ecial Causes of Rapid Progress of North 
 American Colonies. 
 
 Special causes are given why these colonies have 
 prospered relatively to others : the lands have not 
 been so much engrossed ; there has been greater 
 freedom of alienation and freedom from entails and 
 family settlements ; " the engrossing of land destroys 
 its plenty and cheapness, and the engrossing of un- 
 cultivated land is the greatest obstruction to its 
 improvement." The expenses of government in these 
 colonies have been relatively small. 
 
 *' All the different civil establishments in North 
 America, exclusive of those of Maryland and North 
 Carolina, did not before the commencement of 
 the present disturbances cost the inhabitants above 
 £64,700 a year; an ever-memorable example at how 
 small an expense three millions of people may not only 
 be governed but well governed." The commercial 
 policy of the mother country allowed the colonists 
 much greater freedom relatively as is shown in detail ; 
 some nations have granted the commerce of their 
 colonies to exclusive companies, " the most effectual of 
 all expedients for stunting the growth of a colony " ; 
 some have confined the colonial commerce to particular 
 
192 A PROJECT OF EMPIRE 
 
 ports ; " but though the policy of Great Britaiu, with 
 regard to the trade of her colonies, has been dictated 
 by the same mercantile spirit as that of other nations 
 it has, however, upon the whole, been less illiberal 
 and oppressive than any of them. Ill everything 
 except their foreign trade the liberty of the English 
 colonists to manage their own affairs in their own way 
 has been complete." 
 
 This examination of the causes of the prosperity of 
 new colonies is summarised in a most graphic passage, 
 and culminates in the question : "In what way, there- 
 fore, has the policy of Europe contributed either to 
 the first establishment or to the present grandeur of 
 the American colonies ? In one way and in one way 
 only it has contributed a great deal. Magna virum 
 mater. It bred and formed the men who were capable 
 of achieving such great actions and of laying the 
 foundation of so great an empire." 
 
 § 7. Advantages to Europe of Colonies in Neiv 
 Countries. 
 
 In Part III. of the same chapter Adam Smith 
 discusses the advantages which Europe has derived 
 from the disco verj'' of America and of a passage to 
 the East Indies by the Cape of Good Hope. These 
 advantages may be divided into two groups : general 
 and national. The general advantages are those that 
 emerge from the natural development of foreign trade : 
 the increase of consuming power and the augmentation 
 of industry with an increase of the employment of 
 productive labour in the old countries. Even those 
 
X.I. COLONIAL POLICY 193 
 
 nations which had no direct trade with these new 
 countries, and did not even obtain colonial produce 
 indirectly for consumption, had gained by the increase 
 in the wealth of their neighbours. 
 
 § 8. National Advantages from Colonies in Military 
 Power or Revenue not realised. 
 
 The general advantages to Europe have been un- 
 doubted ; but when we come to the peculiar and 
 special advantages which each nation might have 
 been expected to derive from the possession of 
 colonies and dependencies the case is altered. 
 
 It is this part of the treatment of colonial policy 
 which has a vital interest at the present time. 
 
 *' The common advantages which every empire 
 derives from the provinces subject to its dominion 
 consist, first, in the military force which they furnish 
 for its defence ; and secondly, in the revenue which 
 they furnish for the support of its civil government. 
 The Roman colonies furnished occasionally both the 
 one and the other. The Greek colonies sometimes 
 furnished a military force, but seldom any revenue. 
 They seldom acknowledged themselves subject to the 
 dominion of the mother city. They were generally 
 her allies in war, but very seldom her subjects in 
 peace." But when we come to the colonies of Euro- 
 pean nations in modern times we find that they have 
 never yet furnished any military force for the defence 
 of the mother country. The military force has never 
 yet been sufficient for their own defence ; and in the 
 
 difi'erent wars in which the mother countries have been 
 
 
 
194 A PROJECT OF EMPIRE chap. 
 
 engaged the defence of their colonies has generally- 
 occasioned a very considerable distraction of the 
 military force of those countries. In this respect, 
 therefore, all the European colonies have without 
 exception been a cause rather of weakness than of 
 strength to their respective mother countries." So 
 much for the increase of military power. As regards 
 revenue, "the colonies of Spain and Portugal only- 
 have contributed any revenue towards the defence of 
 the mother country or the support of her civil govern- 
 ment. The taxes which have been levied on those of 
 other European nations — upon those of England in 
 particular — have seldom been equal to the expense 
 laid out upon them in time of peace, and never 
 sufficient to pay that which they occasioned in time 
 of war. Such colonies, therefore, have been a source 
 of expense and not of revenue to their respective 
 mother countries." 
 
 As is shown at the conclusion of Book V., in the 
 two wars against Spain and France, the American 
 colonies cost Great Britain much more than double 
 the sum which the national debt amounted to before 
 the commencement of the first of them (1739). " Had 
 it not been for those wars the debt might and probably 
 would by this time (l 776) have been completely paid ; 
 and had it not been for the colonies the former of 
 these wars might not, and the latter certainly would 
 not, have been undertaken." This short commentary 
 has been developed in Seeley's popular essay on the 
 Expansion of England, and it is hardly necessary to 
 point out, with the South African addition to the 
 
XIII 
 
 COLONIAL POLICY 195 
 
 national debt still unpaid, tliat it is the colonies and 
 dependencies which still form the great source of 
 expense to Great Britain. At the conference of 
 colonial premiers in London in 1897 Mr. Chamberlain, 
 as Colonial Secretary, is officially reported as saying : 
 " You will find that every war, great or small, during 
 the reign of Victoria, in which we have been engaged 
 has had at bottom a colonial interest, that is to say, 
 either of a colony or of a great dependency like Lidia. 
 This is absolutely true, and is likely to remain true 
 to the end of the chapter. If we had no empire there 
 is no doubt that our military and naval resources 
 would not require to be maintained at anything like 
 the present level." ^ 
 
 Eeverting to the main argument of Adam Smith, 
 it is clear that when he wrote the great colonising 
 nations of Europe, and notably England, had gained 
 nothing either in military strength or in revenue 
 from the possession of colonies, but on the contrary 
 had suffered loss and accumulated debt. 
 
 § 9. Supposed Advantage of the Monopoly of 
 the Colonial Trade examined. 
 
 But at that time it was firmly believed that each 
 particular colonising country had gained a special 
 and peculiar advantage from the monopoly of its 
 colonial trade. 
 
 The greater part of the remainder of Adam Smith's 
 chapter on colonies is devoted to an examination of 
 this contention ; and the general result of the examina- 
 
 ^ JReport of Proceedings, C — 8596. 
 
196 A PROJECT OF EMPIRE chap. 
 
 tion is that this boasted monopoly had itself also been 
 a source of loss to the mother country on the whole. 
 England, for example, in Adam Smith's opinion had, 
 it is true, by the maintenance of the monopoly against 
 foreign countries gained over them a certain relative 
 advantage in that branch of commerce ; but his main 
 point is that, in securing this relative advantage, an 
 absolute advantage of greater magnitude had been 
 sacrificed. 
 
 The revolt and subsequent separation of the 
 American colonies was the beginning of the total 
 abandonment of the monopoly of the colonial trade, 
 and in the course of time the self-governing colonies 
 have acquired the right, and exercised it, of imposing 
 protective duties against the mother country.^ The 
 absolute change in policy is shown specially in the 
 case of manufactures. Under the old system the 
 colonies, with few exceptions, were not even allowed 
 to manufacture for themselves if they had the means 
 or the inclination ; they were regarded as the great 
 closed market for the manufacturers of the home 
 country. At the present time the manufactures of 
 the mother country are subject to very heavy import 
 duties, and the utmost relaxation consists in a pre- 
 ferential duty as compared with nations politically 
 foreign. 
 
 § 10. Present Importance of the Argument. 
 
 Adam Smith's argument on the monopoly of the 
 colonial trade is intricate and difficult, but it is well 
 
 ^ See below, Chapter XV. 
 
COLONIAL POLICY 197 
 
 worthy of careful study, for two reasons. In the 
 first place, at the present time, the idea is again 
 beginning: to find favour that in the interests of 
 the mother country, and the empire, the system of 
 monopoly as against foreign countries ought to be 
 partially restored. It ought, therefore, to be of 
 interest and of utility to consider the effects of the 
 monopoly when in its full vigour. In the second 
 place, the argument of Adam Smith rests almost 
 entirely on those principles on the relative advantages 
 of employing the capital of the country which he 
 always considered fundamental, and which after being 
 lost sight of or ignored for a long period are again 
 reasserting their practical importance. 
 
 Whether Adam Smith's diagnosis of the actual 
 effects of the old system was correct or not is 
 for the present purpose of less importance than the 
 consideration how far the ideas which he applied are 
 applicable to our present case. 
 
 § 11. Effects of Monopoly must he separated from 
 the Natural Effects. 
 
 In treating of the economic effects of the colonial 
 monopoly Adam Smith always distinguishes between 
 the effects of the natural trade and the effects due 
 solely to the monopoly. In his judgment the former 
 are, in general, always advantageous, in the latter 
 the total effect is injurious to the nation as a whole 
 and to the great classes of which it is composed. The 
 natural trade was also of advantage to the colonies, 
 and in their case there were compensating advantages 
 
198 A PROJECT OF EMPIRE 
 
 from the monopoly, and most of the oppressive regula- 
 tions were inoperative.^ 
 
 It is to be observed that Adam Smith, having 
 already disposed of the political aspects of the question 
 relating to military power and revenue, is now con- 
 cerned solely with the commercial aspects. 
 
 Throughout the argument it is taken for granted 
 that for the home country it is advantageous that its 
 capital should be employed, first of all, in home 
 industries, but that the surplus may with advantage 
 be sent into these distant colonial trades ; also, capital 
 may be turned with advantage into these distant 
 places if in return the home country obtains valuable 
 products, especially raw materials, which it could 
 only acquire for itself, if at all, at a much greater 
 cost. If at any time under natural conditions the 
 rate of profits in the colonial trade was unduly high 
 that would show that in the circumstances of the 
 society the people were obtaining these colonial 
 products at an excessive cost. If the cost fell by the 
 development of the trade the cost of manufactures in 
 the home country would fall, and the exports to other 
 markets would be increased, and in this way indirectly 
 the home country would obtain more capital and give 
 greater employment to home labour. So far, of course, 
 the argument would apply equally to the development 
 of any foreign trade through which we gained an 
 increase either in consuming or in productive power. 
 
 This consideration is of great importance in the 
 examination of the effects at present of foreign 
 
 ' See below, § 1;'. 
 
XIII 
 
 COLONIAL POLICY 199 
 
 investments of British capital. In the meantime, 
 however, attention must be directed to the effects 
 of interference with this natural trade by means of the 
 various devices summarised under the monopoly of 
 the colonial trade. 
 
 § 12. General Effects of the Monopoly. 
 
 Adam Smith's central position is that by this 
 monopoly capital is unduly forced from its natural 
 employment either at home or in more favourable 
 foreign trades (all the circumstances being taken into 
 account) into these colonies. The reason is, that the 
 monopoly gives exceptional profit, and capital always 
 follows profit. The next consequence of this artificial 
 diversion of capital is that there is relatively a 
 deficiency for the home and other natural employ- 
 ments, and accordingly the profit in these employ- 
 ments also rises. The final result is that this rise in 
 profit, now becoming general, raises the cost of pro- 
 duction of all other things including our exports. In 
 this way our exports to foreign countries are 
 diminished, and we are undersold in the near and 
 favourable markets in commodities for which we have 
 special aptitudes. Here we have the locus classicus : 
 " Our merchants complain of high wages of British 
 labour as causes of underselling in manufactures, but 
 they are silent about high profits of stock." The 
 essence of the argument is that the natural trade 
 lowers cost, the monopoly raises it. 
 
200 A PROJECT OF EMPIRE chap. 
 
 § 13. Disadvantage of high rate of Profit. 
 
 That the causa causans of the disadvantage of 
 the monopoly is the general rise in the rate of profit is 
 incidentally, at any rate, decisive as to the distinction 
 drawn by Adam Smith between profit and advantage. 
 The great mercantilist writer, Thomas Mun, in his 
 England's Treasure by Foreign Trade, had argued 
 that the more distant trades were more advantageous, 
 simply because they yielded a higher rate of profit. 
 Adam Smith, on the contrary, held that so far as 
 distance was concerned, though the profit might be 
 greater, the advantage to the country was less, because 
 the capital being kept longer out of the country gave 
 less employment to productive labour, and was not 
 to the same extent consumed and reproduced within 
 the country itself. 
 
 § 14. Effects of Monopoly on Rents, Wages, 
 and Profits. 
 
 That there might be no doubt as regards the main 
 contention, Adam Smith shows in detail that all the 
 great classes of the society suffer from the artificial 
 stimulus given to the general rate of profit. Rents 
 are reduced because the fcirms must get the ordinary 
 rate of profit (allowance being made as before for the 
 amenities of agriculture) ; the price of land falls 
 doubly, partly from the fall in rent, partly from the 
 rise in the interest on capital in general ; labour also 
 suffers doubly, first by lessened employment through 
 the contraction of the home supply of capital ; and 
 
COLONIAL POLICY 201 
 
 secondly, because in the division of the annual 
 produce of the land and labour a greater share goes 
 to capital ; and lastly, even the owners of capital 
 suffer as a class because the artificially high rate 
 stimulates extravagance and checks parsimony, so 
 that at the end of any given period the capital of the 
 country is less than otherwise would have been the 
 case, and as shown before, the rise in cost of pro- 
 duction hinders the natural development of certain 
 industries. Another point emphasised is that one 
 colonial market is less stable than a number of foreign 
 markets. 
 
 § 15. Effects of the Monopoly in the Colonies. 
 
 It has already been pointed out that in Adam 
 Smith's opinion one principal reason why the English 
 colonies prospered more than those of other countries 
 is that in their case the monopoly and consequent 
 restrictions imposed by the mother country were 
 much less stringent. 
 
 But from the colonial point of view this artificial 
 diversion of British capital into their lands and ex- 
 tractive industries must also have had its positive 
 advantages ; the loss to Britain, so far, must have 
 been a gain to the colonies. This point has been well 
 brought out by Professor Ashley in his essay on 
 '* The Relations of England and America, 1660-1760." ^ 
 He quotes from the third book of Adam Smith the 
 fruitful sentence : " The progress of our North 
 American and West Indian colonies would have been 
 
 ^ Economic Surveys, p. 332. 
 
202 A PROJECT OF EMPIRE 
 
 much less rapid had no capital but what belonged to 
 themselves been employed in exporting their surplus 
 produce." He quotes also from Burke's celebrated 
 speech on American taxation in 1774, in which, after 
 noting that America had tolerated the system of 
 commercial restraint, he says : " They were indem- 
 nified for it by a pecuniary compensation. Their 
 monopolist happened to be one of the richest men in 
 the world. By his immense capital (primarily em- 
 ployed not for their benefit but for his own) they 
 were enabled to proceed with their fisheries, their 
 agriculture, their shipbuilding (and their trade, too, 
 within the limits) in such a manner as got far start 
 of the slow, languid operations of unassisted nature. 
 This capital was a hotbed to them. Nothing in the 
 history of mankind is like their progress." And 
 Professor Ashley also quotes the significant admission 
 by Adam Smith, that unjust as the prohibitions of 
 the monopoly may have been, they have not hitherto 
 been very hurtful to the colonies ; and Professor 
 Ashley's own judgment is, that prior to 1760 the 
 English commercial legislation did the colonies no 
 harm, and the English connection did them much 
 good. 
 
 At the same time, however, as Dr. Cunningham 
 shows, the restraints, if not a source of material 
 damage, were a source of irritation to the colonies 
 when they approached the age of self-reliance and 
 were seized with the spirit of national independence.^ 
 
 In the present work of which, as often indicated, 
 
 ' Ciuiiiiughani, vol. ii. p. ,')83 sq. 
 
COLONIAL POLICY 203 
 
 the object is to extract ideas for present use, it is not 
 necessary to go into all the details of the old colonial 
 monopoly. A fuller examination would show that 
 in general it was the colonies which gained from any 
 modifications of the leading ideas. Bounties, for 
 example, were given by the mother country on 
 certain colonial exports to this country, e.g., naval 
 stores and materials for shipbuilding and manu- 
 factures, and in several cases considerable duties were 
 imposed if the same things were brought to Britain 
 from foreign countries. 
 
 On the policy of these bounties Adam Smith has 
 the forcible commentary, of great interest from the 
 point of view of a real union : " The interest of our 
 American colonies was regarded as the same with 
 that of the mother country. Their wealth was 
 considered as our wealth . . . They were our own in 
 every respect, and it was an expense laid out on the 
 improvement of our own property and for the profit- 
 able employment of our own people. It is unnecessary, 
 I apprehend at present (1784), to say anything further 
 in order to expose the folly of a system which fatal 
 experience has now sufficiently exposed." 
 
 In the same way England also, in many cases, gave 
 drawbacks on articles imported from foreign countries 
 to England when they were re - exported to the 
 colonies ; so that the colonists often obtained foreign 
 products cheaper than the consumers in the home 
 country. Professor Ashley has shown in detail that 
 the regulations of the Navigation Act had the effect 
 of encouraging shipbuilding in the American colonies, 
 
204 A PROJECT OF EMPIRE 
 
 and that with oue exception the restrictions which 
 might have proved to be injurious were inoperative. 
 
 § 1 6. General Summary of Profit and Loss to 
 Britain from the Colonies. 
 
 When on the eve of the declaration of independence 
 of the American colonies Adam Smith was taking a 
 broad survey of the economic position of the British 
 Empire and its constituent parts, he was forced to the 
 conclusion that the mother country, through this 
 extension of empire, had gained nothing in military 
 power or in revenue for the general advantage of the 
 empire, and in fact had suffered loss as shown by the 
 great increase in the national debt. As regards the 
 monopoly two more sentences may be quoted of the 
 nature of a general summary. " In the exclusive 
 trade it is supposed consists the great advantage of 
 provinces which have never yet afforded either 
 revenue or military force for the support of the civil 
 government or the defence of the mother country." 
 But as regards the results of this exclusive trade we 
 are told : " Under the present system of management, 
 therefore. Great Britain derives nothing but loss from 
 the dominion which she assumes over her colonies." 
 Even as regards trade the monopoly has only dis- 
 placed a more advantageous trade with Europe ; and 
 not increased the aggregate volume. 
 
 It is admitted that a particular order of men 
 namely, the merchants who trade with the colonies, 
 may have benefited from the monopoly, but their 
 gain has been at the expense of the bulk of the nation. 
 
COLONIAL POLICY 205 
 
 Nor can this gain be taken from the favoured class 
 by taxation for the benefit of the nation. " The 
 men whose revenue the monopoly increases con- 
 stitute a particular order which it is both absolutely 
 impossible to tax beyond the proportion of other 
 orders, and extremely impolitic to tax beyond that 
 proportioD." 
 
 The general result is that the provinces of the 
 British Empire had not contributed, and at the time 
 of writing did not contribute their fair share either 
 
 o 
 
 towards the ordinary expenses of the civil government 
 of the whole empire, or towards the ordinary expense 
 for their own defence of a permanent character, or 
 towards the extraordinary expense that was incurred 
 in times of war, even though these wars were under- 
 taken on account of the provinces themselves. 
 
 And the irony of the whole situation lay in the fact 
 that owing to a variety of causes the principal 
 colonies were preparing the way for political separa- 
 tion from the country to which they owed so much. 
 The irritation caused by the imposition of taxes, 
 ostensibly for imperial purposes, of such small 
 extent that they would not pay the expenses of 
 collection — " peppercorn rents," " shearing the wolf" 
 — was sufficient to cut asunder for ever the ties which 
 it was sought to tighten. 
 
 Adam Smith had no illusions as to the weakness 
 of the British Empire, and of the causes of that 
 weakness. 
 
2o6 A PROJECT OF EMPIRE chap. 
 
 § 17. Alternative of Disintegration or 
 Real Union. 
 
