A Policy of Free Exchange: An Argument Against Socialism and Socialistic Legislation

by Henry Dunning Mac Leod

I.

On the Science of Economics and its Relation to Free Exchange and Socialism

It was long an assured opinion in this country that Adam Smith was the founder and creator of political economy and free trade. A once prominent politician is reported to have said that political economy and free trade sprang perfect and complete from the brain of Adam Smith, as Minerva did from the head of Jupiter. Such ideas, however, show a complete ignorance of the history of Economics, and are now quite abandoned by all persons who have studied the subject.

In fact, it is contrary to nature that it should be so. Great sciences are not created by a book. They invariably arise from small beginnings, just as the mighty Danube flows from a spring in the garden of a German burgher. Men begin to observe certain phenomena connected with some single general fundamental concept. Then others extend it to a larger number of phenomena based on the same concept: and so at last, by the contributions of an increasing number of observers, it grows into a great science, just as the Danube from a tiny spring is swollen into a mighty river by multitudes of tributary streams.

Every one with a scientific instinct can at once perceive that Adam Smith’s work is pervaded by a combative air, that every part of it is evidently written
at something preceding, and that it was intended to overthrow a prior system.

As a matter of fact, Economics was founded as a science by an illustrious sect of philosophers in France in the middle of the last century, who were the first to perceive and declare that there is a positive and definite science of Economics, based upon demonstrative reasoning, in the same way as the physical sciences.

The first department of Economics to be reduced to scientific principles was that of money. Charlemagne caused the pound weight of silver to be adopted as the standard of money in all Western Europe; and he divided it into 240 pennies. The mediaeval sovereigns clipped, curtailed and debased their coinages, but declared that the clipped and debased coin should pass at the same value as good coin. Philip le Bel was particularly conspicuous for issuing debased coin, for which he was consigned to the Inferno by Dante. This degradation of the coin produced such intolerable evils and misery to the people that Charles V of France referred the matter to one of his councillors, Nicolas Oresme, who addressed to him a treatise on money, which may be said to stand at the head of modern Economics. In consequence of similar evils in Poland, Sigismund I requested Copernicus to draw up a treatise on the subject. This has recently been discovered and printed in the new edition of his works. These two treatises laid down the true principles of money, which are now accepted by all sound Economists.

For many centuries all governments enacted laws regarding trade without suspecting that there are any fixed principles on the subject. Sometimes they favoured free trade, sometimes protection; sometimes they cockered up one species of industry, sometimes another, according to the whim of the moment. They never seem to have had the faintest idea that the true principle was to leave every industry alone, and allow each one to develop itself according to its natural tendencies.

They found France divided into a number of separate and semi-independent provinces, each of them surrounded with customhouses, which were an intolerable barrier to commercial intercourse; every species of industry was loaded with minute and oppressive regulations; a very large portion of the human race was groaning under the bonds of slavery; in every country persons were relentlessly persecuted for their religious opinions. The Economists held that these commercial, personal and religious oppressions were contrary to the fundamental rights of mankind.

They proclaimed as the indefeasible natural rights of mankind the freedom of person, the freedom of opinion, and the freedom of exchange or of commerce.

Now it is evident that this wide and extensive scheme comprehends not only a single science, but a whole multitude of sciences; and we shall henceforth confine ourselves strictly to that part of it which relates to commerce or exchanges.

Quesnay’s first publication,
Le Droit Naturel, contains a general inquiry into these natural rights; and he afterwards in another work, called
Maximes Générales du Gouvernment Économique d’un Royaume Agricole, endeavoured to lay down, in a series of thirty maxims or general principles, the whole basis of the economy of society. The twenty-third of these declares that a nation suffers no loss by trading with foreigners; the twenty-fourth declares the fallacy of the balance of trade; the twenty-fifth says: ‘Let entire freedom of commerce be maintained; for the regulation of commerce, both internal and external, the most sure, the most exact, the most profitable to the nation and to the State, consists in entire freedom of competition.’ These maxims entirely overthrew the prevailing system of political economy. This was the work of Quesnay and his followers; and, notwithstanding certain errors and shortcomings mentioned below, they are unquestionably entitled to be acknowledged as the founders of political economy and free trade.

