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skill and artistic taste play an important part, specialisation of national industry and the trade intercourse it involves should proceed further at any rapid rate. When a nation has once established firm reliable business connections with other nations along these lines of obviously profitable intercourse, a slow growth of external trade is always to be expected. Germany and the United States have in recent years been engaged in establishing lines of enduring intercourse with other nations similar to those which we established in earlier decades of the nineteenth century. Though, in doing so, they may cut across certain of our lines and oblige us to make alterations and readjustments in the character of our external trade, there is no reason to suppose that their external trade will not conform to the same economic law as ours, slackening its rate of growth until it has become as slow as ours. When the main lines of external trade are once laid down, the chief factors making for its increase will be a growth of population and a rise of the cruder standard of comfort of the poorer classes. When population exhibits a declining rate of growth, and when the mass of the population of a country has attained a tolerably large command of material necessaries and conveniences, it is unreasonable to look for a further rapid increase either of the volume or the values of external trade; industrial progress for the future is contained more and more in the elaboration of internal

trade and industry and in the diversion of an ever larger share of energy to the creation and distribution of intangible commodities.

§ 6. The rise and fall of external trade cannot therefore in itself be rightly taken as an index of the industrial prosperity of a nation. Still less can short periods of fluctuation over a few years furnish any evidence of the general condition of trade. A reductio ad absurdum of this short-range test has been lately furnished by the statistics of foreign trade of the United States, where an extraordinarily rapid growth of manufacturing export trade suffered a signal collapse during a period of phenomenal prosperity. The explanation was, of course, quite simple. Up to 1900 the development of the new American manufactures, chiefly in the metal trades, was so rapid that, after supplying fully the home market, a large and increasing surplus remained which sought foreign markets. After 1900 the internal enterprise of American industry became for a time so great as to absorb for domestic use the greater part of the former surplus, so that the export trade suffered a great depression.

There are several fairly satisfactory tests of fluctuations in the general industrial condition of a nation. In Great Britain the gross income-tax returns, conjoined with evidence of wage rates in representative trades, furnish such a test, to be fortified by evidence of the consumption of certain kinds of food, and by

statistics of banking and insurance. The returns of the railroads, the output and employment of labour in mining and other fundamental industries, are valid evidence of the material prosperity of a country.

Values and volumes of imports and exports taken by themselves are no reliable index of the industrial prosperity of a nation, for there is no fixed law of interdependence between external trade and internal industries even with regard to the production of material wealth: a temporary contraction of internal trade and industry is quite consistent with an expansion of external trade, and vice versa. Of the two trades, import and export, the former, however, is a somewhat truer index of the shorter fluctuations in the material prosperity of a nation than the latter, inasmuch as increasing wealth brought into a country from outside, as food, raw material, or manufactured goods, implies an expansion both of internal industry and of consumption, whereas a temporary increase of exports may imply not an expansion of home industries so large as to overflow more freely into foreign markets, but a positive contraction of home markets. The necessity, however, of a balance between import and export trade in the long run does not justify us in asserting this superiority of import trade as an index of national prosperity excepting for short periodic changes.





EFORE entering on a study of the principles of International Exchange, a clear understanding of the economy of exchange between individual members of a single group or commercial society is essential.

It is not difficult to see how liberty of exchange benefits a whole society and each of its members where complete mobility of capital and labour and equal access to natural resources of the land exist. Under such circumstances each owner of industrial energy will be impelled "as by an invisible hand" in pursuit of his own self-interest so to dispose his capital and labour as to contribute to the maximum wealth of society. In other words, free exchange will be the safest guarantee of the most economical division of labour. Let us build up this theory by a concrete illustration, so as to see just where the prime simplicity begins to disappear and difficulties to appear.

A little group of pioneers settles down in a newly opened land along the bank of a creek, cut off from all other society, and compelled to form a self-sufficing community. They bring with them various sorts and degrees of strength, skill, and experience, some having several crafts, others only one, but all willing to turn their hands to any industry which they can most profitably undertake.

A, B, and C will settle down to farming, taking the clearest, most fertile, and convenient land, and will raise food, partly for their own consumption, partly for exchange. D will be a miller and baker, E a smith, F a tailor, G a carpenter, and so on, each undertaking some work for which he has a natural aptitude or some advantage of experience. In order that the division of labour most conducive to the general wealth may be secured, it does not follow that each man will undertake the sort of work in which he is most proficient. A may be the best man all round, capable of making a better miller than D, a better smith than E, and a better carpenter than G, etc.; but, possessing this universal superiority, he selects farming because his relative superiority for that work is greater than for other crafts. D, then, who acts as miller, is not absolutely the best miller, for A is better; indeed, it may also be the case that E, the smith, would have made a better miller than D. But if E had chosen to be miller, either D, a weakly man, must have taken E's place as smith, in

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