 " Countries which contribute neither revenue nor 
 military force towards the support of the empire 
 cannot be considered as provinces. They may perhaps 
 be considered as appendages, as a sort of splendid 
 and showy equipage of the empire . . . The rulers 
 of Great Britain have for more than a century past 
 amused the people that they possessed a great empire 
 on the west side of the Atlantic. This empire 
 has hitherto existed in imagination only. It has 
 hitherto been not an empire but the project of an 
 empire ; not a gold mine but the project of a gold 
 mine ; a project which has cost, which continues to 
 cost, and which, if pursued in the same way as it 
 has been hitherto, is likely to cost immense expense 
 without being likely to bring any profit. It is surely 
 now time that our rulers should either realise this 
 golden dream in which they have been indulging 
 themselves, perhaps, as well as the people, or that 
 they should awake from it themselves and endeavour 
 to awaken the people. If the project cannot be 
 completed it ought to be given up. If any of the 
 provinces of the British empire cannot be made 
 to contribute towards the support of the whole 
 empire, it is surely time that Great Britain should 
 free herself from the expense of defending those 
 provinces in time of war, and of supporting any 
 part of their civil or military establishments in 
 time of peace ; and endeavour to accommodate her 
 
COLONIAL POLICY 207 
 
 future views and designs to the real mediocrity of 
 her circumstances." ^ 
 
 Confronted with this alternative of abandonment 
 or orofanisation Adam Smith himself had no hesitation. 
 *' To propose that Great Britain should voluntarily 
 give up all authority over her colonies and leave them 
 to elect their own magistrates, to enact their own 
 laws, and to make peace and war, as they might 
 think proper, would be to propose such a measure 
 as never was and never will be adopted by any 
 nation in the world . . . The most visionary 
 enthusiasts would scarce be capable of proposing such 
 a measure with any serious hopes at least of its ever 
 being adopted." 
 
 If such a separation were to take place by mutual 
 agreement and with guarantees for free trade between 
 the diflferent parts of the disbanded empire, possibly 
 this solution might be the best. The colonies, 
 though not our subjects, in time of peace would at 
 any rate be our good friends and give us the maximum 
 benefit of trade, whilst in time of war they would 
 certainly be our allies ; and being left, on this sup- 
 position, to provide for their own defence, it is 
 probable that they would be very effective allies. 
 But this alternative of separation is rejected by 
 Adam Smith at once on the grounds of national 
 sentiment. 
 
 In the meantime, however, we have gone very 
 near the accomplishment of the feat which Adam 
 Smith declared impossible, and have granted such 
 
 ^ Book V. chap. iii. 
 
2o8 A PROJECT OF EMPIRE chap.xih 
 
 a degree of self-government to the principal colonies 
 as to leave our sovereignty a shadow of what it was 
 when he complained of the empire as an imaginary- 
 project. 
 
 His own plan involved a complete scheme of 
 imperial federation ; the basis of which was repre- 
 sentation in proportion to taxation for imperial 
 purposes. 
 
CHAPTER XIV 
 
 THE IMPERIALISM OF ADAM SMITH 
 
 § 1. The ''Shopkeeper" Idea of Empire Criticised. 
 
 " To found a great empire for the sole purpose of 
 
 raising up a people of customers may at first sight 
 
 appear a project fit only for a nation of shopkeepers. 
 
 It is, however, a project altogether unfit for a nation 
 
 of shopkeepers but extremely fit for a nation whose 
 
 government is influenced by shopkeepers. Such 
 
 statesmen, and such statesmen only, are capable of 
 
 fancying they will find some advantage in employing 
 
 the blood and treasure of their fellow - citizens to 
 
 found and maintain such an empire. Say to a 
 
 shopkeeper. Buy me a good estate and I shall always 
 
 buy my clothes at your shop even though I should 
 
 pay somewhat dearer than what I can have them for 
 
 at other shops, and you will not find him very 
 
 forward to embrace your proposal. But should any 
 
 other person buy you such an estate the shopkeeper 
 
 will be much obliged to your benefactor if he would 
 
 enjoin you to buy all your clothes at his shop. 
 
 England purchased for some of her subjects who 
 
 found themselves uneasy at home a great estate in 
 
 a distant country. . . . The cultivators became in 
 
 209 p 
 
\ 
 
 2IO A PROJECT OF EMPIRE chap. 
 
 little more than thirty or forty years so numerous 
 and thriving a people that the shopkeepers and 
 other traders of England wished to secure for them- 
 selves the monopoly of their custom. Without 
 pretending, therefore, that they had paid any part 
 either of the original purchase money or of the 
 subsequent expense of improvement they petitioned 
 the parliament that the cultivators of America might 
 for the future be confined to their shop ; first for 
 buying all the goods which they wanted from Europe ; 
 and secondly for selling all such parts of their own 
 produce as those traders might find it convenient to 
 buy. For they did not find it convenient to buy 
 every part of it. Some parts of it imported into 
 Enojland might have interfered with some of the 
 trades which they themselves carried on at home. 
 Those particular parts of it, therefore, they were 
 willing that the colonists should sell where they 
 could ; the farther off" the better ; and upon that 
 account proposed that their market should be confined 
 to the countries south of Cape Finisterre. A clause 
 in the famous Act of Navigation established this 
 truly shopkeeper proposal into law."^ 
 
 Thi^ shopkeeper policy, considered as the basis of 
 imperial union, is^ondem ned by Adam Smith fi rst 
 of all on economic grounds as adverse to t,]ie interests 
 of the home country! The only people who benefit 
 (i.e. from th^ monopoly) are theja iercantile c lasses 
 who trade with -tlie^^olonies, the '^shopkeepers " 
 who make the colonist buy and sell at their 
 
 ' Book IV. chap. vii. 
 
x.v IMPERIALISM OF ADAM SMITH 211 
 
 *' shops," and the gain of the particular traders is 
 not transferred to the whole body of the people, but 
 indirectly is adverse to national interests by divert- 
 ing capital from more advantageous employments. 
 The colonial trade artificially fostered is less advan- 
 tageous than the foreign trade developed under 
 natural conditions. 
 
 § 2. The Ideal of Empire not purely Economic. 
 
 In looking at the relations of the mother country 
 to the colonies, from the point of view of empire, 
 Adam Smith also first of all takes up the economic 
 standpoint. From this point of view the adoption of 
 the Greek ideal of colonisation might eventually turn 
 out the best. If the independence of the colonies 
 were allowed " Great Britain would not only be 
 immediately freed from the whole annual expense 
 of the peace establishment of the colonies, but might 
 settle with them such a treaty of commerce as would 
 efi'ectually secure to her a free trade more advan- 
 tageous to the great body of the people, though less 
 so to the merchants, than the monopoly which she at 
 present enjoys. By thus parting good friends the 
 natural affection of the colonies to the mother 
 country which, perhaps, our late dissensions have 
 well - nigh extinguished, would quickly revive. It 
 might dispose them not only to respect for whole 
 centuries together that treaty of commerce which 
 they had concluded with us at parting, but to favour 
 us in war as well as in trade, and instead of turbulent 
 and factious subjects to become our most faithful, 
 
212 A PROJECT OF EMPIRE chap. 
 
 affectionate, and generous allies ; and the same sort of 
 parental affection on the one side and filial respect 
 on the other mii^ht revive between Great Britain and 
 her colonies which used to subsist between those of 
 ancient Greece and the cities from which they 
 descended." 
 
 In spite, however, of its economic advantages, 
 Adam Smith rejected this scheme of friendly 
 separation as fantastical, and opposed to the funda- 
 mental notions of territorial sovereignty. But the 
 actual separation of the greatest of the colonies took 
 place as the result of war and without any provision 
 for free trade ; indeed, one of the first ideals impressed 
 on the new republic was that as a nation it must 
 learn to be self-contained, must learn to manufacture 
 and build great cities and not be content to remain a 
 mere agricultural state, even if that were the shortest 
 way to national wealth. This is the great argument 
 of Alexander Hamilton, whose personality, achieve- 
 ments, and ideals have been restored to their proper 
 place and setting in the world's history in the 
 brilliant biography by Mr. F. S. Oliver. 
 
 And yet in spite of the dislocation by war in its 
 origin, and of a speedy renewal of war when the 
 republic sided with Napoleon against the mother 
 country, in spite of the divergence of commercial 
 interests and policies and of the more important 
 division of opinion at the time of the great civil war, 
 it is not too much to say that after nearly a century 
 and a half of independence the people of the United 
 States of America have much of the natural affection 
 
XIV IMPERIALISM OF ADAM SMITH 213 
 
 so well depicted by Adam Smith for the country of 
 their origin. 
 
 And as regards the other colonies, which by the 
 force of circumstances as well as by the fear of 
 example, we have gradually admitted to self-govern- 
 ment in all essentials, there can be no question that 
 though only nominal subjects in peace they would be 
 devoted allies in war. And for this purpose even the 
 nominal sovereignty has its advantages, although in 
 the meantime the home country bears a dispro- 
 portionate part of the burden of defence and in 
 return has not even freedom of trade. 
 
 § 3. Ideal of British Empire in Development of 
 British Constitution. 
 
 Adam Smith himself, however, did not look upon 
 empire merely from the economic standpoint even 
 when his subject was emphatically the wealth of 
 nations. Writing before the separation was an 
 accomplished fact, and before it seemed likely that 
 it ever would be an accomplished fact, he propounded 
 a scheme of imperial federation which he described 
 as the natural development of the British Constitu- 
 tion. In place of the Greek ideal of friendly dis- 
 integration he set up the ideal of Roman organisation 
 with one essential difference ; the provision, namely, 
 for the representation of the provinces. It was the 
 absence of this principle of representation which on 
 Adam Smith's view ruined the Roman Empire, and it 
 was in the adoption of this principle that he sought 
 for the nexus that should bind into one the different 
 
214 A PROJECT OF EMPIRE 
 
 parts of the scattered British Empire. " The idea of 
 representation was unknown in ancient times. When 
 the people of one state were admitted to the right of 
 citizenship in another, they had no other means of 
 exercising that right but by coming in a body to vote 
 and deliberate with the people of that other state. 
 The admission of the greater part of the inhabitants 
 of Italy to the privileges of Roman citizens completely 
 ruined the Roman Republic. . . . Though the Roman 
 Republic, therefore, was necessarily ruined by the 
 union of Rome with the allied States of Italy, there is 
 not the least probability that the British Constitution 
 would be hurt by the union of Great Britain with her 
 colonies. That constitution, on the contrary, would 
 be completed by it, and seems to be imperfect with- 
 out it."' 
 
 § 4. Practical Difficulties. 
 
 There are, Adam Smith admits, very great diffi- 
 culties in the way. " I have heard of none, however, 
 which appear insurmountable. The principal arise 
 not from the nature of things, but from the prejudices 
 and opinions of the people, both on this and on the 
 other side of the Atlantic." Adam Smith confronts 
 these prejudices, and in spite of them carries his pro- 
 posal to the logical conclusion. Representation in 
 the Imperial Parliament, "or, if you will, the states- 
 general of the British Empire," '" for the conduct of 
 imperial affairs is to be based on taxation, and in pro- 
 portion to the taxation is to be the representation. 
 
 ' Book IV. cluvp. vii. - Book v. chap. iii. p. 397. 
 
XIV IMPERIALISM OF ADAM SMITH 215 
 
 The difficulties to be met in the establishment of 
 an Imperial Parliament, based on taxation, are boldly- 
 faced and boldly answered. The people on this side, 
 he says, are afraid that in the course of time the 
 balance of the constitution would be overturned, and 
 that either the power of the crown or the power of 
 the democracy would be unduly increased. His 
 answer is an appeal to the idea of growth ; as the 
 numbers increased there would be the same propor- 
 tions in the monarchical and democratic elements as 
 before. The people on the other side of the Atlantic 
 were afraid that owing to their distance from the seat 
 of empire, they would not have the same real share 
 in the Government, and that they would not be 
 treated with the same consideration. The answer is 
 that the colonial representatives would find it to their 
 interest to bring before the Imperial Parliament any 
 cases of malversation of authority in these distant 
 places, and that their success as representatives would 
 largely depend on their efficiency in pointing out 
 and removing any causes of dissatisfaction of their 
 constituents. And he goes on to say that the diffi- 
 culty of distance would not be of very long duration, 
 because with the growth of wealth and population " in 
 little more than a century the seat of empire would 
 naturally remove itself to that part of the empire 
 which contributed most to the general defence and 
 support of the whole." Nor must this idea of the 
 transference of the seat of empire be regarded 
 simply as the logical outcome of the scheme of a 
 visionary. Adam Smith, first and last, is under the 
 
2i6 A PROJECT OF EMPIRE 
 
 domination not of imagination, but of facts ; his 
 ideals — large as they are — are raised within the 
 limits of reality. He was well aware, from the history 
 of the past, that the seat of empire might be trans- 
 ferred in response to changes in the distribution of 
 power ; and he based his anticipation of the 
 superiority of the American colonies over the mother 
 country in wealth and population on the relative 
 progress already made, and on an appreciation of the 
 wonderful natural resources of the North American 
 continent. 
 
 And if any scheme of imperial union is to be success- 
 ful in our century, we must also allow for the possi- 
 bility that in little more than a century from the 
 present day Canada may surpass the United Kingdom 
 in wealth and numbers. And Canada is only one of 
 the growing nations of the empire. 
 
 § 5. TJie Case of India. 
 
 In dealing in his chapter on Colonies with the 
 growth of empire and the organisation of imperial 
 power, Adam Smith refers also to India. Here again, 
 as already shown in the last chapter, his most severe 
 condemnation is bestowed on the *' shopkeeper " 
 policy of the mercantilists. The greatest of econo- 
 mists asserts with vehemence that the government of 
 the millions of India cannot be subordinated to 
 ^the trade policy of the mercantile classes of Britain. 
 The ruling country must take up the burden of 
 government itself, and apply without fear the 
 principles of justice to the dependency. It is matter 
 
XIV IMPERIALISM OF ADAM SMITH 217 
 
 of history that tlic ideas emphasised by Adam Smith 
 as regards the rule of subject races have been the 
 guiding rules in the subsequent expansion of the 
 British Empire over alien races. These ideas were 
 by no means the creations of Adam Smith ; in the 
 phrase of to-day they were part of the subconsciousness 
 of the nation, and were being called to the surface 
 not only by Adam Smith but by all the great states- 
 men and thinkers of his time ; they found the most 
 exuberant expression in the rhetoric of Burke ; they 
 were embedded in the arid forms of Parliamentary 
 bills. And, here again, whatever scheme of empire is 
 adopted in our own day the difficulty of a growing v^ 
 India has to be faced ; in this case not a mere growth 
 of numbers, but a growth of ideas. 
 
 § 6. The Public Debts of the Bntish Empire. 
 
 So far the account of Adam Smith's imperialism 
 has been taken for the most part from the chapter 
 on Colonies ; ^ it must be supplemented by the later 
 chapter that forms the fitting climax to the whole 
 argument of the Wealth of Nations.'^ This later 
 chapter is entitled, " Of Public Debts." The real 
 burdens of national debts, and their dangers, are 
 exposed with arguments that have only lost their 
 force through familiarity, and through the un- 
 paralleled growth in the taxpaying capacity of the 
 nations of the world. It seems probable, judging 
 from the rapid increase of public debts, that this old 
 learning must be revived. In this place, however, 
 
 ' Book IV. chap. vii. - Book v. chap. iii. 
 
2i8 A PROJECT OF EMPIRE 
 
 the ideas which most need extraction for present use 
 are those which deal with the rehations of public 
 debts to imperialism. When Adam Smith wrote the 
 growth of empire had meant the growth of debt ; 
 from his time to our own we find the same correla- 
 tion. Adam Smith, as usual, faces the difficulties, and 
 applies his principles with utmost candour. Since 
 the debt has been incurred for the sake of the empire 
 the constituent parts of the empire should contri- 
 bute towards the payment of the interest and the 
 extinction of the principal. 
 
 For this purpose, as well as for the expenses of 
 imperial defence and of imperial administration, an 
 additional revenue must be obtained by means of 
 taxation from the rest of the Empire. Adam Smith 
 accordingly goes on to consider what would be the 
 effect of extending the British system of taxation to 
 " Ireland and the plantations," and what modifications 
 would be required. 
 
 v5 7. The Union with Irelarid. 
 
 It must be remembered that Adam Smith was 
 wTiting before the Union with Ireland (1800), of 
 which, altogether apart from any wider imperial 
 federation, he strongly approved. "By a union with 
 Great Britain Ireland would gain, besides the freedom 
 of trade, other advantages much more important, 
 and which would more than compensate any increase 
 of taxes that might accompany that union." These 
 much greater advantages are to be found in the 
 deliverance of the people of the country from ihe 
 
x.v IMPERIALISM OF ADAM SMITH 219 
 
 rule of " an oppressive aristocracy founded on the 
 most odious of all distinctions, those of religious 
 and political prejudices, distinctions which more than 
 any other animate both the insolence of the oppres- 
 sors and the hatred and the indignation of the 
 oppressed, and which commonly render the inhabi- 
 tants of the same country more hostile to one another 
 than those of different countries ever are. Without a 
 union with Great Britain the inhabitants of Ireland 
 are not likely for many ages to consider themselves 
 one people." Those who wish to get at first hand 
 the evidence which more than confirms this reference 
 by Adam Smith to the ruling aristocracy of Ireland 
 have only to read Arthur Young's Tour in Ireland, 
 which, curiously enough, was begun just after the 
 publication of the Wealth of Nations. Arthur 
 Young's observations and records of the economic, 
 political, religious, and social conditions of Ireland 
 extend over a period of three years (1776-1779), and 
 the book is one of the most fascinating ever written, 
 though, until recently, strangely neglected in com- 
 parison with the other works by this most famous 
 ao;riculturist. 
 
 § 8. Imperial Taxation and Representation. 
 
 To return to the main argument : Adam Smith's 
 scheme of imperial federation was intended to apply 
 both to Ireland and the Colonies, and was to involve 
 as a foundation the extension of the British system of 
 taxation, so far as suitable throughout the whole 
 empire. Such an extension, however, he thought. 
 
220 A PROJECT OF EMPIRE 
 
 " could perhaps scarcely be done consistently with 
 the principles of the British constitution without 
 admitting into the British Parliament, or, if you will, 
 into the states-general of the British empire, a fair 
 and equal representation of all those different pro- 
 vinces ; that of each province bearing the same 
 proportion to the produce of its taxes as the represen- 
 tation of Great Britain might bear to the produce of 
 the taxes levied upon Great Britain." This is a repeti- 
 tion of the proposal in the chapter on Colonies, and 
 it is to be observed that already he is forced to admit 
 that the prejudices of great bodies of people impose 
 obstacles which it is perhaps impossible to surmount.^ 
 
 And to show still more clearly his appreciation of 
 the difficulties, he continues : — 
 
 " Without pretending to determine whether such 
 a union be practicable or impracticable, it may not, 
 perhaps, be improper in a speculative work of this 
 kind to consider how far the British system of taxa- 
 tion might be applicable to all the different provinces 
 of the empire ; what revenue might be expected from 
 it if so applied ; and in what manner a general union 
 of this kind might be likely to affect the happiness 
 and the prosperity of the different provinces com- 
 prehended within it.^ Such a speculation can at worst 
 be regarded but as a new Utopia, less amusing cer- 
 tainly, but no more useless and chimerical than the 
 old." 
 
 ' See above, § 4. Both quotations are from the first edition, wliich, liow- 
 ever, was not published till 177G — tlie year of the American sejiaration. 
 
 ■■^ This iJESSiifje shows clearly that Adam Smith did not consider the 
 question of empire, as is sometimes asserted, merely from the point of view 
 of benefit to Britain. 
 
XIV IMPERIALISM OF ADAM SMITH 221 
 
 It may be recalled that Adam Smith had already- 
 applied the term Utopian with much more emphasis 
 to the possible establishment of free trade in the case 
 of Great Britain ; and his calculations of the imperial 
 revenue are all founded on existing facts, and are by 
 no means illustrations from hypothetical arithmetic. 
 
