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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.
THE ALPHABET OF FREE EXCHANGE
BEFORE 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
But if E had chosen to be miller, either D, a weakly man, must have taken E's place as smith, in
which case the community would have lost more by having a bad smith than they gained in a better miller; or else F, G, or some other person hardly more competent, must have taken the part of smith, D acting as his substitute in the post thus vacated, an arrangement which might have proved equally wasteful as regards the productivity of the community. Evidently it is desirable that each person should undertake, not necessarily that work which he can do better than any other man, or that work which he can do better than any other work, but that work which, if he undertake it, permits the best disposal of the productive powers of the rest of the community
§ 2. But what force will impel each man to undertake the work which it is best for the community that he should do? We are not at liberty to assume that any man will sacrifice any private gain he can secure to serve the general good. We can easily understand why A is induced to choose farming, though he would have also made the best smith or carpenter, for we assumed his superiority as farmer to be greater than his superiority as smith or carpenter, so that by taking to farming he will have a larger absolute surplus of goods for exchange against other goods than if he had chosen to be smith or carpenter.
But turn to the case of E, the smith. It may well have been the fact that E would not merely have
made a better miller than D, but that he might even have made a somewhat better miller than he made smith in the sense that after satisfying his own needs he would have had a larger surplus-product available for exchange with the products of the others. How is he induced to accept a post which seems less profitable for him than the post of miller? The fact, however, is that, though as miller he might have made a somewhat larger surplus for exchange, his choice of this work would have caused an arrangement of other kinds of work so disadvantageous as to reduce the quantity of other goods which he could get in exchange for his surplus of miller's goods to a smaller amount than he can get for a smaller absolute surplus of smith's goods. So, following his personal gain, he prefers his work of smith. Similarly, all the other members of our group are impelled to choose that work which at once brings them the greatest gain and conduces to the greatest wealth of the group, choosing not always the work they can do best, but the work which it is socially best for them to do.
§ 3. This is a simple statement of the true economy of a laissez-faire society. The accurate adjustment of this economy is seen to rest upon the single condition of Free Exchange. Interfere with that at any point or in any degree, and the real income of the community as a whole and of each member is reduced. Suppose, for example, that our miller D,