We may now give a brief abstract of the doctrine of the Economists, by which they vindicated the principle of liberty and the right of property.

Natural justice is the conformity of human laws and actions to natural order; and this collection of physical and moral laws existed before any positive institutions among men. And while their observance produces the highest degree of prosperity and well-being among men, the non-observance or transgression of them is the cause of the extensive physical evils which afflict mankind.

If such a natural order exists, our intelligence is capable of understanding it; for if not, it would be useless, and the sagacity of the Creator would be at fault. As, therefore, these laws are instituted by the Supreme Being, all men and all states ought to be governed by them. They are immutable and irrefragable, and the best possible laws; they are necessarily the basis of the most perfect government, and the fundamental rule of all positive laws, which are only for the purpose of upholding that natural order which is evidently the most advantageous for the human race.

The evident object of the Creator being the preservation, the increase, the well-being, and the improvement of the race, man necessarily received from his origin not only intelligence, but instincts conformable to that end. Every one feels himself endowed with the triple instincts of well-being, sociability, and justice. He understands that the isolation of the brute is not suitable to his double nature, and that his physical and moral wants urge him to live in the society of his equals in a state of peace, goodwill and concord. He also recognizes that other men, having the same wants as himself, cannot have less rights than himself, and therefore he is bound to respect their right, so that other men may observe a similar obligation towards him.

How could man understand the necessity of labour or obey the irresistible instinct of self-preservation without perceiving at the same time that the instrument of labour, the physical and intellectual qualities with which he is endowed by nature, belong exclusively to himself, that he is master and the absolute proprietor of his own person, that he is born and should remain free?

But the idea of liberty cannot spring up in the mind without associating with it that of property, in the absence of which the first would only represent an illusory right without an object. The freedom the individual has of acquiring useful things by labour includes necessarily the right of preserving them, of enjoying them, and of disposing of them without reserve, and also of bequeathing them to his family, who prolong his existence indefinitely. Thus liberty conceived in this manner involves and is dependent on the idea of property, which may be conceived in two aspects, as it regards moveable goods, and as it regards the earth, which is the source from which labour ought to draw them.

We must now examine what their doctrines were regarding exchanges or commerce.

While they expressly declared that exchanges, or commerce, were one of the departments of economical philosophy, they most unfortunately devised another and alternative name for it, which being misinterpreted by a subsequent very distinguished French writer, has been the cause of all the mischief and confusion of the science in recent times.

They termed the department of economical philosophy relating to exchanges, or commerce, the ‘production, distribution and consumption of wealth.’ It might not be very apparent to the general reader how in the mind of the Economists these two concepts are identical, and meant exactly the same thing; and we must now explain the interpretation of this latter expression given to it by its authors.

They defined the word wealth to mean the material products of the earth which are brought into commerce and
exchanged, and those only. The products of the earth, which were consumed by their owners without an exchange, they termed
biens, but not
richesse. They steadfastly refused to admit that labour and credit are wealth; because they alleged that this was to allow that wealth can be created out of nothing. They constantly maintained that man can create nothing, and that
ex nihilo nihil fit.

By production they meant obtaining the rude produce from the earth and bringing it into commerce.

But this rude produce is scarcely ever fit to be used by men. It has to be fashioned and manufactured in a multitude of ways, to be transported from place to place, and perhaps sold and resold more than once before it is ultimately purchased for use and enjoyment.

The final purchaser, who bought the product for his own use and enjoyment, and so took it out of commerce, they termed the
acheteur-consommateur; because he consummated, or completed, the operation.

Consommation, in the language of the Economists and of all French writers before them, meant simply purchase, or demand; it involved no idea of destruction.