 § 9. Bases of Im2)erial Taxation. 
 
 The four principal branches of British revenue 
 were in his day the land-tax, the stamp duties, and 
 the customs and excise duties. Each of these is 
 examined from the point of view of use for imperial 
 purposes. 
 
 At the moment the observations on the land-tax 
 are of peculiar interest, and may be quoted at length. 
 " If there were no tythe either in Great Britain or 
 Ireland the landlords could afford to pay six or seven 
 millions additional land-tax without being more bur- 
 dened than a very great part of them are at present. 
 America pays no tythe, and could, therefore, very well 
 afford to pay a land-tax. The lands in America and 
 the West Indies are, indeed, in general, not tenanted 
 or leased out to farmers. They could not, therefore, be 
 assessed according to any rent-roll. But neither were 
 the lands of Great Britain in the 4th of William and 
 Mary assessed according to any rent-roll, but accord- 
 ing to a very loose and inaccurate estimation. The 
 lands in America mio-ht be assessed in the same 
 manner, or according to an equitable valuation, in 
 consequence of an accurate survey like that which 
 was lately made in the Milanese and in the dominions 
 
222 A PROJECT OF EMPIRE chap. 
 
 of Austria, Prussia, and Sardinia." Adam Smith 
 regarded taxes on land with special favour.^ The 
 stamp duties, he considered, might be levied without 
 any variation in all colonies where the forms of law 
 process, and the deeds by which property, both real 
 and personal, is transferred are the same, or nearly 
 the same. 
 
 " The extension of the customs-house laws of Great 
 Britain to Ireland and the plantations, provided it 
 was accompanied, as in justice it ought to be, with 
 an extension of the freedom of trade, would be in the 
 highest degree advantageous to both. . . . The 
 British empire would thus afford within itself an 
 immense internal market for every part of the pro- 
 duce of all its different provinces. So great an 
 extension of market would soon compensate, both to 
 Ireland and the plantations, all that they could suffer 
 from the increase of the customs duties." " 
 
 The excise is the only part of the system which 
 Adam Smith considered would present any real diffi- 
 culties owing to the difference in the kinds of produce, 
 and even the excise might be adapted with some modi- 
 fications to the circumstances of the different provinces. 
 
 Having examined the application of the British 
 system of taxation to the empire, he proceeds to calcu- 
 late, on the existing yield in Britain, the probable 
 imperial revenue. It is not necessary to go into these 
 calculations, but the general results are worth notice. 
 The aggregate imperial revenue would amount to 
 
 ^ Cf. Wealth of Xalio7hi, Book v. chap. ii. part ii. art. 1. See below, 
 Chapter XVI. § r>. 
 
 2 Cf. Chapter XVI. § G. 
 
XIV IMPERIALISM OF ADAM SMITH 223 
 
 sixteen and a quarter millions sterling, ten being 
 furnished by Great Britain, as was the case at the 
 time of writing. After deducting the expenses of 
 government in the different provinces, it is shown 
 that there would remain six and a quarter millions 
 for the service of the debt in place of the one million 
 which at the time was set aside for the purpose by- 
 Great Britain alone. The proportions to an age 
 which loves percentages seem startling, but they 
 show that Adam Smith intended his empire to he a 
 real empire, united throughout for all the great 
 requirements of empire, even including the payment 
 of interest on the debt incurred in building up the 
 empire and the parts thereof. 
 
 § 9. S7i7nmarij of Leading Ideas. 
 
 After this somewhat detailed account of Adam 
 Smith's treatment of colonial and imperial policy it 
 seems desirable to make a brief summary of the 
 leading ideas. In the light of this summary we may 
 then consider how the actual policy of this country 
 towards the provinces has fallen short of Adam 
 Smith's ideal (see Chapter XV.), and how far it is 
 possible or desirable under present conditions to apply 
 all or any of these constructive ideas to practice (see 
 Chapter XVL). 
 
 The first idea is that colouies and dependencies 
 ought to contribute to the military power of the 
 empire as a whole ; also to the expense of the civil 
 establishments that are equally necessary for the 
 support of the empire ; and to the interest on the 
 
224 A PROJECT OF EMPIRE 
 
 debt incurred in its development. This idea is in 
 full accord with the first principles both of taxation 
 and expenditure. 
 
 The first great rule of taxation is that the subjects 
 of every state ought to contribute towards the 
 support of the government as nearly as possible in 
 proportion to their respective abilities, that is in pro- 
 portion to the revenue which they respectively enjoy 
 under the protection of the State. The subjects are 
 compared to the joint tenants of a great estate — 
 liable to a share in all the expenses of upkeep and 
 acquisition. 
 
 Similarly the first claim on the revenue so raised 
 is for the expense of defence. " The first duty of the 
 sovereign, that of protecting the society from the 
 violence and invasion of other independent societies, 
 can be performed only by means of a military force." 
 
 The second of Adam Smith's leading ideas is that 
 in return for, or in connection with, this contribution 
 to the imperial revenue, the subjects of the provinces 
 ought to have a share in the control of expenditure. 
 Such control can only be exercised by some method 
 of representation. The want of such representation 
 was the cause of the ruin of the Roman organisation, 
 whilst the development of representation in pro- 
 portion to taxation is essential to the growth of the 
 British Constitution. 
 
 The third leading idea is that the government of 
 a great empire has other duties to perform besides 
 providing for the protection and advancement of com- 
 merce. Mercantile profit is not always the measure 
 
\ 
 
 XIV IMPERIALISM OF ADAM SMITH 225 
 
 of national advantage ; in some important cases they 
 are opposed. The state is a bad trader ; and the 
 traders are bad statesmen, especially in the treatment 
 of subject races. 
 
 The fourth idea is that the mother country cannot 
 meet the expenses of empire from the indirect profit 
 obtained from a monopoly of the trade of the colonies 
 and dependencies. 
 
 It will be seen that of these fundamental ideas two 
 are positive : the subjects must pay taxes and the 
 taxpayers must be represented ; two are negative ; 
 the state is not a business run for profit, and the 
 state cannot get its revenue by the monopoly of trade. 
 
 Incidentally Adam Smith considers the alternative 
 policy to this scheme for imperial federation ; what 
 may be called the method of friendly disintegration. 
 Under this plan the parts of the empire would sepa- 
 rate in a friendly manner with treaties of commerce 
 mutually advantageous, each separate nation now 
 providing for its own defence and administration. 
 This method is rejected by Adam Smith as opposed to 
 the fundamental sentiments at the root of nationality. 
 The possibility is shown in our own times by the 
 political severance of Norway and Sweden ; but 
 there can be no question that since the time of Adam 
 Smith the tendency has been to an increasing extent 
 towards closer amalgamation of loosely connected 
 States ; and great wars have been undertaken to 
 prevent disintegration — witness the civil wars in the 
 United States of America and in South Africa, 
 
CHAPTER XV 
 
 BRITISH COLONIAL POLICY SINCE ADAM SMITH 
 
 § 1. Different Ideas of Colonial Policy. 
 
 The separation of the thirteen American states from 
 the mother country, and the recognition of their 
 Independence, naturally led to a change in British 
 colonial policy. In the brief survey attempted in 
 this chapter, an effort will be made to indicate the 
 leading ideas that have brought about the present 
 situation. To begin with, the fear of losing other 
 colonies, especially Canada, led the Government to 
 try to keep the colonies more under control as 
 regards the management of their internal affairs. 
 This was the first idea — more manaofement, and 
 more careful management. It was believed that 
 the chief cause of the revolt of the thirteen states 
 had been the growth of the sentiment of inde- 
 pendence in consequence of the absence of effectual 
 .home control. 
 
 The second idea was that the individual colonies 
 were to be carefully watched, and in some cases to be 
 isolated, and weakened politically, so as to prevent 
 any dangerous federation. Pitt, for example, in 
 
 introducing the Quebec Bill of 1791, said that the 
 
 226 
 
CH. XV BRITISH COLONIAL POLICY 227 
 
 object was to create two colonies in Canada, separate 
 and jealous of each other, so as to guard against the 
 repetition of the American example in which the 
 thirteen colonies had, or thought they had, the 
 same interests. Both of these ideas have not 
 only been abandoned but reversed ; devolution and 
 federation have ousted altoQ-ether the ideas of 
 
 O 
 
 management and jealousy. The history of the change 
 is instructive. 
 
 In order to carry out this policy of internal control, 
 various officials had to be appointed directly by the 
 Colonial Office (which in 1794 had been revived for 
 the purpose) ; great abuses naturally sprang up in 
 the patronage ; and the colonies were shamelessly 
 exploited for the benefit of place-hunters in the home 
 country. In the Crown colonies the dominion of the 
 Crown (i.e. of its advisers) was absolute, and the 
 authority of the Colonial Office was exercised directly 
 by instructions to the governors. The management 
 from Downing Street aimed at omniscience and 
 omnipresence. In the free colonies the home control 
 was exercised for the most part indirectly through 
 the influence of the governors and their councils. 
 " Self-government was there in theory ; but in prac- 
 tice the governors, aided by dominant interests in 
 the colonies, contrived to govern according to the 
 policy dictated from Downing Street."^ 
 
 1 Erskine May's Cmistitutional History of England, vol. iii. chap. xvii. 
 p. 361. Ibid, for the abuses connected with patronage. 
 
228 A PROJECT OF EMPIRE chap. 
 
 § 2. Growth of Self-Government — Preferential 
 Duties. 
 
 The irritation caused by these abuses of manage- 
 ment from Downing Street, naturally led the 
 colonists to demand, and the progressive party in 
 England to support, an extension of self-government. 
 
 With successive grants of self-government, by way 
 of counteracting the tendency to independence an 
 endeavour was made to bind the colonics by commer- 
 cial ties. Mindful of the evil results of the restrictions 
 imposed under the old monopoly, attention was 
 directed to the development of the old system of 
 bounties and preferential duties on exports of colonial 
 produce to this country. Intercolonial trade was 
 also managed from the same point of view — namely, 
 the commercial nexus as the bond of empire. The 
 West Indies, for example, instead of being allowed to 
 develop their natural trade with the United States, 
 were compelled to take, at high prices, the produce 
 of Canada, which sometimes could not give enough.^ 
 But the bribe to Canada irritated the islands. The 
 preferences given to the colonies in British markets 
 were defended as a sort of compensation for the 
 political restraints imposed. 
 
 Unfortunately, however, the people of this country 
 began to realise or to imagine (which in politics has 
 often the same result) that the colonial preferences 
 imposed burdens solely on them,- and gave benefits 
 
 ' Davidson, Commercial Federation and Colonial Trade Policy, p. 11. 
 
 * Diivklson, J). 14 n. In 1840 it was ciilculated that England lost from 
 £5,500,000 to £8,000,000 per annum by dearer goods, besides losing in the 
 quality, notably in the case of timber. 
 
BRITISH COLONIAL POLICY 229 
 
 solely to the colonists. It is true that, nominally, 
 this country had similar advantages in the colonial 
 markets as against the foreigner, but, as a matter of 
 fjict, England at the time practically had a monopoly 
 owing to being the first to take advantage of the 
 industrial revolution in manufactures, and there was 
 no need of restrictions. 
 
 Naturally, then, such being the popular idea of 
 the working of this preference-and-control system, 
 people in this country began to ask wherein lay the 
 benefit of colonies to the mother country ? This was 
 a very old question, going back, as Dr. Cunningham 
 has so well shown, to the very beginnings of colonies ^ 
 in the seventeenth century. 
 
 The colonies also, in spite of the preferences, saw 
 that in some cases they might gain more by trade 
 with other countries, notably the United States. 
 Accordingly the attempt to bind together the home 
 country and the colonies by a system of commercial 
 preferences and political restrictions had the oppo- 
 site ejffect to what was intended ; it created mutual 
 jealousies between the various parts of the empire. 
 The reciprocity was, in Davidson's phrase, a reci- 
 procity of disadvantage. And this constant looking 
 to trade and commercial connections as the true basis 
 of union rather tended to stifle than to enkindle other 
 sentiments." 
 
 Recently attempts have been made to show that 
 the preferential system had its advantages, and that 
 
 ^ Cunningham, vol. ii. p. 333. 
 
 2 Cf. Davidson, pp. 51-52 n., for summary of the history of the preferential 
 duties. 
 
230 A PROJECT OF EMPIRE chap. 
 
 its abandonment was resented by the colonies ; but, 
 at any rate, the fact remains that by 1854 the system 
 had been practically given up, and the last vestige, 
 the preference on timber, disappeared in 1860. 
 
 § 3. Vieiv of^yresent Position of Imperial Union: 
 a Contrast. 
 
 This complete abandonment of the colonial prefer- 
 ences, which in theory had been a sort of compensa- 
 tion for the political control by the mother country, 
 naturally led to a still further development of self- 
 government in the case of the free colonies. And, 
 as a consequence, at the present day we are left, so 
 far as they are concerned, with the " minimum of 
 empire," or, conversely, they are practically inde- 
 pendent. Especially is this the case with regard to 
 the organisation for defence, which by Adam Smith 
 is placed first in the requirements of a real, as dis- 
 tinct from an imaginary or nominal empire. 
 
 When Adam Smith wrote, it was a matter of general 
 belief that the home country, in return for undertaking 
 alone the expense of defence, obtained, in some way 
 or other, an equivalent in the monopoly of trade. 
 And certainly the monopoly was sufficiently exclu- 
 sive, even if less exclusive than that of other 
 colonising nations ; and the monopoly embraced 
 India as well as the British colonies. Adam Smith, 
 indeed, maintained that the gain to the country by 
 this monopoly was illusory ; but the general opinion 
 was exactly the opposite ; and the people of the 
 mother country, at any rate, believed that, in return 
 
XV BRITISH COLONIAL POLICY 231 
 
 for their sacrifices in blood and treasure, they had a 
 veritable gold mine in the monopoly of trade. 
 
 § 4. *' Not an Empire hut the Project of an 
 Empire." 
 
 But when we look to the present position, we find 
 that every shred of this monopoly of trade has 
 vanished ; so that as a nation we have not even 
 the consolation of this doubtful privilege. "This 
 empire," said Adam Smith, " has hitherto existed 
 in imagination only. It has hitherto been not an 
 empire, but the project of an empire." It has been 
 only a "golden dream." Judged by the tests which 
 he was bold enough to apply, our present empire, in 
 like words, must be called a dream within a dream. 
 
 In the course of little more than half a century, 
 the free colonies have, in efi"ect, become free nations, 
 under a nominal sovereignty ; we have adopted the 
 old Greek plan, without even providing for freedom 
 of commerce — a scheme of empire which was rejected 
 by Adam Smith, even with the provision of com- 
 mercial treaties which were supposed to endure for 
 centuries. Fortunately, we have succeeded in pro- 
 portion as we have relaxed the ties of empire in 
 strengthening the bonds of affection ; and above all, 
 the self-governing colonies have followed the mother 
 country in political freedom, and the crown colonies 
 and dependencies, if governed by this country, are 
 governed for the benefit of the respective peoples. And 
 yet, if from the point of view of organised military 
 power the British empire, in the words of Adam 
 
232 A PROJECT OF EMPIRE chap. 
 
 Smith, is still only " a golden dream," from the point 
 of view of the civilisation of the world it has been, 
 and remains one of the greatest realities in progress. 
 
 At the same time, it must be admitted that neither 
 the statesmen nor the peoples of the most civilised 
 countries have yet come within sight of the acceptance 
 of a cosmopolitan political ideal, which shall sub- 
 ordinate the interests of the nation to the interests 
 of civilisation in general. As with Adam Smith, 
 so now, home is the centre of political attraction, and 
 the unit of civilisation is still the independent political 
 society. The long continuance of the horrors of the 
 Congo, and of similar, if lesser, barbarities in different 
 parts of the world, is proof sufficient of the over- 
 whelming domination of national compared with 
 cosmopolitan sentiment. And, again to quote Adam 
 Smith, our love of country is not derived from our 
 love of mankind in o;eneral. 
 
 § 5. What at present are the National Advantages 
 of Empire f 
 
 If, then, still taking up the national standpoint, 
 we ask, as Adam Smith asked. What are the special 
 national advantao^es which we as a nation derive from 
 our extended empire, if we separate, as he did, the 
 cosmopolitan from the peculiar national advantages, 
 the answer is the old answer that there are no actual 
 advantages, but only possibilities of advantage. 
 
 What are the national economic advantages, apart 
 from the increase of military force or revenue, which, 
 under modern conditions, might be expected to be 
 
BRITISH COLONIAL POLICY 233 
 
 obtained by the mother country from the extension 
 of empire ? There is, first of all, a wider field for the 
 settlement and employment of the people of the 
 country. Every old country from the beginnings of 
 history has felt the need of finding room for an 
 expanding population. 
 
 At the present time Germany feels a pressing need 
 for the expansion of her overseas dominion in view of 
 the growth of population. The territorial expansion 
 of the British empire, on the other hand, has been so 
 rapid and extensive that we have reached the point 
 of satiety. 
 
 But although we have apparently provided an 
 unlimited field for the emigration of our surplus 
 population, we have taken no pains to put the surplus 
 labourers into that field ; we have left them to over- 
 crowd our own cities, or to seek new homes in foreign 
 states, as their ignorance or inclination directed. 
 "From 1853 to 1898 the total emigration of persons 
 of British or Irish origin was 8,549,569 persons, of 
 whom, 5,690,712 went to the United States." Con- 
 versely, the people of other nationalities are welcomed 
 to our colonies, and recently, for example, the im- 
 migration into Canada of foreigners (including those 
 from the United States) has far exceeded that from 
 the United Kingdom. It is also said that the 
 emigrants to Canada from Europe have, for the 
 most part, a lower standard of comfort than the 
 British, and as a consequence they are much more 
 quickly in a position to be able to equip land and to 
 become the real owners of land out of their savings. 
 
234 A PROJECT OF EMPIRE 
 
 The question of emigration and immigration is, no 
 doubt, complex and full of difficulty. In the past 
 England gained much from alien immigrants, and it 
 is possible that the empire may gain under modern 
 conditions in the same way ; but it is hardly probable 
 that haphazard emigration from the United Kingdom 
 and haphazard immigration into the rest of the 
 empire will produce the maximum of benefit either 
 to the home country or the empire. For fifty years 
 after Adam Smith wrote the emio-ration of the skilled 
 workman to a foreign state was criminal, both on the 
 part of the artisan himself and of the provocative 
 agent. Already, it is true, we have been forced by 
 glaring evils to begin the elements of organisation 
 in the classification of immigrants and the exclusion 
 of certain classes. But w^e are far from any idea of 
 the systematic organisation of what may be termed 
 intermigration between the different parts of the 
 empire. To all intents and purposes, what we are 
 pleased to call the British empire is equally open to 
 the surplus (white) population of all other countries. 
 
 Secondly, as with the living capital, the most 
 valuable part of the capital of the nation (even if the 
 value is reckoned strictly in terms of money), so with 
 the dead capital. Like the wind it goes whither it 
 lists. It is true that large masses of British capital 
 have been invested within the limits of the empire, 
 but also masses of capital have been sent elsewhere. 
 Here, again, no doubt, the question is complex ; under 
 certain conditions there are advantages in the per- 
 manent investment of British capital in foreign 
 
XV BRITISH COLONIAL POLICY 235 
 
 countries ; but, other things being equal (or what is 
 the same thing, the special conditions being absent), 
 in general the employment of capital within a 
 country is more advantageous to its people than if 
 it is employed out of the country. The advantage of 
 the employment is not to be measured merely by the 
 profit ; we must look to its continuous use and con- 
 tinuous reproduction. And so far what is true of a 
 country is true of an extended empire. Railways, 
 for example, made by British capital in the United 
 States may yield greater profit than similar railways 
 in Canada or South Africa, but the advantage to the 
 empire is very different. 
 
