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processes of production and exchange for each village and each villager.
§ 6. Next suppose that the village on the other side of the creek set up a separate government of its own, or were annexed by a neighbouring state which claimed sovereignty over the land on that side of the creek, would this fact of political separation affect the utility of preserving the policy of free exchange between the persons living on both sides of the creek? Obviously not. Freedom of exchange would still tend to make each person on either side dispose of his labour-power and his capital in a manner which conduced to the maximum productivity of the two villages, regarded as an economic group; and each villager would continue to get a share of this productivity which would be larger than he could get by any other disposition of economic resources. The political separation of the two villages could not in itself affect the economic gain of maintaining the old relations. Except where political interference with these trade relations is expressly contrived, there is no plausibility in the mistaken notion that villages, towns, or nations engage in trade with one another. In our example it is not the villages which exchange with one another, but individual villagers; and whatever opposition of immediate interests arises in trade intercourse, is more frequent, keener, and more persistent between persons engaged in the same trade in the same village than in the different villages.
What applies to these two villages, politically divided, applies to the entire states of which they form part. No jot or tittle of the economy of Free Exchange is abated by increasing the number of persons on both sides of the stream engaging in commercial intercourse, or by expanding the trade-area. These primary verities and utilities of Free Exchange are nowise affected by the fact that the persons engaging in exchange may be gathered into two or more separate groups for purposes of political government. It is true that the possibility of economic selfsufficiency is greater as the group is larger and admits more division of labour; but this does not cancel the damage of erecting barriers. For every extension of the area of free markets secures a more effective division of labour, a larger general production of wealth, and a larger absolute share for each free participant. It is of prime importance to keep in mind the fact that political units are not commercial units. Nations do not trade with one another. The notion that they do is falsely suggested by the fact that governments, acting in the real or supposed interest of certain of their citizens grouped in "trades" or "interests," and exercising political influence in order to benefit their private businesses, establish "tariffs" and other politico-economic devices. The practical influence which political boundaries exercise, by limiting the mobility of capital and labour from one state to another, will receive due consideration
later on. At present it must suffice to recognise that the primary advantages of free exchange to a number of farmers, manufacturers, merchants, and others buying and selling in common markets, are nowise affected by the fact that some of them are citizens of Great Britain, others of France or Germany, and others again of the United States. Free Exchange, whatever the area, and regardless of political boundaries, is the first condition and instrument of that application of industrial energy by all participants, which shall secure the greatest aggregate of wealth and the absolutely largest amount for each member of this industrial commonwealth.
This conclusion is very far from implying that any actual practice of Free Exchange affords a guarantee of a fair and equal distribution of the enlarged product which division of labour secures, either among individuals, trades, or among industrial individuals grouped politically as nations. It is, indeed, these apparent imperfections in distribution of wealth by so-called Free Exchange that are often made the pretexts of political regulations in the form of Tariffs, Bounties, etc.
EXCHANGE BETWEEN "NON-COMPETING
N order to understand the economic impediments in the way of Free Exchange with a view to considering how far the claims of Protectionists and Tariff Reformers to remove them are valid, it is first necessary to study closely the play of the forces which determine the conditions of exchange of goods in our small primitive community.
Let us then return to this split society with several farmers on each side of the creek, and with (say) one tailor, one carpenter, one shoemaker, and one miller in each village.
In such an industrial society in what ratio would commodities exchange with one another, and in what proportion would the advantages of such exchange be divided among the participants? If F, the tailor, puts twice as much time and trouble (ie. cost) into making a coat as H, the shoemaker, puts into making a pair of boots, it is evident that these two commodities exchange in the ratio of two
to one. For if F tried to demand three pairs of boots for a coat instead of two, he could not get them. The other tailor across the creek would under-bid him; or H would rather do without a new coat than make an exorbitant exchange; or finally, a handy man himself, he would make a coat for himself. It is easy to see that given free competition, mobility and adaptability of labour-power, a coat and a pair of boots must exchange according to the trouble or cost incurred in making them. And if a coat and boots, then other commodities—a sack of flour, a hatchet, a table-must exchange in proportion to the trouble they respectively cost to make. In the cruder stage of such barter the rate of exchange would be a rough average of this cost, each separate act of exchange being liable to diverge from this "rate" to meet some special case of cost. So, though the rate of exchange between coat and boots might be one coat to two pairs of boots, a shoemaker who had some stock in hand might give three pairs for a coat, if the tailor were very busy and had to work extra time to make the coat. If, however, this was not an accidental situation, but due to an industrial improvement which enabled the shoemaker to produce shoes more easily than before, it is evident that this over-supply of shoes in relation to coats would establish a new ratio in the exchange rate of coats and shoes to accord with a new cost rate.