The
consommateur, or consumer, was the person for whose benefit all the preceding operations took place. Production was only for the sake of consumption, or demand; and consumption, or demand, was the measure of reproduction; because products which remain without consumption, or demand, degenerate into superfluities without value.

The complete passage of a product from the original producer to the ultimate consumer, or purchaser, through all its intermediate stages, the Economists termed commerce, or an exchange; and as any man who wished to consume, or purchase any product, must have some product of his own to give in exchange for it, he was also a producer in his turn. Hence, in an exchange, things are produced, and consumed or purchased, on each side. An exchange has only two essential terms—a producer, or seller, and a consumer, or purchaser. These are the only two persons necessary to commerce; and they often exchange directly between themselves, without any intermediate agents.

Hence the ‘production, distribution and consumption of wealth,’ as defined by the Economists, meant simply the commerce, or the exchange, of the material products of the earth, and of these only.

But distribution was often used as synonymous with consumption. Hence ‘production, distribution and consumption,’ ‘production and distribution,’ and ‘production and consumption’ all meant exactly the same thing—the commerce or exchange of the material products of the earth.

The Economists, by restricting the term wealth to the material products of the earth, made materiality and labour the accessories or accidents of wealth; but they did not make them the
principle, or essence, of wealth. The
essence, or
principle, of wealth they held to consist in
exchangeability; because they expressly excluded the material products of the earth which were not brought into commerce and exchanged from the term wealth.

Now, considering that the Economists admitted and declared that there is a positive and definite science of exchanges or commerce, how is it possible to restrict it to the commerce or exchanges of material products only? It must evidently and necessarily comprehend
all exchanges, or all commerce in its widest extent and in all its various forms.

There is a gigantic commerce in labour; there is a colossal commerce in rights and rights of action, credits, or debts. How is it possible to exclude the commerce in labour and the commerce in rights and rights of action from the general science of exchanges, or commerce?

The basis of the science of Economics is the meaning or definition of the term WEALTH. The Economists admitted that exchangeability is the real essence of wealth; but they clogged it with the limitation that it only applied to material products, and denied it to labour and credit, which equally possess the quality of exchangeability. But this is contrary to the fundamental principles of natural philosophy. Bacon long ago pointed out that when the quality or the concept which is at the basis of a science is once determined, all quantities whatsoever which possess that quality, however diverse in form they may be, must be included among the elements or constituents of the science. This is what Plato calls the one in the many, i.e. the same quality appearing in many different forms. It would be just as rational to restrict the term force to the force of men and animals, and to exclude gravitation from the term force.

Aristotle defined wealth to be
all things whose value can be measured in money. Here we have a fundamental concept, of the widest generality, and fitted to form the basis of a great science. Out of this single sentence of Aristotle the whole Science of Economics is to be evolved, just as the great oak is developed out of a tiny acorn.

In an ancient anonymous dialogue Socrates is made to show that money is only wealth where and when it can be exchanged, or purchase other things; where it cannot be exchanged, or purchase other things, it is not wealth. He shows that anything which can be exchanged for, or purchase other things like money, is wealth, for just the same reason. He says that persons gain their living by giving instruction in the sciences. Therefore, he says, the sciences are wealth—
and that those who possess them are wealthier—
. This is the first recognition, of which I am aware, that labour is wealth.

Demosthenes showed that personal credit is wealth; because a merchant can purchase goods with his credit equally as with money.

The Roman jurists showed that rights and rights of action, such as credits or debts, are wealth, because they can be bought and sold.

Thus, after 800 years from the time of Aristotle, the Roman jurists completed the science, because they completed the number of its constituent elements. There is nothing which can be bought and sold or exchanged, or whose value can be measured in money, which is not of one of these three forms, or orders of quantities: (1) material products; (2) personal qualities, i.e. labour which can be exchanged for wages, and character which may entitle to credit; and (3) abstract rights.

The relation of these quantities to each other is termed their value; and the laws of natural philosophy show that there can be only one general law of value, or a single general equation of Economics.