 Thirdly, as regards foreign trade, following Adam 
 Smith, all foreign trade means to some extent the 
 employment of capital out of the country, and so far 
 is less advantageous than home trade. But, under 
 certain conditions there are advantages that more 
 than compensate this export of capital ; and in old 
 countries thnt have long been wealthy, there is 
 generally a surplus of capital that cannot be employed 
 in home trade. On Adam Smith's principles, trade 
 within the empire, other things being equal, is more 
 advantageous to the empire than external trade. 
 Even in the case of friendly disintegration he assumed 
 that provision would be made for free trade between 
 the different states. Under present conditions, how- 
 ever, the trade of the United Kingdom with foreign 
 countries is about three times the magnitude of its 
 trade with the British possessions ; and although 
 the trade of the possessions with foreign states is on 
 
236 A PROJECT OF EMPIRE chap, xv 
 
 the whole much less than with the United Kingdom, 
 this distribution in our favour can be accounted 
 for, only to a small extent, by the nominal imperial 
 connection. 
 
 Apart from the recent grant by the colonies of 
 preferences to British exports for the most part in 
 the shape of a super-tax on foreign goods, the home 
 country has no special advantage over foreign nations 
 in trading with British possessions. 
 
 Accordingly, we are forced to the conclusion that 
 as regards national, as distinguished from a share in 
 cosmopolitan, advantages, whether we look to military 
 and naval power, or to the employment of our labour 
 and capital, we have " not an empire but the project 
 of an empire." 
 
 Accordingly, the most pressing political question of 
 the day is whether the time has not arrived when, 
 especially from the point of view of defence, the 
 potentialities of empire must be turned into actualities. 
 To the world at large the wide extension of the pax 
 Britannica is no doubt an immense boon, but, if 
 opportunity offered, in the present as in the past, the 
 nations of the world w^ould share in the partition of 
 the British possessions as readily as in the partition 
 of China. If our empire is to be preserved under 
 modern conditions, the power of the sea must be 
 upheld, not merely by tlie United Kingdom but by 
 the United Empire. That is the first essential 
 requisite ; and if this is attained the way is prepared 
 for a closer union for other political and social 
 requirements. 
 
CHAPTER XVI 
 
 CONCLUSION 
 
 § 1. British Command of the Sea needs Colonial 
 Co-operation. 
 
 The growth of the naval power of foreign states — 
 especially of those which in military power are 
 already immensely superior to the United Kingdom — 
 will make it impossible, in the course of a very few 
 years, for this country alone to secure the main- 
 tenance of the empire by the supreme command of 
 the sea. The British command of the sea can only 
 be retained with the efifective aid of the colonies. 
 The need for ejffective colonial aid for the maintenance 
 of naval power is urgent and pressing ; it cannot be 
 met by promises which will require a long period for 
 their fulfilment; nor merely by the adoption of 
 means designed to advance the general prosperity of 
 the constituent parts of the empire. In times of 
 commercial crisis it is of no avail for a bank to have 
 excellent permanent investments if it cannot meet 
 immediate requirements ; and in case of war no 
 ultimate reserves of wealth and numbers will sufiSce 
 to build and man ships, and to train and equip 
 armies in time for active service. 
 
 237 
 
238 A PROJECT OF EMPIRE 
 
 § 2. Present and Future Need for Co-operation. 
 
 The aid that is required is not simply to meet au 
 unforeseen and temporary emergency not likely to 
 recur ; the need for aid is not only pressing, but it is 
 a permanent and growing need ; and the aid from 
 the colonics to be effective must be aid in proportion 
 to their wealth and population, and must grow with 
 their growth. 
 
 In the last resort, therefore, such aid — adequate 
 aid — can only be afforded, whatever form it may take 
 and whatever the conditions of control adopted, by 
 the consent of the colonies to the imposition of new 
 taxation for the purpose. The continuous expense of 
 defence can only be met from a continuous revenue. 
 How, then, is this consent to be obtained ? What 
 reasons are to be brouo'ht to bear on the colonial 
 democracies to induce them to take up this new 
 burden ? 
 
 It needs no showing that the aid of the colonies 
 must be voluntary. In all the essential elements 
 affectinoj their economic interests the self-o[overninsr 
 colonies are practically independent nations. They 
 can impose what taxes they please — even protective 
 duties against the mother country — and they can 
 make any experiments they choose in industrial legis- 
 lation. They have full command over their lands, 
 labour, and capital. For this country to insist on 
 the payment of " ship-mone}^ " would be more likely, 
 as in the past, to arouse civil war than to further 
 national defence. 
 
XVI CONCLUSION 239 
 
 § 3. Defence a Primary Duty for every Nation. 
 
 It may, perhaps, be thought that this insistence 
 on the de facto national independence of the self- 
 governing colonies is fatal to the request for aid for 
 imperial defence. The cause generally assigned by 
 recent writers for the revolt and final separation of 
 the thirteen American colonies is the growth of the 
 idea of nationality ; and the immediate occasion of 
 the revolt was the attempt to raise revenue ostensibly 
 for imperial defence. How, then, shall we venture to 
 propose to the present colonies similar contributions 
 for similar purposes ? 
 
 The answer is that the recog-nition of the idea 
 
 o 
 
 of nationality carries with it the recognition of the 
 primary duty of defence. 
 
 Let it be supposed that the ultimate goal of 
 Canada, Australia, New Zealand, and South Africa is 
 in each case national independence ; and that through 
 fear of imperilling this issue they refuse to contribute 
 a proportionate share to imperial defence. The only 
 possible alternative is that they themselves must 
 provide for their own defence, and for the enforce- 
 ment of their rights and privileges against foreign 
 powers. If, then, the colonies recognise this primary 
 national duty there can be no question that they 
 must also provide an effective naval force. They 
 must follow the example of the United States in 
 defence if they elect to follow that example in inde- 
 pendence. With the best of good will the United 
 Kingdom cannot undertake for the future to keep up 
 
240 A PROJECT OF EMPIRE chap. 
 
 alone the sea power of the empire ; and if the empire 
 is broken up, and for nominal sovereignty an alliance 
 is substituted, the other allies must bear their share. 
 
 The point is that whatever the degree of national 
 independence claimed for the colonies, the time has 
 come when each and all must consent to provide a 
 revenue for maritime defence. 
 
 If Canada, for example, in the future becomes an 
 independent nation or joins the United States, she 
 must, in either case, contribute to the maintenance 
 of naval power ; and if she elects to remain an 
 effective part of the British Empire this obligation is 
 in no way diminished. 
 
 § 4. Imperial Co-operation most Efficient and 
 Economical. 
 
 Fortunately, with the growth of freedom and self- 
 government, there has been also a growth of imperial 
 as well as of national sentiment, and at present there 
 is no question either of breaking away from the 
 United Kingdom or of amalgamation with foreign 
 states. 
 
 And it is easy to see from general considerations 
 that the local defence of the seaboard of the colonies 
 will be best promoted by a close organisation with 
 the British navy. 
 
 If the self-governing colonies accept the principle 
 that they ought to contribute in proportion to their 
 wealth and population to the naval defence of the 
 Empire, if they are willing to provide an adequate 
 revenue for the purpose, they w^ould no doubt desire 
 
CONCLUSION 241 
 
 that the most effective use possible should be made 
 of their contributions. 
 
 If each colony aims, in the first place, at securing 
 only its own local defence, or the trade routes in 
 which it is most concerned, if it insists that its own 
 contributions shall be spent entirely under its own 
 control, there will be a loss of economy and a loss of 
 efficiency. The solution suggested in Adam Smith's 
 scheme of imperial federation is found in the principle 
 of representation. He uses the term " the States 
 general " of the empire, but it is not essential to the 
 principle that it should take that form. What is 
 needed is that each colony should in some way have 
 a share in the control and the management of imperial 
 defence. And as an ideal this plan seems much to 
 be preferred to the adjustment of local expenditure 
 to local needs. Defence is eminently a duty of the 
 central government, and in any real empire there 
 must be some such central authority. 
 
 It is also obvious that if the colonies contribute 
 to an imperial navy they must have a voice in the 
 uses to which it shall be put. But this can only 
 mean that they have a voice in the appointment 
 of the central authority which must decide on peace 
 and war, and on the questions on which the issue 
 depends. 
 
 At the same time, we are warned by history, and 
 by the actual growth of institutions, that the approach 
 to an ideal must be made by tentative steps. Adam 
 Smith was no advocate of systems meant to be estab- 
 lished by sudden revolutions. He looked on colonial 
 
 R 
 
242 A PROJECT OF EMPIRE chap. 
 
 representation as the natural development of the 
 British constitution. And, applying his methods and 
 ideas, there is no reason why the colonies should not 
 begin, in the matter of their contributions to the 
 naval force of the empire, by making provision for 
 local needs and special trade routes. On this plan 
 they would follow the lines of historical development. 
 If we go far enough back we find that in England, 
 not only particular localities, but even particular 
 traders, and in some cases particular bishops, made 
 their own contributions of ships of war for the pro- 
 tection of property and trade. ^ 
 
 Those who prefer modern science to ancient history 
 for the suggestion and clarification of ideas, may be 
 referred to the laws of biological development ; the 
 highest organism in its embryonic stages goes through 
 all the forms of previous existence, the only difierence 
 being that the changes of centuries are compressed 
 into hours or moments. If the colonies begin with 
 the methods of the Saxon period we may be sure 
 they will rush over the intervening centuries, if only 
 they know, consciously or unconsciously, the final 
 type to which they ought to move. 
 
 § 5. Sources of Revenue for Imperial Defence. 
 
 If the colonies undertake to make continuous 
 contributions to the naval forces of the empire, it 
 
 ' See Stubbs's Coiistitutional History, vol. i. j)p. 105, 117, .093. In Saxon 
 times each .shire was bound to furnish ships in jtroportion to its number of 
 hundreds ; the shire was in origin an under-kingdom, and in the twelfth 
 century the ships of different localities sailed under their own local magnates 
 as captains. 
 
XVI CONCLUSION 243 
 
 may seem ungracious even to indicate the sources 
 from which they may obtain the necessary revenue, 
 especially in view of the fact that each lays much 
 stress on fiscal autonomy. 
 
 But what might seem impertinence from the 
 practical politician becomes an interesting speculation 
 in the words of a prophet dead more than a hundred 
 years. Of the modes of raising revenue for defence 
 suggested by Adam Smith as capable of being applied 
 throughout the empire, two are of special interest 
 at the present time, namely, the land-taxes and the 
 customs duties. They are also in this connection of 
 special historical interest. In Saxon times the pro- 
 vision of ships was a recognised burden on land ; 
 e.g. in 1008 Ethelred ordered that a ship should be 
 furnished by every three hundred hides,^ and we read 
 of a grant of land being made (to a bishop), subject 
 to the provision of a fully equipped ship. 
 
 There is nothing new under the sun ; all taxes are 
 old, and it is only the amounts which vary ; the 
 unearned increment from land was discovered, named 
 (incrementum) , and taxed in the mediaeval period.^ 
 Modern ideas of taxation of land values are all found 
 in the Wealth of Nations. 
 
 " Ground rent and the ordinary rent of land are, 
 therefore, perhaps, the species of revenue which can 
 
 ^ The hide is supposed to be land for one freeman, normally 240 acres. 
 
 - " When a county was let out at ferm for more than it was formerly wont 
 to be let for, the improvement, or advance money, was usually called 
 Creme7Uum, the increment " (Madox, Excheqtier, p. 225). In Magna Charta 
 clause 25 provides that counties, etc., shall be let out at the old rents without 
 any increment {ad antiquas firmas absque ullo iiicremento) ; and it is signihcant 
 that in subsequent confirmations this cl&use was omitted. 
 
244 A PROJECT OF EMPIRE chap. 
 
 best bear to have a peculiar tax imposed upon 
 them." ' 
 
 Adam Smith observed that in his day, had it not 
 been for the tithe the landlords could have paid much 
 more land-tax, and " America pays no tithe, and 
 could, therefore, very well afford to pay a land-tax." 
 It is not necessary to go over ground so well " eared " 
 already, but if we take the usual estimates that at 
 present the self-governing colonies have a population 
 of some thirteen millions, and that in a century this will 
 exceed one hundred millions, and if we assume that 
 site values grow with wealth and population in new 
 countries, this source of revenue seems admirably 
 fitted for meeting the growing needs of defence. 
 
 The other principal source of revenue on which 
 Adam Smith would rely for contributions from each 
 part of the empire is the customs revenue. Here 
 again the historical origin is interesting as bearing 
 on present-day proposals. " The duties of customs 
 appear to have been originally considered as taxes on 
 the profits of merchants. . . . The gains of alien 
 merchants were looked upon more unfavourably than 
 those of English merchants. It was natural, there- 
 fore, that those of the former should be taxed more 
 heavily than those of the latter." " In those ignorant 
 times it was not understood that the profits of 
 merchants are a subject not taxable directly ; or that 
 
 ' The whole of Adam Smith's treatment of taxation of land is of special 
 interest at the present time. He shows that improvements ou^'ht not to be 
 taxed ; approves, and gives examples of national valnation of lands, and 
 observes that "it is not very nnreasonable that the rich should contribute 
 to the public expense, not only in proportion to their revenue, but something 
 more than in that j)roportion." — Hook \. chap. ii. art. 1. 
 
XV. CONCLUSION 245 
 
 the final payment of all such taxes must fall with 
 a considerable overcharge upon the consumers." ^ 
 
 The further examination of the customs duties 
 as a source of imperial revenue for imperial purposes 
 may be deferred until after the consideration of 
 internal free trade {i.e. within the limits of the 
 empire) and the commercial relations of the empire to 
 foreign states. One more reference, however, may be 
 made to general principles. The method of assigning 
 particular revenues to particular expenses which was 
 at first universal has in general been for the most part 
 abandoned. In a period of transition, however, such 
 a method may be useful as being of a more simple 
 type. That a colony should vote so many millions a 
 year from its general revenues for defence against 
 what many might think unreal dangers, might seem 
 an absurd suggestion, but it seems not unreasonable 
 that it should assign a certain share of a growing 
 revenue to new needs. In matters of imperial 
 defence, as so often observed, a century may be 
 a short period. 
 
 § 6. Free Trade tvithin the Empire. 
 
 If we take a broad view of Adam Smith's ideas on 
 the conditions necessary to convert the project of an 
 empire into a real empire, next in importance to the re- 
 cognition by the colonies of the duty of defence, must be 
 placed the establishment of free trade within the limits 
 of the empire. Here we must carefully distinguish 
 between such internal free trade and free trade with 
 
 ■* Book V. chap. ii. art. 4. 
 
246 A PROJECT OF EMPIRE chap. 
 
 foreign nations ; the two questions are quite distinct 
 and are best considered separately, as is obvious by a 
 reference to actual instances of the policy of nations. 
 The United States, for example, has adopted against 
 the rest of the world a protectionist system ; but 
 from the beginning free trade between the con- 
 stituent states was provided for by the constitution.^ 
 Alexander Hamilton was as strong an advocate of 
 internal free trade as of external protection. And in 
 the same way internal trade between the different 
 states of the German empire is combined with 
 protection against foreign countries ; and here again 
 List was as much in favour of the first as of the 
 second condition. 
 
 As already shown, Adam Smith was of opinion 
 that the separation of the colonies on friendly terms 
 (as in the Grecian model) might not be disadvan- 
 tageous to the mother country if — and the condition 
 is essential — if the separation were made with the 
 provision of commercial treaties "which might endure 
 for centuries together " for the establishment of free 
 trade between the parts ; that is to say, political 
 disintegration with alliance for defence and open 
 markets for trade. 
 
 And in the real federation of which he himself 
 approved one of the essential conditions is that the 
 whole empire should form one great internal market. 
 "The trade between all the different parts of the 
 British empire would, in consequence of tlie 
 uniformity in the custom-house laws, be as free as 
 
 ' See below, § 9. 
 
XVI CONCLUSION 247 
 
 the coasting trade of Great Britain is at present. 
 The British empire would thus afford within itself 
 an immense internal market for every part of the 
 produce of all its different provinces." Then follows 
 a remarkable sentence which has an important bearing 
 miLtatis TYiutandis on present issues. " So great an 
 extension of the market would soon compensate, both 
 to Ireland and the plantations, all that they could 
 suffer from the increase of the duties of customs." 
 
 § 7. Advantages of Internal Free Trade. 
 
 The whole range of economic history shows that 
 national progress has always been associated with the 
 development of internal free trade. In mediaeval 
 England, for example, every town protected itself 
 against every other, and one of the principal charac- 
 teristics of the transition from the mediaeval to the 
 modern period was the break-up of these " ancient 
 customs " and the substitution of national for local 
 regulation of trade. "The fifteenth and sixteenth 
 centuries saw the rise of nationalities not only in a 
 political but in an economic sense as well ; since 
 industry and commerce were beginning to be 
 organised for national objects and on a national 
 basis. The town no longer held its position as the 
 chief organ of economic life." ^ 
 
 As regards the advantages of internal free trade to 
 the empire as a whole the appeal to experience ought 
 to sufhce. Consider the United Kingdom, Germany, 
 the United States, France, Italy, and it is plain that 
 
 ' Cunningham, Oroicth 0/ English Industry and Commerce, vol. ii. p. 5. 
 
248 A PROJECT OF EMPIRE chap. 
 
 in every case the adoption of internal free trade 
 between the different states or provinces or under- 
 kingdoms was essential to the completion of national 
 unity. 
 
 Both the United Kino;dom and the colonies would 
 suffer certain inconveniences as reorards revenue, 
 from the necessary alteration of their customs duties 
 which at present, to a considerable extent, fall on the 
 products of different parts of the empire ; but there 
 can be little doubt that the necessary revenue could 
 be raised in other ways ; and customs for revenue 
 might be retained so long as necessary. The real 
 difficulty is encountered when we look at the question 
 from the standpoint of the protectionist colonies ; the 
 real difficulty is not revenue but protection. And if 
 these difficulties are to be overcome/ the advantages 
 must be made clear. 
 
 In the first place, then, the very idea of such 
 internal free trade is that capital and labour would 
 flow where most required. And there can be no 
 doubt that the flow in both ca,ses would be from the 
 mother country to the colonies. It is also equally 
 clear that the great object of all the colonies is to 
 attract labour and capital. 
 
 The interests of the colonies in this matter of 
 internal free trade may be examined from the point 
 of view of the history of the United States and in 
 reference to the arguments advanced by Alexander 
 Hamilton. The question may be put in this form : 
 If it was an advantage to the American colonies in 
 
 ' See next section. 
 
XVI CONCLUSION 249 
 
 the time of Hamilton to adopt protectionist duties 
 against Europe and especially against England, why- 
 should it not be equally advantageous for Canada 
 which economically is at an early stage of develop- 
 ment to adopt a similar policy ? 
 
 It must again be pointed out that at present the 
 question is not as to the complete abandonment of 
 differential duties, but only of such as fall on British 
 goods. The case of imperial protection against the 
 world is considered later on. 
 
 With this proviso it will be apparent to any reader 
 of Hamilton's report that his great arguments do 
 not apply to the case of Canada and the United 
 Kingdom ; and Canada is only taken as representa- 
 tive of all the protectionist colonies. 
 
 The opening sentence of Hamilton's Report on 
 Manufactures states that his attention had been 
 directed " particularly to the means of promoting 
 such manufactures as will tend to render the United 
 States independent on foreign nations for military 
 and other essential supplies." Amongst these 
 essential supplies are all kinds of manufactures ; 
 and he goes on to show, in the first place, that the 
 markets of Europe were not regularly open to the 
 agricultural products of the States ; and accordingly 
 there was a difficulty in obtaining the corresponding 
 imports from Europe when barriers were imposed on 
 the exports from the States. It is obvious that if 
 Canada is regarded politically and economically as 
 part of the British empire, military dependence on 
 the mother country for supplies is totally different 
 
250 A PROJECT OF EMPIRE 
 
 from dependence on foreign nations ; and the 
 markets of England are, and have been for years, 
 open to colonial products. 
 