We have thus a definite body of phenomena, all based upon a single general concept; separate and distinct from all other phenomena, and circumscribed by a definition, which constitutes a science, and may be designated as pure, or analytical, Economics.

Thus, if any one had conceived the idea of describing the mechanism of these exchanges, or of commerce, Economics might have been the eldest born of all the sciences; but there was no science in existence in those days to serve as a model for the creation of a science of Economics; and a long and dreary interval had to elapse before the moderns reached the perfection of the ancients, all to redound to the immortal glory of Bacon, who was the first to point out that the physical sciences must first be created to serve as models before it is possible to create the sciences of society.

For many centuries it was held that money alone is wealth; and we must briefly state some of the consequences which flowed from this doctrine, which produced innumerable wars and other calamities.

The first merit of the Economists was that they entirely overthrew the doctrine of the balance of trade; and they made a considerable advance in Economics by maintaining that in commerce neither side gains or loses.

The Economists maintained that labour engaged in agriculture is the only form of productive labour; because, they alleged, it is the only one in which the value of the produce exceeds the cost of production. The excess of the value of the produce over that of the cost of production they called the
produit net; and they maintained that, as this is the only increase of wealth to a country, all taxation should be levied out of the
produit net of the agriculturists, and that all other classes should go free.

With such views they held that internal commerce conduces nothing to the wealth of the nation, and foreign commerce very little. They called foreign commerce only a
pis aller. One very important truth, however, they perceived. They saw that money is the most unprofitable merchandise of any to import, and that merchants never import money when they can import products. Therefore they called the import of money only the
pis aller of a
pis aller.

They contended that the labour of artisans in manufactures is sterile or unproductive, because, though this labour adds to the value of the product, yet during the process of the manufacture the labourer consumes his subsistence; and the value added to the product only represents the value of the subsistence destroyed during the labour. Hence there was a transference of the value of the labourers’ subsistence into an equivalent value of another kind; but no production of wealth.

They held that all the costs of trafficking come out of the profits of the producers and the consumers, which, though gains to them, are not profit to the nation; and therefore that the State ought not to tax them.

All classes of the community, except the agriculturists, they denominated sterile or unproductive.

These doctrines provoked a reaction: men who were labouring in all sorts of vocations were roused to indignation, by being stigmatized as sterile and unproductive. Men were astounded to hear that a nation cannot be enriched by commerce or manufactures.

Nevertheless, the doctrines of the Economists seemed to be logically unassailable, provided that their fundamental dogma was right. But the consequences they drew from it were so startling, and so contrary to patent undeniable facts, that clear-sighted men began to inquire—Is it true that in commerce neither side gains?

Two writers entered the field against the Economists—Condillac in France, and Adam Smith in England. Both published their works in the same year, 1776. They overthrew the doctrine that in commerce neither side gains, and maintained that in commerce
both sides gain—a truth that was seen by anticipation by the great Emperor Frederick II, in the thirteenth century; and by Boisguillebert, the morning star of Economics, in the beginning of the eighteenth century. In this brief sketch we have no space to say much about Condillac, because his explanation is not very satisfactory, and his work never attracted the slightest attention till very recently.

Adam Smith, then, attacked the doctrine of the Economists, that in commerce
neither side gains or loses. By a course of masterly reasoning, far superior to that of Condillac, but too long to be set out here, he demonstrated that in commerce
both sides gain; and, therefore, that nations, in multiplying their commercial relations, multiply their profits and multiply wealth. Even if Adam Smith had never done anything else for Economics than this, he would have been entitled to immortal glory. By this single demonstration he brought about a change in public opinion and in international policy which has for ever removed a perennial source of war from the world. Nations learnt that instead of destroying each other, and trying to ruin each other’s commerce, it was their interest to promote each other’s prosperity and to multiply their commercial relations with each other.

Adam Smith next proceeded to demolish the doctrine that neither commerce nor manufactures enrich a nation. He demonstrated that both commerce and manufactures are productive of wealth, and enrich a nation.

But the utility of his work is sadly marred by the total want of clear, distinct and uniform fundamental concepts or definitions. He entitles his work,
An Inquiry into the Nature and Causes of the Wealth of Nations; but he nowhere gives a clear and distinct definition of what wealth is. In the Introduction he says that the real wealth of a country is the annual produce of ‘land and labour.’ But he entirely omits exchangeability, which was the quality which the Economists, in agreement with the ancients, recognized as the essence of wealth. But Smith’s definition is ambiguous. It is not clear whether he means the produce of land and the produce of labour, or the produce of ‘land and labour’ combined. It is probable that he meant the last; and so he has been generally understood. Now, such a definition is manifestly too wide and also too narrow; because there are multitudes of things which are the produce of ‘land and labour’ which are not exchangeable, and therefore not wealth; and there are multitudes of things which are exchangeable, and therefore have value and are wealth, which are in no way the annual produce of ‘land and labour.’

Thus, after proceeding some length, he classes the ‘natural and acquired abilities of the people’ as fixed capital and as national wealth. How are the ‘natural and acquired abilities of the people’ the annual produce of ‘land and labour’? Further on he classes bank notes, bills of exchange, &c., as circulating capital. How are these, which are mere incorporeal rights, the annual produce of ‘land and labour’? It is evident that these ideas are absolutely incongruous. This indefiniteness of view we might have shown at much greater length; but these instances are sufficient to prove that his ideas of wealth in different parts of his work are absolutely inconsistent.

Keen observers have long ago seen that the first half of Adam Smith’s work is entirely inconsistent with the latter half; because in the first half labour is considered as the essence of value and wealth, and in the second half exchangeability, i.e. demand, is admitted to be the real essence of value and wealth.

Ricardo adopted the first half of Adam Smith’s doctrine, and founds all his ideas of value upon labour. Whately adopted the latter half, and adopts exchangeability pure and simple, and says that Adam Smith’s title only denotes the subject-matter of his work; but that Economics is the science of exchanges, or of commerce.

Adam Smith’s first two books are upon production and distribution; but he explains that that means commerce, and he says that his purpose is to examine the causes of the price of things; in other words, the theory of value; and McCulloch says in a note that it might be called the science of values.

Now, from the foundation of Economics as a science up to the time of Whately, who was Professor at Oxford in 1830, there was in this country a perfect uniformity of opinion as to the general nature of the science. The Economists expressly declared that it is the science of exchanges, or of commerce, or the theory of value: and so it was understood to be by the writers in France who did not enrol themselves in the sect of the Economists; by Condillac, Adam Smith, Ricardo, McCulloch, Whately, and all persons who were interested in it. And, however imperfect it might have been, or however many defects it may have had, these were all capable of being rectified. If this concept had been steadily adhered to, and the same labour had been bestowed upon it, to rectify and develop it, by the same methods by which all other sciences have been created, it might long ago have been erected into a positive and definite science, like any of the physical sciences.

While the Economists declared that the expression ‘production, distribution and consumption’ of wealth is one and indivisible, and meant nothing but exchange, or commerce, J. B. Say broke it up into its constituent terms and completely changed their meaning. While the Economists defined production to mean bringing the rude produce of the earth into commerce, Say defined it to mean bestowing value on a product. While the Economists defined distribution to mean the intermediate operations between production and consumption, and those only, Say treats of distribution in such a nebulous way that it is difficult to make out distinctly what be means by it. The Economists and Adam Smith used the word consumption (
consommation) to mean purchase pure and simple, or demand; Say defined it to mean the destruction of value, and says that all consumption is a destruction of value. The absurdity of this is patent. When a person purchases (i.e. consumes, in the language of the Economists and Adam Smith) a diamond ring, a piece of plate, a picture, a statue, or a book—does he thereby destroy them? The fact is that consumption, which Say defined to mean destruction, is no part of Economics at all. For Economics is limited to the phenomena of exchange.