 Hamilton's second argument is that it was desir- 
 able to foster manufactures in the states so as to give 
 an encourao^ement to agriculture. Here af^^ain there 
 can be little doubt that the agricultural interests of 
 Canada (and other colonies) are prejudiced by the 
 protectionist duties imposed against British manu- 
 factures. 
 
 Thirdly, there is the argument that for a new- 
 country it is necessary to promote artificially the 
 growth of towns and cities in order to obtain a 
 variety of industries and other social advantages. 
 This argument may be answered by reference to the 
 development of the United States. Internal free 
 trade over these vast territories, even before the 
 recent development of the means of transport, did 
 not prevent the growth of cities in the newest and 
 most distant States ; towns and cities were not con- 
 fined to the old Eastern states, nor were the newer 
 states devoted entirely to agriculture. And in the 
 same way it may be supposed that the growth of 
 towns and cities in the British dominions would not 
 be prejudiced by internal free trade. One of the 
 best founded inductions of commercial geography is 
 that the growth of towns and cities depends mainly 
 not on manufactures but on trade. 
 
 Let the statesman of any self-governing dominion 
 consider the question from the point of view, not of 
 particular manufactures, but from that of the whole 
 
CONCLUSION 251 
 
 industry of his dominion, and, even with this narrow 
 view of colonial interests in which no regard is paid 
 to the rest of the empire, he will discover that free 
 trade with the United Kingdom is an object worth 
 striving for ; because the gain to agriculture and the 
 gain to trade would more than compensate the 
 temporary loss from the partial decline of certain 
 protected manufiictures. 
 
 But the question must be regarded from a higher 
 standpoint. Internal free trade means, indeed, in the 
 first place only the breaking down of fiscal barriers 
 and obstacles within the empire ; but it is also a 
 necessary preliminary to the full development of all 
 kinds of improvements in the means of communica- 
 tion and transport (in Adam Smith's words, endorsed 
 by Hamilton, " the greatest of all improvements "), so 
 that not only material goods, but men and ideas may 
 be readily transferred from one part of the empire 
 to another. Internal free trade, with the develop- 
 ment in a multitude of forms of closer union between 
 the different parts of the empire, is closely connected 
 with imperial defence. Under modern conditions 
 defence depends, in the last resort, more than ever on 
 wealth and population, and we may add organisation. 
 " In ancient times," observes Adam Smith at the con- 
 clusion of his remarkable chapter on the expense of 
 defence,^ " the opulent and civilised found it difficult 
 to defend themselves against the poor and barbarous 
 nations. In modern times the poor and barbarous 
 find it difficult to defend themselves against the 
 
 ^ Book V. chap. i. part i. 
 
252 A PROJECT OF EMPIRE chap. 
 
 opulent and civilised. The invention of firearms, 
 an invention which at first sight appears to be so 
 pernicious, is certainly favourable to the permanency 
 and extension of civilisation." And since Adam 
 Smith wrote this argument has increased in force 
 at an increasing rate ; witness the expense of a single 
 big gun, a single battleship, or a single railway for 
 strategic purposes ; or consider in gross the enormous 
 military expenditure of every civilised state. If we 
 wish to compare the real military power of modern 
 nations, e.g. Russia, France, and Germany, we have 
 to take account of their wealth and population, and 
 also of the internal organisation by which this poten- 
 tial power of numbers and wealth may be brought to 
 bear on military needs. If the colonies are in earnest 
 in wishing to co-operate in making the defence of the 
 empire absolutely secure, they must realise that in 
 modern times national or imperial power is increased 
 by everything that increases the numbers and wealth 
 of the empire as a whole, and by everything that 
 unites more closely the various parts. 
 
 Apart from the consideration of defence, there are 
 other objects of political union which can be most 
 effectively achieved on a large scale. The resources 
 which are the ultimate reserves of military power are 
 also the resources from which must be met the grow- 
 ing social needs of the community. The rise in the 
 standard of life and the standard of comfort of the 
 masses of the people is only possible with a con- 
 tinuous increase in the productive powers of the 
 society. The most efficient cause of the prosperity of 
 
XVI CONCLUSION 253 
 
 new colonies, as shown by Adam Smith on a wide 
 inductive survey, is the capital, living and dead, 
 which they acquire from the old civilisations. If the 
 United Kingdom has much to gain from the develop- 
 ment of the natural resources of the colonies, the 
 colonies have much to gain from the accumulations, 
 material and immaterial, of the old country. 
 
 §. 8. Difficulties in the Establishment of Internal 
 Free Trade — how met. 
 
 In the light of history it would be foolish to deny 
 that the sudden abolition of all protective duties now 
 imposed by the British dominions against British 
 goods might be inconvenient to certain classes and 
 industries and localities. 
 
 If, however, the real advantages of internal free 
 trade are once appreciated by the statesmen and 
 the people of the dominions, these difficulties are not 
 insuperable. 
 
 The most formidable are not founded on facts but 
 on opinions, and opinions may be changed. In the 
 forefront there is the idea of impossibility ; and so 
 long as statesmen are content to repeat, one after the 
 other, that a thing is impossible, it is ipso facto im- 
 possible. It will cease to be impossible as soon as 
 it seizes the imagination of a great colonial leader of 
 the order that believes in a thing because it is im- 
 possible. Every great success in war and in peace 
 has been impossible until it has been accomplished. 
 In the background there are the prejudices of 
 the people ; but though the race continues, the 
 
254 A PROJECT OF EMPIRE chap. 
 
 individuals change and the prejudices change with 
 them. 
 
 These are, no doubt, commouphice generalities, but 
 they are sufficient to clear the way for practical 
 considerations of a more detailed kind. 
 
 The difficulties, once they are faced, may be met 
 by a variety of methods, some of which are being 
 tried for other purposes at the present time. 
 
 In the first place, we may apply Adam Smith's 
 idea that the freedom of trade should be only restored 
 by slow gradations. The precise nature of the 
 gradations must be left to the practical man ; but 
 some of the possible ideas to be applied may be 
 noticed. 
 
 Internal free trade, as already insisted, does not 
 necessarily mean either now, or in the future, 
 external free trade with foreign states. From the 
 point of view of gradations this distinction may be 
 of importance. Already some of the colonies have 
 granted preferences to the mother country by the 
 simple plan of putting supertaxes on foreign goods ; 
 and a further reduction of the duties on British goods 
 might be accompanied, in the period of transition, by 
 a corresponding supertax on the foreign. 
 
 If the idea of internal free trade is accepted the 
 real difficulty is with the vested interests. And these 
 vested interests ought to be reduced to their true 
 dimensions in equity, before compensation, direct or 
 indirect, is provided. " There is no prescription of 
 institutions " ; the utmost that is required is the 
 adequate compensation to the vested interests of 
 
XVI CONCLUSION 255 
 
 individuals. And what constitutes adequate or 
 equitable compensation varies indefinitely according 
 to the circumstances of the case ; it ranges in prac- 
 tice from the pretium affectionis above the mere 
 market value given to hereditary landowners (with 
 John Stuart Mill's approval) down to the cancelment 
 of arrears of rent or interest or debts, without any 
 compensation whatever. From the economic point of 
 view — in which the principal consideration is the 
 possible shock to security through interference with- 
 out compensation — there is no doubt that compen- 
 sation to vested interests has been carried to an 
 unjustified extreme. In the progress of society 
 security must be sacrificed to security in Bentham's 
 phrase ; and it is only by such sacrifices that any 
 social improvements have been accomplished ; e.g. in 
 the laws of bankruptcy and the laws affecting the 
 tenure of land. 
 
 In some cases it seems sufficient to give a reason- 
 able intimation of the impending change ; and some- 
 times people may be expected to notice for themselves 
 the growing changes in public opinion which are likely 
 to be expressed in interference with private interests. 
 A limit of time might be indicated for the coming of 
 age of the infant industries, and in the meantime a 
 stop might be put to the creation of new difi"erential 
 duties within the empire. Certainly it has never 
 been admitted that the permanence of protective 
 duties ought to be considered one of the reasonable 
 expectations implied in industrial contracts ; and 
 in fact the favourite argument in support of such 
 
256 A PROJECT OF EMPIRE chap. 
 
 duties in new countries is that they are essentially 
 temporary, and for the benefit of infant industries 
 only. 
 
 If in an old country such as England a complete 
 abolition of a complicated mass of protective duties 
 could be accomplished in the course of a very few- 
 years, it seems absurd to suppose that in new 
 countries which show themselves ready to under- 
 take all sorts of social experiments, especially in the 
 interests of labour, the one task which they dare not 
 attempt should be the abolition of protective duties. 
 In general, in any interference with vested interests, 
 it is only the owners of property that have received 
 compensation, but Adam Smith's main reason for the 
 gradual abolition of protective duties was that labour 
 might not be suddenly thrown out of employment. 
 If this difficulty were carefully examined and fairly 
 met, there seems no reason why the labour parties in 
 the colonies should oppose free trade with the United 
 Kingdom. We are often reminded of the solidarity 
 of labour, and in this country the labour leaders are 
 in favour of free trade even with foreign countries. 
 Free trade within the empire would promote the 
 establishment of labour exchanges between the 
 United Kingdom and the dominions, and the in- 
 crease in the mobility of labour would increase the 
 total revenue available for labour. 
 
 § 9. The Method of Preferential Duties. 
 
 The method, so much favoured at present, of 
 purchasing freedom of trade with the colonies by 
 
XVI CONCLUSION 257 
 
 preferential duties on their products {i.e. by taxes on 
 foreign goods of similar character) does not get over 
 the difficulty of the divergence of class interests. 
 The United Kingdom must give preferences for the 
 most part on agricultural products if they are to be 
 of any advantage to the colonies. Whatever method 
 of compensation is adopted taxes on ordinary food- 
 stuffs would be unpopular in this country with a very 
 large number of people. And in a matter of union 
 sentiment is of the first importance. The people in 
 the colonies who would benefit are the agricultural 
 classes, who are confessedly in no need at present of 
 any such aid. The bargain so far would have the 
 appearance of giving a bounty to the thriving farmers 
 of the colonies to be paid for out of the necessities of 
 the poor in the old country. It may be proved by 
 experts to the satisfaction of statisticians that there 
 would be no real injury to the poor, but the sentiment 
 would not be disposed of so readily. 
 
 Those who would gain in the first place from the 
 preferences granted by the colonies are the manufac- 
 turers of this country, at the expense ostensibly of the 
 manufacturers in the dominions overseas. The extent 
 of the gain and the loss would depend on the nature 
 and degree of the preferences. If they are only super- 
 taxes on foreign goods, the rates against Britain being 
 practically the same as before, the main result will be 
 a substitution of a certain amount of British imports 
 for foreign, and the colonial manufacturers will not 
 suffer. But by preferences of this kind no real 
 advance is made towards free trade within the empire. 
 
 s 
 
258 A PROJECT OF EMPIRE 
 
 The root idea in this policy would be the protection 
 against the foreigner by the empire (the United 
 Kingdom included), rather than the gradual develop- 
 ment of free trade within the empire. The system 
 of preferences by the method of supertaxes must be 
 resfarded as a substitute for free trade within the 
 empire, instead of being a method by which it may 
 be promoted. Judging by experience, preferential 
 protection of this kind, like other forms of protection, 
 would tend to be permanent owing to the creation 
 of vested interests, and possibly to increase owing 
 to the political power usually exercised by protected 
 interests. 
 
 There is no getting over the difficulty that the 
 adoption of free trade within the empire must mean 
 the disturbance of vested interests in the colonies. 
 If the policy is to be decided by a conflict of classes, 
 the colonial agriculturists have more to gain by free 
 trade with the United Kingdom than by any system 
 of supertaxes on foreign manufactures. A conflict 
 of classes is not a good beginning for union, but it 
 may be necessary. 
 
 If the ideal of internal free trade is accepted it 
 might no doubt be approached by the method of 
 preferences if they take the form of a gradual and 
 continuous reduction in the duties imposed on 
 British goods, supertaxes on foreign goods being only 
 used as a temporary method of adjustment. 
 
 In the last resort, however, if free trade within the 
 empire is to be attained it must be by the realisation 
 that such internal free trade is a fundamental condi- 
 
CONCLUSION 259 
 
 tion of any real imperial union. Here, as already 
 insisted, the history of all the great civilised countries 
 is conclusive. The colonies without any bribe, or any 
 careful weighing of the class interests affected, recog- 
 nised the duty of sharing in the naval defence of the 
 empire as soon as the need was realised. Their states- 
 men repudiated with indignation the idea that their 
 contributions would depend on the grant of com- 
 mercial favours. If in the same way they can be 
 brought to see that free trade throughout the empire 
 is one of the best methods of securing closer union, 
 greater community of interests, and greater wealth 
 and power to the empire as a whole, it may be ex- 
 pected that they will follow the example of other 
 great states, and consent to this partial abandonment 
 of national sovereign rights.^ The adoption of free 
 
 ^ The advantages of internal free trade as the basis of imperial union, and 
 the difficulties to be overcome in the attainment, are well shown in the 
 history of the United States after the recognition of independence by Britain 
 by the treaty of 1783. The point has been admirably brought out in Mr. 
 Oliver's Life of Hamilton. One of Hamilton's chief difficulties was to get 
 rid of the sovereignty ideas of the particular states in matters of trade. 
 "Power, prosperity, and consideration, which all men affected to desire, 
 were only to be had on terms which the states could not bring themselves to 
 pay. . . . The thirteen states proceeded to indulge themselves in the costly 
 hixury of an internecine tariff war. The states with seaports preyed upon 
 their land-locked brethren, and provoked a boycott in return. It was a 
 dangerous game, ruinous in itself, and behind the custom-house officers 
 men were beginning to furbish up the locks of their muskets" {Alexander 
 Hamilton, p. 134, by F. S. Oliver). 
 
 The necessity for vesting the control of foreign commerce solely in 
 Congress and the difficulties of an independent commercial policy for each 
 state, have been well summarised by Dr, E. L. Bogart in his excellent 
 Economic History of the United States (p. 102 sq.). " Until 1789, therefore, 
 the states undertook to regulate commerce, and by retaliatory measures to 
 secure greater freedom {i.e. in foreign trade). During the years 1780 to 1788 
 Pennsylvania enacted fifteen tariffs, Virginia twelve, Massachusetts, New 
 York, and Maryland, each seven ; Connecticut six, and the other states a 
 smaller number. ... To make matters worse the states finally began to 
 make commercial war upon each other. It had now become evident that if 
 
26o A PROJECT OF EMPIRE 
 
 trade within the empire would naturally lead to, or 
 be accompanied by, the agreement to a common 
 policy in the commercial relations of the various 
 parts of the empire with foreign states. 
 
 § 10. Fiscal and Commercial Relations of the 
 Em^pire with Foreign Countries. 
 
 There remains, then, the difficult question : What 
 ought to be the relations of the united British Empire 
 to foreign states in the matter of trade ? What ideas 
 of Adam Smith are here applicable and with what 
 results ? 
 
 We cannot, of course, expect to find in Adam 
 Smith cut-and-dried answers to our present problems. 
 " Conditions have changed," although, as it happens, 
 the problems of greatest moment at the present time 
 are those which in his day were also of supreme im- 
 portance, namely problems of empire. But, apart 
 
 reprisals were desirable it was impossible to carry them out so long as each 
 state controlled its own action with regard to foreign coninierce. Unified 
 action could never be secured until Congress should be made supreme in 
 foreign relations. Moreover, the mutual jealousies of the states were daily 
 making some plan of central control more necessary. At the same time, 
 American industries had been developing, and a growing desire for protection 
 began slowly to replace the idea of retaliation." Inter-state protection was 
 abandoned by the Constitution of 1789, but protection against foreign countries 
 did not become the main idea of commercial policy till after the conclusion of 
 the great Napoleonic wars. The point is that internal free trade within the 
 states was adopted first on its own account ; secondly, for the power it gave 
 in retaliation and treaty-making ; and lastly (after an interval) the com- 
 mercial union was used largely for protection against foreign countries. The 
 commercial relations of Britain and the colonies and of the colonies inter sc 
 are certainly much less strained and more callable of adjustment than were 
 the relations of the thirteen states. It must be remembered also that Pitt 
 in 1783 (no doubt under the inlluence of Adam Smith) tried to persuade the 
 British Parliament to offer full freedom of trade to the new United States, 
 possibly with the idea of again bringing about a union with tlie mother 
 country. 
 
CONCLUSION 261 
 
 from changes in conditions, in matters of national 
 policy there is no appeal to authority ; and what we 
 want to find out is not what the master said, but why 
 he said it. 
 
 If it were a question of authority merely, to be 
 settled by the appropriate ipse dixit, the answer would 
 be simple. Adam Smith certainly approved of a 
 customs union for the whole empire ; a uniform 
 system for the whole empire. 
 
 Adam Smith deals with the proposal for an imperial 
 customs union from the point of view of revenue ; a 
 revenue to meet the expense of defence and the 
 expense of the general government of the empire. 
 Land-taxes, stamps, and excise are also considered 
 from the same standpoint. The idea is to provide 
 an imperial revenue which shall not depend on the 
 annual votes of the provincial assemblies but on a 
 system of taxation for imperial purposes approved 
 by a central authority in which the different provinces 
 are represented. 
 
 " What is necessary for the defence and support 
 of the whole empire and in what proportion each part 
 ought to contribute can be judged of only by that 
 assembly which inspects and superintends the affairs 
 of the whole empire." ^ The object in the extension of 
 the British system of taxation to the colonies for 
 imperial purposes was obviously to get over the 
 difficulty of assigning the particular contributions of 
 the constituent states. 
 
 Adam Smith does not discuss the possibility of 
 
 ^ Book IV. chap. vii. 
 
262 A PROJECT OF EMPIRE "chap. 
 
 using the customs union for protective purposes ; 
 though he remarks incidentally that " the extension 
 of the custom-house laws of Great Britain to Irelanvl 
 and the plantations, provided it was accompanied, as 
 in justice it ought to be, with an extension of the 
 freedom of trade, would be in the highest degree 
 advantageous to both." The extension of freedom of 
 trade, however, refers to the abolition of the vexatious 
 restraints at that time imposed on the external trade 
 of Ireland and the colonies, including their trade with 
 Britain. 
 
 In his treatment of taxes on consumable com- 
 modities Adam Smith lays down the general rule that 
 customs duties ought always to be for revenue and 
 not for monopoly, and it may be inferred that in his 
 judgment the rule would apply also to the imperial 
 customs proposed. 
 
 At the same time it is to be observed that although 
 he maintained that, corresponding to every excise 
 duty on the home product, there ought to be a corre- 
 sponding customs duty on the foreign import, he 
 never insists on the converse that corresponding to 
 every customs duty there ought to be an excise 
 exactly equivalent. He considers the applicability of 
 the excise duties for imperial purposes in some detail, 
 and incidentally gives some interesting facts on the 
 difference between an American fermented liquor 
 called beer, "but which, as it is made of molasses, 
 bears very little resemblance to our beer "; but he does 
 not suggest that for every customs duty there must be 
 an excise in the interests of the purity of free trade. 
 
XVI ' CONCLUSION 263 
 
 " Absolute prohibitions and high duties," which 
 were intended to give the home producer a monopoly, 
 were the objects of Adam Smith's attack ; and if a 
 tax yielded a good revenue it could only give a 
 moderate advantage and not a monopoly to the home 
 producer. 
 
 It may be observed that it was not till long after 
 the repeal of the Corn Laws that the maxim of 
 countervailing excise duties was carried to the extreme 
 of pure theory. Ricardo, for example, proposed that 
 an import duty of 10s. per quarter should be retained 
 on corn, not because there was an excise to that 
 amount in the home country, but as a fair equivalent 
 to the exceptional local taxes falling on the producers 
 of corn. And in estimating this countervailing duty 
 at 10s. he admits that he gave a certain benefit to 
 the home producer. "A duty of 10s. per quarter on 
 importation to which I wish to approach is, I am sure, 
 rather too high as a countervailing duty for the peculiar 
 taxes which are imposed on the corn grower over and 
 above those which are imposed on the other classes of 
 producers in the country ; but I would rather err on 
 the side of a liberal allowance than a scanty one." ^ 
 
 ^ Ricardo's Works (M'Culloch's edition, p. 493). Ricardo did not approve 
 of general protective duties on account of general taxation. " For the same 
 reason that protecting duties are not justifiable on account of the rise of 
 wages generally, from whatever cause it may proceed, it is evident they are 
 not to be defended when taxation is general and equally aftects all classes of 
 producers " {ibid. p. 463). Nor did he approve of the idea which was supposed 
 to be the guiding principle in the recent revision of the United States tariff, 
 viz. that the foreign cost should be estimated and a duty levied equal to the 
 diiference between the American and the foreigu cost with a fair profit to the 
 American producer. Ricardo argued that countervailing protection for high 
 wages or general taxation or to secure " remuneratory " prices would mean 
 simply general protection. Like Adam Smith, however, he did not carry the 
 theory of free trade to a doctrinaire or punctilious extreme. The revival of 
 
264 A PROJECT OF EMPIRE 
 
 If, then, a customs union could be adopted by the 
 British Empire with a provision for the assignment 
 of a certain proportion of the yield for imperial 
 purposes, especially defence, it would be absurd to 
 object merely on the ground of the difficulty of 
 imposing equivalent excises. Internal free trade 
 throughout the empire, though possible without any 
 customs union, would be promoted and strengthened 
 thereby, and the benefits of real commercial union 
 are too great to be cast aside on account of a literal 
 interpretation of free trade, which is as little 
 defensible as the literal interpretation of a scriptural 
 text badly translated from the original. 
 
 Nor is there any reason to insist on the exact 
 uniformity of the imperial customs so long as the 
 main ideas are realised ; namely, a sufficient revenue 
 and a fair distribution of the burdens. The best of 
 taxes, even in theory, is neither perfectly equitable 
 nor perfectly free from consequences not intended. 
 The principal difficulty to surmount is the danger of 
 monopoly and corruption, and to guard against this 
 danger the system adopted ought to be simple and 
 only subject to change on important changes in 
 conditions. The greater the complexity, so much the 
 less suitable is the tariff for revenue, and so much 
 more liable to sinister manipulation. 
 
 The imperial customs union might, no doubt, be 
 used, as by other nations it is used, not merely for 
 
 the principle of continuity in economic theory warns us of the danger of 
 arguing from particular cases to general propositions. Ricardo's approval 
 of a lOs. import duty on corn did not make him an approver of general 
 protection. See above, Chapter XI. § 11. 
 
XVI CONCLUSION 265 
 
 revenue but for other aims. And the possible uses 
 for such purposes ought not to be rejected without 
 careful consideration. A customs union for the whole 
 British Empire would be the most powerful instru- 
 ment that ever existed, if it could be used effectively, 
 either for commercial agreements or for retaliation. 
 The initial difficulty would be to decide on the 
 principles which should govern the uses of so power- 
 ful a weapon ; principles which would be accepted by 
 the varied interests of the constituent states of the 
 empire. 
 
 It must be admitted, moreover, that taxation for 
 other than revenue purposes is beset with practical 
 difficulties. The most ardent protectionist would 
 hardly propose, as the model for the new British 
 empire, the ancient Chinese type of isolation from the 
 foreigner. And certainly there is nothing in the 
 ideas of Adam Smith, even after making full allowance 
 for his emphasis on the relative advantages of home 
 over foreign trade, which would lead up to any 
 system of " prohibitions and high duties." 
 
 The negative argument becomes overwhelming if 
 we try to invent a complex and detailed protective 
 system for the whole British Empire. Let any one 
 who doubts this look at the new tariff of the United 
 States and consider by what changes it might be 
 adapted to the case of the British Empire.^ 
 
 1 The new Tariff Act (Payne) was signed by the President on 5th Augnst 
 1909. It is published in the Economist for 21st August with the schedules in 
 detail for the benefit of traders interested. Its general characteristics are of 
 equal interest to the politician and economist. The dutiable list embraces 
 fourteen schedules, and the clauses indicating various and multitudinous 
 items are 481 in number, and extend over about twenty columns of the 
 
266 A PROJECT OF EMPIRE 
 
 But we have to take account also, not only of 
 the negative difficulties of protection, but of the 
 positive advantages of freedom. Dealing with " pro- 
 hibitions of rival articles, or duties equivalent to 
 prohibitions," Hamilton said : " This is another and 
 efficacious means of encouraijing national manufac- 
 tures ; but, in general, it is only fit to be employed 
 when a manufacture has made such progress, and is 
 in so many hands, as to ensure a due competition 
 and an adequate supply on reasonable terms " ; which 
 is exactly the central idea of Adam Smith in attacking 
 the evils of monopoly. 
 
 To attempt to confine the trade of the empire to 
 the limits of the empire is to abandon for the empire 
 the real advantages of foreign trade. Throughout 
 the empire there will be surplus products ; under 
 present conditions, in England, of manufactures ; in 
 the colonies, of raw materials and food-stufis ; these 
 
 Economist in small print. The free list embraces 237 items, most of those of 
 any importance being subject to various provisions for duties under certain 
 conditions. The last clause in the dutiable list provides that every imported 
 article not enumerated which is similar either in material, (juality, texture, 
 or the use to which it may be applied, to any article chargeable with duty, 
 shall pay tlie same duty, etc., etc. There is also tlio provision of a maximum 
 and minimum tariff, the maximum being imposed by way of retaliation on 
 any state not granting reciprocity. Some of the duties are extremely heavy, 
 but are not easy to quote. Ready-made clothing, made wholly or partially oi 
 wool, for example, pays in the first place a sjiecific duty per pound on its 
 weight, the duty being four times that on unwashed wool per pound, and in 
 addition there is an ad valorem duty of 60 ])er cent. The differences in the 
 duties are extremely curious. A great variety of buttons are subject to 
 varying duties, e.g. metal trousers buttons (except steel) are at one rate, and 
 steel trousers buttons at another ; buttons of metal, embossed with a design, 
 device, pattern, or lettering, pay 45 per cent rt<^ valorem, but all buttons not 
 specially provided for in the section on buttons, and all collar or cuff buttons 
 or studs comi)03ed wholly of bone, mother-o'-pearl, or ivory, pay 50 per cent 
 ad valorem. Why should a bone collar-stud pay 5 per cent more ad valorem 
 than an embossed button '! 
 
XVI CONCLUSION 267 
 
 surpluses must be exported to foreign parts, or else 
 the corresponding industry will be checked. If the 
 empire is to retaliate on the principle advocated by- 
 Adam Smith, the very object of the retaliation would 
 be the reopening of closed foreign markets, i.e. the 
 extension of foreign trade. 
 
 If we are to recall, and to insist on Adam Smith's 
 different advantages of employing capital in different 
 modes, we must recall not only the general statement 
 that the home trade is more advantageous than the 
 foreign trade, but also that trade with a near is more 
 advantageous than trade with a remote country. 
 
 To Canada, much of the trade with the United 
 States is more advantageous (from this point of view) 
 than trade with the United Kingdom. Under present 
 conditions the population of the United Kingdom is 
 about three times as great as the (white) population 
 of the colonies ; and its wealth is in the aggregate in 
 a far higher proportion. Under present conditions, 
 also, the foreign trade of the United Kingdom is one 
 of the main sources of its wealth ; and any check in 
 this trade would weaken the whole empire. 
 
 In this inquiry we are concerned mainly with the 
 ideas and the ideals of Adam Smith which may be 
 applied to build up a real empire, stronger in military 
 power and stronger in all the elements of national 
 well-being. From this standpoint the ultimate aim 
 is of more importance than the immediate benefit. 
 Are we to look forward to a time when the British 
 empire shall be as little dependent as possible on the 
 rest of the world, self-contained and self-sufficing ; or 
 
268 A PROJECT OF EMPIRE 
 
 is one part of our ideal to be an extended trade that 
 shall reach the remotest corners of the earth ? The 
 full answer to this question takes us beyond the 
 range of economic ideas, for we must take account of 
 the indirect political and social effects of this ever- 
 extending commerce. 
 
 The greater the extension of the commerce of the 
 British empire so much the greater would be its 
 moral and political iufluence in promoting the general 
 advance of civilisation.^ 
 
 Even on narrow economic grounds, however, it is 
 true of great empires, as of small nations, that the 
 richer the neighbours the richer the state — and this 
 indirect accession to opulence can only be realised by 
 the extension of commerce. 
 
 No one has appreciated more than Adam Smith 
 the advantages of the employment of capital in the 
 home country and the importance of the home 
 market ; but at the same time no one has shown 
 more clearly the real advantages of foreign trade. 
 He condemned the policy of isolation by prohibitions ; 
 he condemned also the calculating policy of giving 
 special favours to the nations which were supposed 
 to be the better customers for our manufactures. By 
 
 ' "In the case of the British possessions there are strong reasons for 
 maintaining the present slight bond of connection. ... It has tlie advant- 
 age, specially valuable at the present time, of adding to the moral influence 
 and weight in the councils of the world of the Power which of all in existence 
 best understands liberty, and whatever may have been its errors in the past, 
 has attained to more of conscience and moral principle in its dealings with 
 foreigners than any other great nation seems either to conceive as possible or 
 recognise as desirable" (J. S. Mill, Jlcprcxeittative Govermnait, p. 133). If 
 for the slight bond of connection there were substituted a real union so much 
 greater would the influence become. 
 
XVI CONCLUSION 269 
 
 such a policy *' the sneaking arts of underling trades- 
 men are erected into political maxims for the conduct 
 of a great empire. . . . By such maxims as these, 
 nations have been taught that their interest consisted 
 in beggaring their neighbours. Each nation has been 
 made to look with an invidious eye upon the pros- 
 perity of all the nations with which it trades, and to 
 consider their gain its own loss. Commerce which 
 ought naturally to be among nations as among 
 individuals a bond of union and friendship has be- 
 come the most fertile source of discord and animosity. 
 The capricious ambition of kings and ministers has 
 not during the present and the preceding centuries 
 been more fatal to the repose of Europe than the im- 
 pertinent jealousy of merchants and manufacturers."^ 
 The empire projected by Adam Smith was an empire 
 with a world-wide commerce flowino; in natural 
 channels ; an empire capable in case of need of in- 
 sisting on the removal of obstructions from these 
 channels and capable also of itself placing obstructions 
 if demanded by the supreme interests of imperial 
 defence. But the minute supervision and manage- 
 ment of the multitudinous transactions of foreign 
 commerce was a task not to be entrusted to "any 
 senate whatever," and still less to the " states general " 
 of a great empire. 
 
 With foreign trade as with currency the best 
 system is that which is automatic in its adjustments ; 
 the worst that which requires most management. 
 In both cases the state has duties of the highest im- 
 
 ^ Book IV. chap. iii. 
 
270 A PROJECT OF EMPIRE 
 
 portance, but the duties are best fulfilled by per- 
 manent regulations on broad principles. 
 
 In treating of the commercial relations of the 
 states of the empire inter se, and of the whole 
 empire to foreign states, attention has been mainly 
 given to fiscal considerations. But there are many 
 important functions of the state which would be 
 better carried out by an imperial union than by inde- 
 pendent action, e.g. the consular service, the control 
 of the means of communication and transport, the 
 general management of mails and telegraphs, sub- 
 sidies of various kinds for defence, the regulation of 
 emigration and immigration, the treatment of subject 
 native races, etc. 
 
 A customs union might, by promoting closer im- 
 perial union, aid in the furtherance of these objects, 
 just as it might aid in the adoption of internal free 
 trade. And in spite of all the difliculties, a customs 
 union on the lines approved by Adam Smith ought 
 to be possible if only the idea of imperial union is 
 once accepted. 
 
 § 11. I'he Project of an Empire. 
 
 The outstanding merit of Adam Smith was his 
 breadth of view ; he ranged in search of facts over 
 every country and every period ; and he was not 
 afraid to project his ideas into the future. Many of 
 these projections have been realised ; some are in 
 process of being realised ; his project of an empire is 
 still a project. The project was outlined when, by 
 the stress of events, the choice seemed inevitable 
 
XVI 
 
 CONCLUSION 271 
 
 between disintegration and real union. It is not 
 often, in the history of nations, that such a choice 
 is twice offered ; yet to-day it is offered to the 
 British people under circumstances that once more 
 convert the project of an empire into a practical 
 proposition. In parting, let us look at the main 
 objects free from detail ; imperial defence, to which 
 every nation or dominion or commonwealth or 
 dependency or possession contributes its share ; a 
 system of representation by which every responsible 
 constituent of the empire has a voice in the control 
 of the concerns of the whole ; an immense internal 
 market for every part of the produce of all the con- 
 stituents ; a customs union and a common policy in 
 commercial relations with other countries ; a policy 
 adverse to every kind of monopoly, and favourable 
 to everything that increases the revenue and the 
 prosperity of the great body of the people throughout 
 the empire.^ 
 
 ^ See above, Chapter XIV. § 8, n. 
 
INDEX 
 
 Advantage — 
 Profit- 
 Coincident with, 73-4, 75-6 
 Distinguished from, 49, 53 n., 
 62-3, 71, 76, 85-6, 96, 176, 200, 
 224-5, 235 
 Test of, the employment of produc- 
 tive labour, 85, 92 
 Agriculture — 
 
 Advantages of, natural and social, 
 
 46-8, 74-5, 145 
 America, in — Carver quoted, 147 
 
 and n. ; Hamilton cited, 250 
 Artificial encouragement of, unde- 
 sirable, 149 
 Colonies, British, in, protective 
 
 policy harmful to, 250 
 Combinations of those engaged in, 
 
 conditions hostile to, 140, 144 
 Decline in numbers engaged in, in 
 
 Great Britain (1811-41), 148 
 Encouragement of, methods of, ap- 
 proved by A. Smith, 150 
 Free imports of produce of the soil 
 
 innocuous to, 99 7^., 146 
 German protection of, 160, 174 
 Home market's importance to, 56 
 
 aiuf, n.'^ 
 Land laws, A. Smith's views regard- 
 ing, 144, 150 
 Monopoly in the sphere of, 144-5 
 Neglect of, for greater profits, 71 
 Profits of, low, 74-5 
 Ashley, Prof., Economic Surveys by, 
 
 cited, 15 n}, 201-3 
 Australia — 
 
 Consumer in, position of, 128 
 Protection in, 92, 173-4 
 
 Bargaining, townsmen's advantages 
 
 regarding, 48 
 Bentham cited, 255 
 Bogart, Dr. E. L. , Economic History of 
 
 the United States by, quoted, 259 n. 
 
 Bonar, Dr., 3 n.'^ 
 Bounties — 
 
 Colonial exports to mother country, 
 
 on, 203 
 Corn, on, 149 
 Defence, for, 159 
 Foreign, countervailing duties on, 
 
 165-6 
 Nature of, 94, 166 
 Sugar, on, 165-6 
 Britannic Confederation cited, xv ?i. 
 Burke, E., Smith's attitude towards, 
 
 18 ; quoted, 202 ; cited, 217 
 Bylea's Sophisms of Free Trade cited, 
 4 n., 62-3 
 
 Camb)'idge Modern History cited, I77n.^ 
 Canada — 
 
 Agriculture in, protective policy 
 
 harmful to, 250 
 Development of, possible future, 216 
 Economic conditions in, 72 
 Fiscal policy of, question as to, 
 
 249-50 
 Immigration to, of many national- 
 ities, 233 
 Maritime defence incumbent on, 240 
 Protection of infant industries in, 173 
 Quebec Bill (1791) 226-7 
 United States, advantage of trade 
 
 with, 267 
 West Indian trade of, 228 
 Cannan, Dr., A. Smith's original lecture 
 
 notes published by, 149 
 Capital — 
 
 Absenteeism of, see subheading Ex- 
 port of 
 Ambiguity of term, 27 
 Circulating, 31 
 
 Colonial object to attract, 248 
 Combinations of masters, 38 
 Definition of, by A. Smith, 30 
 Direction of industry in hands of 
 controllers of, 40 
 
 27- 
 
274 
 
 A PROJECT OF EMPIRE 
 
 Capital, contd. — 
 
 Displaced by foreign import, (jues- 
 tions as to re -investment of, 
 112-13 
 Employment of — 
 Four modes of, 44 
 Home trade, in — 
 
 Bounties to induce, question as 
 
 to, 113-14 
 
 Investors' advantage in, 2, 106 
 
 National advantage of, xi, xiii, 
 
 49-51, 57, 65, 80, 85-6. 97, 
 
 106, 198, 235, 267, 268 
 
 Protective duties to induce, 
 
 question as to, 94, 113-14 
 Profit the guide to, 113, 199 
 Export of— 
 British investments abroad — 
 Amount of, 105 
 Increase in rate of, 105 
 Magnitude of, xiii, 68, 93, 234 
 Profits of, 77 
 High profits from, 77, 199 
 Modes of, xii 
 Overflow, representing, 78, 105, 
 
 198 
 Scope for, 70 
 
 Security of, as compared with 
 that of investment in agri- 
 culture, 74-5 
 Smith's views on, xii, 65, 68, 
 
 77-8 
 Unproductive purposes, for, 81 
 Fixed, 31 
 Forms of, complexity and variety of, 
 
 28 
 Individual's most profitable invest- 
 ment of, in relation to national ad- 
 vantage, popular idea regarding r. 
 A. Smith's, xii {see alsi> Individual- 
 ism — National iuterests) 
 Industry limited by, 103 
 Interest, at. 31-2 
 
 Labour's interests in relation to, 39 
 Labour's need of auxiliary and sus- 
 taining, 27-8, 37, 40, 104 
 Mental or immaterial, 32-3, 35-6 
 
 and n. 
 MoV)ility of, necessary for foreign 
 
 trade, xiii 
 Money attribute of, 30-31 
 Money fundanicntally important in 
 
 creation and application of, 30 
 Parsimony and industry in relation 
 
 to, 36 
 I'rotit on, requisite for employment 
 
 of labour, 92, 94 
 Rej)lacenient of, out of annual pro- 
 duce, 34-5 
 Wages, projiortiou distributed in, 126 
 
 Carrying trade — 
 
 Comparison of, with other forms of 
 
 trade, 52-4 
 Effect, not cause, of wealth, 67-8 
 Expansion of, scope for, 70 
 Carver, T. N., Histo-ricdl Sketch of 
 
 Ameriatn Ayricidture by, quoted, 
 
 147 «. 
 Chamberlain, J., quoted, on colonies, 
 
 195 
 Cheapness — 
 
 Free trade argument from, 109-12 ; 
 
 countered by protectionist argu- 
 ment of employment, 117 
 Importance of. to the great body of 
 
 the people, 128-30 
 Reactions of, on employment and 
 
 conditions of labour, 128 
 Coal duties, 58 n. 
 
 Cobden, R., quoted, on Peel's econo- 
 mic policy, 135 
 Colonies, British. (For particular 
 
 colonics .see their names) — 
 Abandonment of, A. Smith's views 
 
 on, 21, 206-7, 211-12, 225, 246 
 Advantages from possession of, as at 
 
 present, question as to, 229, 232, 
 
 236 
 Affection of, for mother country, 231 
 British public debt to be partly a 
 
 charge on, A. Smith's proposal as 
 
 to, 223-4 
 Capital desired by, 248 
 Chamberlain quoted on, 195 
 Crown, 227, 231 
 Defence, duty of, recognised by, v, 
 
 259 
 Emigration field for British pojiula- 
 
 tion, neglected as, 233-4 
 Expenses, not revenue, a source of, 
 
 194, 195, 204, 205, 211 
 Government of — 
 
 Abuses in, 227 
 
 Self-government, grants of, 227, 
 230, 231 
 Immigrationto, of many nationalities, 
 
 233-4 
 Imperial federation scheme for, A. 
 