The Economists steadfastly refused to admit that labour and credit are wealth. But on the first page of his work Say classes
titres de créance, bank notes, bills of exchange, the funds, &c., as wealth; and further on includes many other kinds of incorporeal property under the title of wealth. These are all abstract rights. Say also, like Adam Smith, includes all the industrial faculties of the people under the definition of wealth and capital.

Now, how can we speak of the ‘production, distribution and consumption’ of bank notes, bills of exchange, the funds, shares in commercial companies, copyrights, patents, and the other forms of incorporeal property?

How can we speak of the ‘production, distribution and consumption’ of labour of different kinds, of knowledge, and other intellectual qualities, and of personal credit?

This separation of the component terms of the expression ‘production, distribution and consumption,’ and their treatment in separate chapters, utterly destroys the character of Economics as a science, and utterly breaks the back of the theory of value, which is the very essence of Economics.

Say’s books abound in valuable observations, but his system of Economics is absolutely unworkable for any practical purposes. Say totally forgot to observe that the expression ‘production, distribution and consumption of wealth’ was rigorously restricted by the Economists to the exchanges, or commerce, of material products only, and, even as applied to them, was a very awkward concept; and that labour and credit were entirely excluded from it. But when labour and credit are admitted to be wealth by Adam Smith and Say, and introduced into Economics by them, the expression becomes mere unintelligible jargon.

J. S. Mill was the friend and pupil of J. B. Say, and modelled his ideas very much on those of Say. Nevertheless, he has considerable divergences from him. He saw that consumption, in the sense of destruction, is no part of Economics; and he divides his work into production, distribution and exchange. But production and distribution, in the language of the Economists and Adam Smith, was exchange—so that Mill’s work is really simply exchange and exchange.

But as the basis of the whole science is the word wealth we have to see what meaning Mill gives to it.

One of Mill’s definitions is as follows: ‘Everything forms part of wealth which has power of purchasing.’ This exactly agrees with the definition adopted 1,300 years ago by the ancients, and includes everything which can be bought and sold, or exchanged, whatever its nature or form may be; and evidently comprehends all the three orders of economic quantities.

The fact is that Say and Mill have brought the science to a complete
impasse. The expression ‘production, distribution and consumption of wealth’ was expressly restricted to the commerce, or exchanges, of material products only; and when we introduce personal qualities and abstract rights into the science, as Adam Smith, Say and Mill have rightly done, it throws the whole subject into irremediable confusion. There is no possibility of erecting the ‘production, distribution and consumption of wealth’ into any sort of scientific system; if we are to attain that end we must revert to the concept of Economics as the science of exchanges, or of commerce, as the most advanced Economists are now doing: and then we have a body of phenomena as capable of being erected into an exact and definite science as astronomy, optics, or any other.

Lord Macaulay remarks that the two greatest and most salutary social revolutions which have taken place in England were those which, in the thirteenth century, put an end to the tyranny of nation over nation; and which, a few generations later, put an end to the property of man in man. To these we may venture to add a
third, not less great and not less salutary than the other two—that great revolution in the ideas of the age which, in the nineteenth century, abolished for ever the property of one set of men in the
industry of another.

The protective system is, therefore, nothing more than a method by which producers endeavour to force consumers to pay a higher price than they otherwise would do for their commodities. Now, let us consider a different case.

Suppose that the legislature, being entirely composed of consumers, should pass a law forbidding the farmers to sell their produce above a certain price, or to export it to foreign countries, where they might find a better market for it: or suppose that laws were made to prevent workmen demanding above a certain rate of wages: or compelling producers to bring their products to market and accept a price for them much below what they would fetch if there were no such law. This would be a case on the part of consumers precisely analogous to what protection is on the part of producers.

Each of these systems, then, is erroneous, but in opposite directions; that of protection, by which the producer obliges the consumer to buy from him his produce at a price above its natural value; that of the maximum, by which the consumer obliges the producer to sell to him his produce at a price below its natural market value. Now, every law which interferes with the natural course of trade, which attempts to regulate the wages of labour, or the price of commodities, which attempts to meddle with the free exchange of industry or products between man and man, must necessarily fall under one of these forms of error. Every such law sins against natural justice, more or less, in one direction or the other, either as it assumes the form of protection or the maximum; and it is just as clear as the sun at noonday, that the only true, just and proper course is to establish and maintain absolute freedom of exchange.

Now, the idea which was at the root of all this legislation was that cost of production should regulate value, and that those who had produced articles had the right to have remunerative prices secured to them by law. This idea was a very natural one to occur to producers; and when we think of the condition of Parliament when this species of legislation was in fashion it is not surprising that it prevailed. In the last century, it is true, there were at various times laws enacted for disturbing the natural course of commerce; but the corn laws, which lasted, with various alterations, until Sir Robert Peel abolished them, were made in 1815. Now, what was the state of Parliament at that time? One branch was entirely composed, as it still is, of agriculturists; the other principally of agriculturists, and the nominees of agriculturists, as well as great manufacturers, great merchants, great shipowners, and great producers of all sorts. It was entirely a Parliament of sellers, a vast close and corrupt combination. The great body of the people, i.e. the consumers, had very little influence in the House of Commons. The sellers had a complete monopoly of law-making; and their legislation is exactly what might have been expected. All the producers in turn were permitted to plunder the public for their own benefit. It was nothing more than a gigantic conspiracy of all the sellers against all the buyers. These laws were a striking proof that no single interest can be entrusted to frame laws for the whole community in a spirit of justice; but, to insure that, all interests must have a voice.

The essence of Adam Smith’s doctrine is that the wider and more extensive commercial intercourse is among nations, the more prosperous and wealthy they all become. Every one, in seeking his own advantage benefits others as well, because if a man wants to acquire any object, he must have to offer in exchange for it something which other people want. Different countries have different advantages for producing commodities for the enjoyment and satisfaction of mankind. It is the interest of the whole world that all commodities should be produced in those places where they can be obtained best and cheapest, and exported to those places where they can only be produced of inferior quality and at a greater cost. Thus the whole world will obtain the greatest amount of enjoyments and satisfactions at the least labour and cost. Thus absolute freedom of commerce and exchange throughout the whole world is the true nature of things. But when hostile tariffs are interposed they act at once as a barrier, and diminish the commercial intercourse of nations to their mutual loss and impoverishment. Protective tariffs are expressly made for the purpose of forcing commerce out of its natural course and development, and that alone is sufficient to condemn them. This is so obvious that we need not dwell on it further.

Napoleon III, with the advice and assistance of Rouher, Chevalier, Cobden and Mallet, negotiated a commercial treaty with England in 1860 which considerably relaxed the protective system then established. But this treaty was carried by the autocratic power of the Emperor, and was utterly distasteful to the great mass of the French people, who were now mainly protectionist and socialist, which are one and the same thing. And alas! France, which in the last century was the beacon to spread the light of free trade throughout the world, is now enveloped in the deepest darkness of protection and socialism: nor does there seem any immediate prospect of her emerging from it.

It has been frequently said that if Cobden were alive now, and saw the falsification of his hopes, he would advocate reciprocity and fair trade, as they are pleased to term it. But those who say so never studied Cobden’s doctrines. Constantly and uniformly he inculcated that England ought to adopt free trade whether other nations did so or not, and even if all the world were against her, as is pretty much the case at present.

Having a perfect recollection of the great free trade discussions, I have no hesitation in saying that Cobden would have done nothing of the sort which the reciprocitarians and fair traders would attribute to him. His constant maxim was that
the true way to fight hostile tariffs is by free trade.

No doubt all these hostile tariffs are extremely exasperating: they inflict incalculable injury, not only upon the wealth and prosperity of England, but upon the nations which enact them, and on the rest of the world. But if, as some hot-headed and inconsiderate persons urge, England were to resort to reciprocity and retaliation, she would merely double the mischief. If the present hostile tariffs destroy an incalculable amount of commercial intercourse, a resort to reciprocity and retaliation would destroy it infinitely more. As Sir Louis Mallet pithily said, ‘If one tariff is bad, two are worse.’ If foreign nations smite us on one cheek by their hostile tariffs, if we followed the advice of the reciprocitarians and retaliated, we should simply smite ourselves very hard on the other cheek.