 Smith's, 208, 213-18, 219-25, 
 
 269 (see also Imperial Union) 
 Imperial sentiment among, 240 
 Labour inmiignition desired by, 248 
 Maritime supremacy of the Empire 
 to be contributed to by — • 
 
 Fiscal union closely connected 
 with, 251-2 
 
 Method of, proposed, 240-2 
 
 Necessity for, 236-40 
 
 Revenue for, sources of, suggested, 
 244-5, 248, 261 
 
INDEX 
 
 275 
 
 ■Colonies. British, cimtU. — 
 
 Taxation, new, requisite for, 238 
 Military drain owing to, 193-5, 204 
 Navif,'ation Act (1660) as affecting, 
 
 158 «.', 203- 
 North America, in (present U.S. A. )- 
 Development of, rapidity of, 191, 
 
 202, 216 
 Expenses of government in, 191 
 Freedom accorded to, 191-2, 201 
 Identity nf interests of. with those 
 of mother country, assumption 
 as to, 203 
 Navigation Act as affecting, 203 
 Revolt of, 196, 205, 212, 226, 239 
 ■Origins of, 189 and n. 
 "Project of Empire," constituting, 
 rather than empire, 206, 231, 236 
 Reversal of policy regarding, 226-7 
 Taxation, British system of, A. 
 Smith's proposed extension of, to, 
 219-22 
 Trade of— 
 British — 
 Monopoly — 
 
 Advantage of. supposed, 
 
 195-7, 230-31 
 Colonies, effect on, 198, 202-4 
 Disadvantage of, real, 60, 
 199-201, 204, 210-11 
 Natural, advantages of, 76, 
 
 197-8 
 Preferential — 
 
 Former, 228 and «.'-', 229 
 
 atid nr, 230 
 Modern proposed revival of, 
 disadvantages of, 256-8 
 Intercolonial, 228 
 Protective policy in, 173 w., 174, 196 
 Vested interests in, question as to 
 disturbance of, 254-6, 258 
 ■Colonies, French, 190 
 Colonies, German, 233 
 ■Colonies, Greek, 188-9, 193, 211, 231, 
 
 246 
 Colonies, new, causes of prosperity of, 
 
 189-92 
 Colonies, Roman, 188-9, 193, 213, 224 
 Colonies, Spanish and Portuguese, 194 
 Commerce, see Trade 
 Commercial union of the empire, see 
 
 Imperial union^ — Free Trade 
 Communication, importance of means 
 
 of, 46, 251 
 Congo State, 183, 232 
 <;onsumers and producers, interests of — 
 Identity of, in the mass, 126. 
 
 132,'l34-5 
 Wecdth of Nations on, miscon- 
 ceptions as to, 117-20 
 
 Consuming power of the masses, in- 
 crease in, advantageous, 78, 82 
 Consumption as production's sole end 
 
 ami puri)ose, 118 
 Continuity, principle of, 32, 111, 264 n. 
 Corn laws — 
 
 Histo-ry of the English Ctfrn Lav;s 
 cited, 134 «., 146 ami n., 148 
 cmd n. ' 
 Repeal of, circumstances of, 146, 
 
 173_ 
 Smith's attitude towards, 19 
 Cosmopolitanism — 
 
 Nationalism contrasted with, by A. 
 
 Smith, 9-10 
 Smith erroneously charged with, 5, 
 12-13, 137, 232 
 Cournot's Mathematical Principles of 
 
 the Theory of Wealth, 64 n. 
 Cunningham, Dr., cited, 77, 189 n., 
 202 and n., 229 and n. ' ; quoted, 
 157, 158, 247 aiid, n. 
 Customs duties — 
 
 Ad valorem duty on all imports, 
 
 probable effects of, 170 
 British system of, proposed extension 
 of, to whole empire, 222, 261, 262 
 Collection of, a proper function of 
 
 the State, 178 
 Colonial, suggested as source of 
 imperial defence revenue, 244-5, 
 248 
 Excise duties in relation to — 
 
 Balance of excise duties by customs 
 
 duties, 88, 160-61, 262 
 Countervailing duties, A. Smith's 
 
 objections to, 163-4 
 Excess of customs duties over excise 
 on "goods of same kind," 161-2 
 Imperial union of, ix, 264-5 
 Incidence of, 164-5 
 Retaliatory, see Retaliation 
 Revenue, for, A. Smith's view of, 
 87-9, 121-2, 262 
 
 Dancing, A. Smith's views on, 1-2 
 Davidson's Commercial Federation and 
 Colonial Trade Policy cited, 228 
 and nn., 229 and n. ^ 
 Debts, public, 217-18, 223 
 Defence, colonial — 
 
 Duty of, recognised by colonies, v, 
 
 259 
 Probabilities as to, under separation 
 scheme, 207 
 Defence, imperial — 
 
 Colonial contributions towards, see 
 under Colonies, British — Maritime 
 supremacy 
 Colonial recognition of duty of, 259 
 
276 
 
 A PROJECT OF EMPIRE 
 
 Defence, imperial, contd. — 
 
 Expense of, a. first claim on imperial 
 revenue, 224, 230 
 
 German method of, vi 
 
 National defence compare<l with, vi 
 
 Nature and methods of. vi, 218, 240-2 
 Defence, national — 
 
 Bounties for, ir)9 
 
 Colonial attitude towards, v, 259 
 
 Duty of, primary, 2-'39 
 
 Free trade exception in ease of, 
 153-60 
 
 Home supply of manufactures which 
 are necessary for, 159 n. 
 
 Imperial defence compared with, vi 
 
 Importance of, greater than that of 
 opulence, 14, 16, 155-6 
 
 Land, a burden on, in ancient times, 
 243 
 
 Nature of, vi 
 
 Opulence a chief bulwark of, 158 
 Devas, C. S., quoted, 4 n., 63 
 Development Fund of Budget of 1909, 
 
 176 n. 
 Duties — 
 
 Aliens, 155 
 
 Countervailing, 163-6 
 
 Customs, nee that title 
 
 Differential, dithculties as to adjust- 
 ment of, 164 {see also Colonies, 
 British — Trade — British — Pre- 
 ferential) 
 
 Excise, see tliut title 
 
 Stamp, 221, 222, 261 
 
 Education — 
 
 Home life in relation to, A. Smith's 
 
 views on, 7-8 
 Maintenance during, capital involved 
 
 in, 32 
 Military training as part of, A. 
 
 Smith's views on, 15 
 National expenditure on, 33 
 Employment {see also Labour) — 
 
 Cheapness in relation to, Gladstone 
 
 quoted on, 124-5 
 Necessity of, to the consumer, 116-17 
 Profit on capital a requisite lor, 92, 94 
 Protection-raised prices in relation 
 
 to, 95 
 Reduction of, tendency towards — 
 
 Contraction of supply of capital, 
 by, 200 
 
 Taxation of commodities, by, 125-6 
 Test of economic advantage, 85, 92 
 Exchange, see Markets 
 Excise duties — 
 
 British system of, A. Smith's pro- 
 posed extension of, to whole 
 
 empire, 222, 261 
 
 Excise duties, contd. — 
 Countervailing, 263 
 Customs duties in relation to, see 
 
 under Customs 
 Experience, necessity of appeal to, 113, 
 
 133-4 
 Exports — 
 
 Bounties on, 79 
 
 Capital, of, see under Capital 
 
 Coal, of, A. Smith's attitude towards 
 
 duty on, 58 n. 
 Colonial, to mother country, bounties 
 
 on, 203 
 Drawbacks on, 165 
 Excess of, over imports, " balance of 
 
 trade" theory as to, see Trade — 
 
 Balance 
 Gladstone's duties on (1860-63), 
 
 156 n.' 
 Growth of, as a test of prosperity, 
 
 55 
 Imports paid for by, 51-2 ; value 
 
 affected by prices of imports, 
 
 125-6 
 Kinds of, relative advantages of 56 
 Profit, high rate of, in home market 
 
 as affecting, 199 
 Re-exports — 
 
 Comparison of, with other exports, 
 56 
 
 Conditions necessitating, 66-7 
 
 Drawbacks on, 203 
 Surplus produce, of, advantageous, 
 
 66, 78, 97-8, 102 
 Wool, of, A. Smith's attitude to- 
 wards duty on, 57-8 
 Extractive industries, advantages of, 
 
 46-7 
 
 Family relationships, A. Smith's views 
 
 on, 7-8 
 Federal government, sec Imperial union 
 Foreign bounties, countervailing duties 
 
 on, 165-6 
 Foreign trade — 
 
 Advantages of, 65, 78, 266-8 
 British, compared with British 
 
 colonial, 235-6 
 Carrying trade between two foreign 
 
 countries, 52-3 
 Colonies, of, restrictions on, 192 
 Companies engageil in, history and 
 
 abuses of, 177-84 and n. 
 Conditions naturally conducive to, 
 
 65 
 Consumers' interests in, mistake ol 
 
 looking solely to, 130 
 Customs, see Hint title 
 Development of, nuignitude of, 73 
 Disadvantage of, 50-51, 56 
 
INDEX 
 
 2/7 
 
 Foreign trade, could.— 
 
 Export of capital a necessity for, 
 xiii, 65 
 
 Exports, see that title 
 
 Fundamental principle of — ^prices of 
 imports as affecting value of ex- 
 ports, 125-6 
 
 Humanity and nationality as affect- 
 ing, 5 
 
 Imperial need of, 266-7 
 
 Imports, see that title 
 
 Internal free trade compatible with 
 variety in policy regarding, viii-ix, 
 '246, 254 
 
 Limitations of, 70 
 
 Mun's England' s Treasure by Foreign 
 Trade citeil, 57, 200 
 
 Nearer, more advantageous than the 
 more remote, 52, 200, 267 
 
 Retaliation, see that title 
 
 Returns of, as compared with home 
 trade returns, 50-52 
 
 Security of, increased, 75 
 
 Simplicity of system of, advantages 
 of, 269 
 
 Varieties of, relative advantages of, 
 52-3, 55 
 
 Wealth of foreign nations advantage- 
 ous to, 131, 166, 268 
 Prance — 
 
 Aix-la-Chapelle Treaty (1748), 180 
 
 Colonies of, conditions in, 190 
 
 Commercial Treaty with (1784), 
 168 
 
 Commercial Treaty with (1860), 
 Gladstone's defence of, 124-5 
 
 Economists of, A. Smith's views in 
 harmony with those of, 148-9 
 
 Foreign investments of, 105 ?i." 
 
 Revolution in, 185 
 
 War with Britain (1755-62), 180 
 Free trade — 
 
 Advantages of, needing demonstra- 
 tion, enumerated, 133-4 
 
 Byles's Sophisms of Free Trade cited, 
 4 n., 62-3 
 
 Cheapness, argument for, 109-12 ; 
 countered by protectionist argu- 
 ment of employment, 117 
 
 Colonies, etc., free trade between 
 
 Great Britain and — 
 
 Foreign trade policy, variety in, 
 
 compatible with, viii-ix, 246, 
 
 254 
 
 Imperial union, under, see Imperial 
 
 union — Free trade 
 Separation of colonies accompanied 
 by, suggestion as to, 207, 211, 
 225, 246 
 
 Dogmatic, weakness of, 42-3 
 
 Free trade, contd. — 
 Establisiiment of — 
 
 Complete, in Great Britain, A. 
 Smitli's projihecy regarding, 
 falsified, 172 
 Gradual approach to, A. Smith's 
 aiivocacy of, 20, 99, 171-2, 
 254, 256 
 Exceptions to— 
 Cases of — 
 
 Customs to balance excise, 
 160-61 ; extensions of jirin- 
 ciple, 163-6 
 Infant industries, 173-4 
 Navigation Act, 153-6 
 Retaliation, 166-70 
 Vested interests, 171-3 
 Extension of, possibilities as to, 
 
 137 
 Importance of, 150, 152, 174 
 Gradual approach to, see under sub- 
 heading Establishment of 
 Home manufactures, A. Snnth's 
 views as to possible effect on, 
 99 w., 145 
 Negative argument for — 
 
 Differential duties, difficulties as 
 
 to, 164 
 Navigation Act (1660), a good ex- 
 ample of, 156-9 
 Present importance of, 150-2 
 Sidgwick's statement of, 136-7 
 Smith's statement of, 137-9, 
 
 144-7 
 United States Tariff Act (1909) a 
 good example of, 265 n. 
 Producers and consumers benefited 
 
 by, question as to, 133 
 Protection, difference from, one not 
 
 of principles but of methods, 86 
 Royal Commission on, suggestion as 
 
 to, xiv, 87, 114, 116 
 Smith's connection with, xi - xii ; 
 his approval of, 133 
 Fund, A. Smith's use of term, 36-7 
 
 Germany — 
 
 Agricultural protection in, 160, 174 
 Defence method adopted by, vi 
 Expansion of, a necessity, 233 
 Foreign investments of, 105 m.^ 
 Free trade, internal, with external 
 
 protection in, 246 
 Navigation Act, suggested revival of, 
 against, 170 
 
 Gladstone, W. E., export and import 
 duties levied and repealed by, 156 
 and n.^ ; quoted, on price of com- 
 modities compared with rate of 
 wages, 124-5 
 
278 
 
 A PROJECT OF EMPIRE 
 
 Great Britain — 
 
 Cai)ital of, invested abroad — 
 Amount of, 10;") 
 Increase in rate of, 105 
 Magnitude of, xiii, 68, 93, 234 
 Profits of, 77 
 
 Colonies of, se-e Colonies, British 
 
 Emigration from, questiuu as to, 
 233-4 ; of labour, see under 
 Labour 
 
 Exjiansion of, 233 
 
 Foreign and eolonial trade of, com- 
 pared, 235-6 
 
 Industrial revolution in, 186, 229 
 
 Maritime supremacy of, imperial 
 preservation of, necessary, 236-40 
 (see also under Colonies, British — 
 Maritime su])remacy) 
 
 May's Vdustitu/ionnl Ilislary of Eng- 
 land quoted, 227 and n. 
 
 Natural resources of, 47 
 
 Stubbs's Constitutional Ilistonj cited 
 242 n. 
 
 Hamilton, Alexander, cited 56 n.~, 
 84, 173 n., 246 ; quoted, 249, 
 266 ; biography of, by F. S. Oliver, 
 cited, 212 ; quoted, 259 n. 
 Holland — 
 
 Carrying trade of, 67-8, 157 
 
 Decline of, 157 
 
 Government of, as atiectiiig economic 
 
 conditions in, 69 
 Naval power of, 154 
 War of 1672-8, 167 
 Wealth of, 68, 69 
 Home trade — 
 
 Capital's employment in — 
 Advantages of — 
 Investors', 2, 106 
 National, xi, xiii, 49-51, 57, 
 65, 80, 85-6, 97, 106, 198, 
 235, 267, 268 
 Bounties to induce, question as to, 
 
 113-14 
 Protective duties to induce, ques- 
 tion as to, 94, 113-14 
 Competition in, as modifying rise in 
 price through import fluties, 
 165 
 Importance of, emphasised l>y A. 
 
 Smith, xi, xiii, 2. 56, 268 
 Limitation of, 70 
 Monopoly of, see Monojioly 
 Protection for, src. Protection 
 lleturns of, as compared with foreign 
 trade returns, 50-51 
 Hume, Smith's attitude towanls, 12 
 
 «. 
 Huskisson, 11, 15S 
 
 Imperial union with Federal Govern- 
 ment — 
 
 Customs uinon for, advantages of, ix, 
 264-5 
 
 Ditliculties in connection with, 214-15 
 
 Foreign trade advantageous to, 266-7 
 
 Free trade within — 
 
 Advantages of, 81, 246-53, 256 
 Customs union advantageous 
 but not necessary for, ix, 
 264 
 Preferences by method of super- 
 taxes a substitute for, not a 
 means to, 258 
 
 Important functions of, other than 
 fiscal, vii., 270 
 
 ilejjresentatiou proportionate to taxa- 
 tion the basis of, 208, 213, 215, 
 219-20, 224 
 
 Revenue of — 
 
 Amount of, A. Smith's estimate 
 
 of, 223 
 Contributions to, assessment of, 
 
 224 
 Expenditure of, control of, 224 
 
 Seal of empire, suggestion as to trans- 
 ference of, 186, 215-16 
 
 Taxation scheme for, 219-22, 224 
 Imports — 
 
 " Balance of trade " theory as to, w 
 Trade — Balance 
 
 Displacement of home industry by, 
 question of, 98-100 
 
 Duties on, see Customs and Protection 
 
 Exports necessary to pay for, 51-2 ; 
 value of exports as aft'ected by 
 prices of imports, 125-6 
 
 Food stuffs, of, necessitated by growth 
 of population, 147-8 
 
 Free, see Free Tratie 
 
 Gladstone's policy regarding (1860- 
 1863), 156 ami n} 
 
 Linen yarn, A. Snath's crucial in- 
 stance of, 142-3 
 
 Prices of, as affecting value of exports, 
 125-6 
 
 Raw materials, of, A. Smith's views 
 as to duties on, 122, 142 
 
 Taxes on, for revenue, see Customs 
 India — 
 
 East India Company, history and 
 abuses of, 180-4 
 
 Mercantilist i>oliovin, condemned by 
 A. Smith, 21 6.' 230 
 
 Present condition of, 182, 187 
 Individualism — 
 
 Erroneous charge of, against A. 
 Smith, 12-i:i 
 
 National interests in relation to — 
 Coincident, 73-4, 75-6 
 
INDEX 
 
 279 
 
 Individualism, conttl. — 
 National interests, contd. — 
 
 Opposed, xii, 41-2, 62, 71-2, 176, 
 
 200, 224-5 
 Reconciled, 76 
 Industrial relations, complexities of, 
 
 40-41 
 Industrial revolution in England, 180, 
 
 229 
 Industries — 
 
 Infant, protection of, 89, 173-4 ; 
 
 supposed to be temporary, 255-6 
 Sweated, 143 n. 
 Industry — 
 Augmentation of, aii vantageous, 78,82 
 Trade precarious as compared with, 
 48, 157 
 Interest {see also Profit) — 
 Capital lent at, 32 
 Rate of, ditference between home and 
 foreign, 69, 75 
 Investments, home and foreign, com- 
 pared, 71, 74-5, 81 (see also 
 Capital) 
 Ireland — 
 
 Emigration from, to U.S.A., 233 
 Trade restraints imposed on, 262 
 Union of, with Great Britain, A. 
 Smith's views as to, 218-19 
 
 Johnson, Dr., cited, 2 ; quoted, 139 
 
 Labour — 
 
 Agricultural, advantages of, natural 
 
 and social, 46-8 
 " Annual produce of the land and 
 labour," modern corresponding 
 term for, 24, 34, 39 
 Broad significance of term, as used 
 
 by A. Smith, 26 
 Capital required by, auxiliary and 
 
 sustaining, 27-8, 37, 40, 104 
 Capital's interests in relation to, 39 
 Combinations of— 
 
 Prohibition of, by law, 38 
 Townsmen's advantages regarding, 
 48, 72 
 Conditions of — 
 
 Misinterpretation of A. Smith's 
 views as to consideration of, 118- 
 119 
 Regulation of, in 19th century, 128 
 Consuming power of those engaged 
 in — 
 Magnitude of, in aggregate, 126-7 
 Reduction in, the same thing as 
 falling otf in aggregate annual 
 produce, 127 
 Cost of, as affected by taxation of 
 necessaries, 122-8, 163 
 
 Labour, contd. — 
 
 Dominant conception in Wealth of 
 
 Nations, 23 
 Emigration of— 
 
 Colonies, British, to, colonial de- 
 sire for, 248 
 Conditions necessitating, 112 
 Prohibition of, 119, 234 
 Employment, see t/uit title 
 Free trade within the empire as 
 
 affecting, 256 
 Markets for, organisation of, 128 
 Mobility of, 172 ; increase of, prob- 
 able under free trade within the 
 em])ire, 256 
 Monopoly of, desired bv mercan- 
 tilists, 119 
 Nature, of, 47 
 Philosophy and specuLation included 
 
 under, 26 
 Productive — 
 
 Employment of {see also Employ- 
 ment) — 
 
 Profit on capital a requisite 
 
 for, 92, 94 
 Test of economic advantage, 
 85, 92 
 Maintenance of, source of — 
 Capital, 35 
 
 Produce, annual, of land and 
 labour, 37 
 Nature of, 24-5 
 Unemployment, see that title 
 Unproductive — 
 
 Distinction of, from absence of 
 
 labour, 35 
 Importance and necessity of, 25-6 
 Maintenance of, source of — 
 Produce, annual, of land and 
 
 labour, 37 
 Revenue, 35 
 Nature of, 25 
 V^alue added by, to national divi- 
 dend to be considered rather than 
 mere employment, 108-10 
 Vested interests of, 171-2, 254-6 
 Wages of, see Wages 
 Waste of, in " making work," 
 108 
 Ixdssez-faire dogma a perversion of A. 
 Smith's system, 60; his approval 
 of the policy, 177; his large excep- 
 tions to it, 150 {see also Free Trade) 
 Land, abundance of, as affecting wages, 
 
 190 
 Land laws — 
 
 Security, consideration of, in alter- 
 ing, 255 
 Smith's views regarding, 144, 
 150 
 
28o 
 
 A PROJECT OF EMPIRE 
 
 Land taxes — 
 
 MediiEval recognition of unearned in- 
 crement, 243 and n^ 
 Smith's views on, 221-2, 243-4 
 Liberty, natural — 
 
 Free trade of more restricted mean- 
 ing than, 153 
 Smith's description of, 120 ; his 
 views similar to those of French 
 economists, 149 
 Lilly, W. S., quoted, 4 n., 63 
 List, Friedrich, cosmopolitanism of, 
 5-6 ; attacks by, on A. Smith, 13, 
 21, 27 ; citt'd, 23, 33, 246 ; quoted, 
 171 ; JVatioTuU Syston of Political 
 Economy by, cited, 6 n. 
 
 M'Cul loch's Introduction to Wealth of 
 
 Nations quoted, 41-2 
 Madox's Exchequer quoted, 243 n?' 
 Magna Charta quoted, 243 n."^ 
 " Man within," A. Smith's appeal to, 4 
 Manufactures — 
 
 Colonial policy regarding, 196 
 Free importation of, A. Smith's 
 views as to probable effect of, on 
 home manufactures, 99 n., 145 
 {see also Free trade) 
 Hamilton's Report on Manufac- 
 tures cited, 84 ; quoted, 249 
 Materials of, exemption of, from 
 
 taxation, 122, 142 
 Underselling in, in near markets, 
 cause of, 199 
 Markets — 
 
 Home, see Home trade 
 
 Labour, for, organisation of, 128 
 
 Money fundamentally important in 
 
 connection with, 29-30 
 Situation of, conditions determin- 
 ing, 45 
 May, Erskine, Constitutional History 
 of Enyland by, quoted, 227 and n. 
 Mercantilists — 
 
 " Balance of trade " theory held by, 
 
 64, 84, 129, 130 
 
 Monopoly the centre of system of, 
 
 83-4, 93, 140, 141, 151 ; desire 
 
 for monopoly of labour, 119 
 
 Smith's attack on, 29, 57, 64, 84, 89, 
 
 90, 93, 118-21, 129, 140, 141, 210, 
 
 216 ; his suspicion against, 131-2 
 
 Merchant sliippiug, non- British capital 
 
 in, 53-4 
 Merchants — 
 Interference of, in proper functions 
 of the State, disadvantages of, 
 177-84, 225 
 Monopoly cliiefly of benefit to manu- 
 fitcturers an<i," 112-13, 140-3 
 
 Militarism, A. Smith's views on, 15-17 
 Mill, J. S., quoted, 103 ; cited, 104, 
 
 173, 255 ; Representative Govern- 
 ment by quoted, 263 n. 
 Money — 
 
 Capital, money attribute of, 31-2 
 Importance, fundamental, of, 29-30 
 Overestimation of, 79 
 Monopoly — 
 
 Agriculturists not actuated by spirit 
 
 of, in A. Smith's view, 144 
 Colonial traile, of, see !//i<ier Colonies, 
 
 British — Trade of — British 
 Evils of, 89, 139, 141 ; reduction of 
 
 produce of the land and labour, 1 20 ; 
 sacrifice of productive labourers 
 and consumers, 120, 130, 131 
 Limited time, granted for, 176 
 Mercantilist system based on and 
 
 permeated with, 83-4, 93, 140, 141, 
 
 151 
 Merchants and manufacturers chiefly 
 
 benefited by, 112-13, 140-3 
 Protection necessarily conducive to, 
 
 93, 101 
 Smith's attack on, 72, 130, 131, 
 
 140, 141-4, 263, 266 
 State intervention in regard to, 134, 
 
 176 
 Taxation of gains of monopolists, 
 
 A. Smith's views on, 141, 205 
 Taxation to secure, A. Smith's views 
 
 on, 88, 121 
 Trusts no modern growth, 151 
 Wages not increased under, 143 
 Muu's England's Treasure by Foreign 
 
 Trade cited, 57, 200 
 
 " National dividend," A. Smith's term 
 
 for, 24, 34, 39 
 National interests — 
 Importance of, 86 
 Individual interests in relation to — 
 Coincident, 73-4, 75-6 
 Opposed, xii, 41-2, 62, 71-2, 176, 
 
 200, 224-0 
 Reconciled, 76 
 Nationalism, A.Smith's defence of,8-] 4; 
 bis adherence to, see tinder Smith 
 Navigation laws — 
 
 American colonies' shipbuilding 
 
 encouraged by, 203 
 Negative argument for free trade. 
 Navigation Act of 1660 considered 
 :is, 156-9 
 Rei>eal of Act of 1660, 158 
 Revival of, suggested, against (Jer- 
 
 niany, 170 
 Smith's attitude towards, 14-15, 54, 
 151-6, 210 
 
INDEX 
 
 2»I 
 
 Newton, Isaac, A. Smith's attitude 
 towards, xiii, 2, 106 and n. 
 
 Norway and Sweden, severance of, 
 225 
 
 Old age, A. Smith's views on, 4 
 Oliver, F. S., biography of Alexander 
 
 Hamilton by, cited, 212 ; quoted, 
 
 259 n. 
 Oriental nations, A. Smith's forecast 
 
 regarding, 187 
 
 Paish, G., cited, 105 w.^ 
 
 Pareto, Cours d' economic politique by, 
 
 cited, 40 n? 
 Parsimony, Smith's views regarding, 
 
 36-7 
 Patriotism, Smith's views on, 9-12 
 Peel, Sir R., economic policy of, 
 
 134-5 
 Pitt, William, free trade with U.S.A. 
 proposed by (1783), 260 «.; Com- 
 mercial Treaty with France (1784) 
 made by, 168 ; Quebec Bill of 
 (1791), 226-7 
 Poetry, A. Smith's views on, 2 
 Political economy — 
 
 Cours d'economie politique (Pareto) 
 
 cited, 40 i}?. 
 National System of Political 
 
 Economy (List) cited, 6 n. 
 Object of, first, 39 
 Principles of Political Economy 
 (Nicholson) cited, xv, 165 n., 
 \Tt n}, 184 n. 
 Principles of Political Economy 
 
 (Sidgwick) quoted, 136-7 
 Smith the founder of, 5 ; importance 
 of his ideas on making of economic 
 history, 62 
 Porter's Progress of the Xation quoted, 
 
 148 and n.- 
 Prices — 
 
 Natural in relation to market 
 
 prices, 2 
 Raising of, by protection, 92-5 
 Prior's Life of Burke quoted, 18 n. 
 Produce, annual, of the land and 
 labour of the people — 
 Definition of term "produce," 36 
 Distribution of, conditions determin- 
 ing, 39 
 Modern corresponding term for, 24, 
 
 34, 39 
 Monopoly conducive to reduction of, 
 
 120 
 Protection as aflFecting, 107-11 
 Reduction in consuming power of 
 the people the same thing as 
 falling off in, 127 
 
 Produce, annual, cunld. — 
 
 Surplus of, advantageously exported, 
 
 66 
 Taxes all paid from, 55 
 Two divisions of, 34-5 
 Upkeep of, 39 
 "Producer," misinterpretation of A. 
 
 Smith's use of term, 118-20 
 Producers and consumers, interests 
 of— 
 Identity of, in the mass, 126, 132, 
 
 134-5 
 Wealth of Nations on, misconceptions 
 as to, 117-20 
 Production (see also Labour)— 
 Consumption the sole end of, 118 
 Cost of, raised by monopoly, 119 
 Money power the basis of, 30 
 Trade a part of, 28, 30, 45 
 Profit [see also Interest) — 
 Advantage — 
 
 Coincident with, 73-4, 75-6 
 Distinguished from, 49, 53 w., 
 62-3, 71-2, 96, 176, 200, 224- 
 225, 235 
 Agriculture, from, 74-5 
 Capital, investment of, determined 
 
 by, 113, 199 
 " Equal or nearly equal," A. Smith's 
 proviso as to, 74, 75, 92, 97, 106- 
 107, 113 
 High rate of — 
 
 Cost of production and export 
 
 trade in relation to, 199 
 Understocking indicated by, 76, 
 198 
 Increase of stock in relation to 
 
 amount of, 40 
 Monopoly of home market managed 
 merely for, instance of, 141-3 
 Protection — 
 
 Australia, in, 91 -2 
 
 Bounty system compared with, 94 
 
 Capital retained in home trade bj', 
 
 94-5 
 
 Colonies, in, 91-2, 173 «., 174, 196 
 
 Employment argument of, against 
 
 free trade argument of cheapness, 
 
 117 
 
 Exports increased under, argument 
 
 as to, 102-3 
 Free trade, difference from, one not 
 
 of principles but of methods, 86 
 Gladstone's import duties (1860-63), 
 
 156 ri.i 
 Hamilton's use of term, 84 
 Increasing tendency to, among 
 
 foreign states, xiii 
 Infant industries, of, 89, 173-4 ; 
 supposed to be temporary, 265-6 ; 
 
282 
 
 A PROJECT OF EMPIRE 
 
 l*rotection, contd. — 
 
 Mediseval towns' individualiKiu as 
 
 to, 247 
 Monopoly, the result of, 93 
 Natural existence of, 106 
 Objects of, primary and ultimate, 
 
 91 
 Particular industries' benefit under, 
 
 as against general disadvantage, 
 
 101 f/ scq. 
 Political power exercised by pro- 
 tected interests, 258 
 Popular view regarding, 136 
 Practical difficulties of, 137 {see also 
 
 Free Trade — Negative argument) 
 Preferential, see under Colonies, 
 
 British — Trade of — British 
 Prevalence of, in A. Smith's time, 
 
 100-101 
 Prices necessarily raised by, 92-5 
 Produce, annual, of land and labour 
 
 as affected by, 107-11 
 Ricardo's views on, cited, 263 /(. 
 Royal Commission on, suggestion as 
 
 to, xiv, 87, 114, 116 
 Sidgwick's views on, 136-7 
 Smith alleged to be founder of, xi ; 
 
 his non-use of the term, 83 ; his 
 
 equivalent phrase, 87 ; his view 
 
 of, xiii, 60, 88-9, 100, 133 
 Socialism the logical outcome of, 95-6 
 Temporary, question as to, 173, 
 
 255-6 
 United States, in, see under United 
 
 States 
 Public school education, A. Smith's 
 
 views on, 7-8 
 
 Rent, 34, 70 ; monopoly as affecting, 200 
 Retaliation- 
 Countervailing duties the principle 
 of, 166 
 
 Dangers of, 152, 167 
 
 Difficulties of, 168-9 
 
 Effective methods of, 170 
 
 Imperial customs union as weapon 
 for, 265 
 
 List quoted on, 171 
 
 Object of, 79-80, 99, 168-70. 267 
 
 Revenge, in, dangers of, 167 
 
 Smith's attitude towards, 79-80, 99, 
 167-70 
 
 Vested interests arising out of, 171 
 Revenue — 
 
 Ad valorem duty on imports con- 
 sidered as source of, 170 
 
 Four principal branches of, in A. 
 Smith's time, 221 
 
 (Jross and net, relations between, 
 91 
 
 Revenue, contd. — 
 
 Imperial, estimated, under A. Smith's 
 
 scheme, 223 
 Taxes for, distinguished from taxes 
 
 for monojmly, 87-9, 120-1 
 " Revenue of the body of the people," 
 
 modern corresponding term for, 24, 
 
 34, 39 
 Ricardians 41 
 
 Ricardo cited, 90 ; quoted, 263 and n. 
 Rubber industry, illustration from, 
 
 77-8 
 
 Saving, A. Smith's views regarding, 
 
 36-7 
 Scotland, argument from possible wine 
 
 manufacture in, 110 
 Security, sai-ritice of, to security, 255 
 Sidgwick, Henry, estimate of, 136 ; 
 
 cited, 36 ; Princijjles of Political 
 
 Econony by, quoted, 136-7 
 Smith, Adam — 
 
 Characteristics of — 
 
 Breadth of view, x, 1, 5, 69, 
 270 
 
 Foresight, 186-7 
 
 Humanism, 5, 19, 27 
 
 Moderation, 18 
 
 Realism, 26 
 Friends of, 3 
 Historical method adopted by, 18, 
 
 27, 29, 188 
 Imperialism of, 60, 80, 141, 209 ; 
 
 his scheme of imperial union, xi, 
 
 213 25, 269 
 Individualism erroneously charged 
 
 against, 12-13 
 Library of. 3 
 
 Literary activities of, 1-2 
 Lost ideas of, xii-xiii 
 Moral philosophy of, 3-4 and n. 
 Nationalism of, x, xi, 5-14, 21, 22, 
 
 60, 137, 141, 232 
 " School " of, 6 
 
 Test to be applied to writings of, 46 
 Tlieology of, 12 u. 
 Theory of the Moral Sentiments, see 
 
 that title 
 Wecdth of Nations, see that title 
 Socialism — 
 
 British public opinion iu regard to , 
 
 177 
 Protection logically resulting in, 
 
 95-6 
 State intervention in commerce and 
 
 industry, cases where suitable, 
 
 175-6 ; in general unsuitable, 
 
 134. 183 
 Statesmanship compared with military 
 
 capacity, 1 7 
 
INDEX 
 
 283 
 
 Statesiiu^i and politicians, A. Smith's 
 
 dislnist of, 137-8 
 Strikes and /Social Problems cited, 
 
 36 11. 
 Stublis's Constitutional History cited, 
 
 212 /(. 
 
 Tarifl' wars, lessons from, 1()9 
 Taxation — 
 
 Bounties a form of, 94 
 
 British system of, proposed extension 
 
 of, to whole empire, 219-20, 261 
 Colonies, of, for maritime defence, 
 
 necessity for, 238 
 Commodities suitable for exemption 
 
 from, 122 
 Employment reduced by all taxation 
 
 on commodities, 125-6 
 Incidence of, 161-6 
 Land, of, see Land taxes 
 Monopolists' gains, of, A. Smith's 
 
 views on, 141, 205 
 Necessaries, of — 
 
 Articles now classed as necessaries 
 
 formerly luxuries, 127 and n. 
 Cost of labour and of consumption, 
 effect on, 122-3, 163 
 Revenue, for, as distinguished from 
 taxation to secure monopoly, 87- 
 89, 120-21 
 Substitutes of taxed commodities, of, 
 difficulties as to, 162-3 
 TheoTjt of the Moral Sentiments— 
 Additions to, in final edition, quoted, 
 
 4, 16-17 
 Basis of, 3-4 
 
 Nationalism vindicated in, x 
 Trade — 
 
 Balance of, exploded theory as to, 
 
 64 andn., 84, 129, 130 
 Capital required for, 30 {see also 
 
 Capital) 
 Carrying, see that title 
 Cities' growth due to, 45, 250 
 Colonial, see under Colonies, British 
 Commercial Federation and Colonial 
 Trade Policy (Davidson), cited, 
 228 and nn., 229 and n? 
 Exports, see tliat title 
 Foreign, see Foreign traile 
 Free, see Free trade 
 Home, see Home trade 
 Imports, see that title 
 Intercolonial, 228 (see also under 
 
 Colonies, British — Trade) 
 Monopoly, see that title 
 Organisation of, money necessary to, 
 
 29-30 
 Philanthropic affections regarding, 
 A. Smith's views on, 138 
 
 Trade, coutd. — 
 
 Precariousuess of, as distinct from 
 
 industry, 48, 157 
 Production, a part of, 28, 30, 45 
 Protection, see that title 
 Sudden dislocations of, deprecated, 
 
 20 
 Town and country, between — 
 
 Bargaining power in, balance of, 
 48 
 
 Importance of, 45, 56 
 Town and country compared as to, 
 
 140 
 Wholesale, three divisions of, 49 
 
 Unemployment — 
 
 Modern preoccupation with, 128 
 Old poor law inetlective regarding, 
 
 151 
 Smith's precautions against, 20, 99, 
 
 171-2, 256 
 United States of America — 
 
 Agriculture in, 147 and n., 250 
 Ashley's Economic Surveys as re- 
 lating to, cited, 158 n}, 201- 
 
 202 
 British colonial trade with, restric- 
 tions on, 228, 229 
 Canadian trade with, advantageous 
 
 to Canada, 267 
 Colonies, British, as, see Colonies, 
 
 British — North America 
 Declaration of Independence, date 
 
 of, 185 
 Economic conditions in, 72 
 Economic History of the United 
 
 States (Bogart), quoted, 259 n. 
 Free trade in, internal, establishment 
 
 of, viii, 246, 259 n. 
 Great Britain — 
 
 Affectionate regard for, 212-13 
 
 Immigration from Ireland and 
 (1853-98), 233 
 
 Maritime rivalry with, 158 
 Natural resources of, 47 
 Principles adopted by, 212 
 Protection in — 
 
 Defences urged for, 174 ; Hamil- 
 ton's advocacy cited, 56 n.~, 
 246 
 
 Infant industries, of, 173 
 
 Origin of, 260 n. 
 
 Tariff Act (1909), provisions of, 
 265 n. 
 
 Tariff " reformers' " ostensible aim 
 in, 91,263 «. 
 Smith's prediction regardingdevelop- 
 
 nient of, 186 
 State ownership of trusts in, feeling 
 
 as to, 95-6 
 
284 
 
 A PROJECT OF EMPIRE 
 
 Vested interests — 
 
 Colonial, question as to disturbance 
 
 of, 254-6, 258 
 Compensation to, question as to, 
 
 254-6 
 Interference with, to be gradual, 
 171-2 
 Voltaire, A. Smith's attitude towards, 
 12 n. 
 
 Wages — 
 
 Adjustment of particular, to general 
 
 level, 95 
 Agriculture, in, rise in, 48 
 Capital distributed in, proportion of, 
 
 126 
 Contract determining, 38, 39 
 Corn law repeal as affecting, 124-5 
 Land, abundance of, as affecting, 
 
 190 
 Monopoly as aflecting, 143, 200-201 
 Profits of stock, relation to, 39-40 
 Protective system as affecting, 151 
 
 Wages, contd. — 
 
 Taxation of necessaries as affecting, 
 
 122-4 
 Wealth of Xations — 
 Burke's estimate of, 18 n. 
 Cannan's edition of, cited, 101 ti.-, 
 
 141 n? 
 Composition of — 
 
 Circumstances of, x, 185-86 
 
 Period occupied by, 185 
 
 Place of, 3 
 Dates of publication of 1st and 3rd 
 
 editions of, 185, 220 n.^ 
 Forgotten chapter of, 44 n. 
 Labour the dominant conception in, 
 
 23 
 M'CuUoch's Introduction to, quoted, 
 
 41-2 
 Reynolds's presentation copy of, 3 n.^ 
 West" Indies, trade of, 228 
 
 Young, Arthur, Tour in Ireland by, 
 cited, 219 
 
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