Thus we see how true Economics throws a clear and steady light on the path of national policy.

‘Value consists in the ratio of exchange which takes place between such and such a product, between such a quantity of one product and such a quantity of another product.’ And in this the Economists were unanimous. Now, it is evident that if value is a ratio, there can be no such thing as intrinsic value; and also that a standard of value is impossible by the very nature of things. Value, like distance, necessarily requires two objects or quantities.

Aristotle also showed that the cause of all value is demand—
. The word
, which is one of the most usual words in Greek for wealth, comes from
, to want or demand: and the ancients showed a thing is
—wealth—only where and when it is
—wanted and demanded: and that where and when it is not
—wanted and demanded—it is not
—wealth. In the ancient dialogue we have referred to above, Socrates shows that money is wealth only in those places where it will purchase other things, and he instanced several examples of local moneys which were valuable and were wealth in certain places, but which had no value and were not wealth in others, where they had no power of purchasing. All the Economists of France and Italy showed that value proceeds entirely from the wants and desires of men. The Economists were quite unanimous that all value proceeds from
consommation, or demand; and that where things are not
consommés—demanded—they are no better than so much rubbish. Now, as all commerce or exchange proceeds from the mutual wants and desires of men, it is quite evident that value requires the concurrence of two minds, and that it proceeds from
reciprocal demand.

But, unfortunately, this idea was taken up in the early part of his work by Adam Smith, though quite discarded in the latter part of it, and his fifth chapter has been the ruin of English Economics.

Of this chapter that distinguished Economist and statesman Francis Horner says—’We have been under the necessity of suspending our progress in the perusal of the
Wealth of Nations on account of the insurmountable difficulties, obscurity and embarrassment in which the reasonings of the fifth chapter are involved…. the discovery that I did not understand Smith speedily led me to doubt whether Smith understood himself.’

We shall now lay before our readers the cause of all this confusion.

In this unfortunate chapter Smith begins by saying that the value of any commodity is equal to the quantity of labour which it entitles him to purchase. Hence if we denote labour by
l, we have

He then says that this is the same thing as saying that it is equal to the
produce of labour which it enables him to purchase. On denoting produce by
p, we have

Then he says that the value of anything is more frequently estimated in money than either in labour or commodities. On denoting money by
m, we have

Hence Smith admits that value, like distance, requires two objects. If any change takes place in the position of these two objects, the distance between them has changed, no matter in which the change has taken place. So if any change takes place in the relation of two quantities, their value has changed, no matter in which the change takes place. Hence it is clear that there can be no such thing as
invariable value. Nothing whatever can have invariable value unless its exchangeable relation with everything else is fixed. Hence we can at once see that, by the very nature of things, there can be no such thing as an invariable standard of value by which to measure the value of other things, because by the very nature of things, the very condition of anything being invariable in value is that nothing else shall vary in value, and that there shall be no variations to measure.

Nevertheless a very large body of Economists have set out upon this wild-goose chase, this search for an invariable standard of value, which it is utterly contrary to the nature of things should exist at all. Directly after the passage we have referred to, Smith commences the search for that single thing which is the invariable standard of value. He says that gold and silver will not do because they vary in their value; sometimes they can purchase more and sometimes less of labour and commodities. Then he says—

‘
But though equal quantities of labour are always of equal value to the labourer, yet to the person who employs him they appear sometimes to be greater and sometimes of smaller value….

‘
Labour, therefore, it appears evidently is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the value of different commodities at all times and places.‘

The utter confusion of ideas in these passages is manifest. A foot, or a fathom, is an absolute quantity, and of course may increase or decrease by itself: but value, by Smith’s own definition, is a
ratio, which requires two quantities: and therefore we might just as well say that because a foot which is constantly varying its own length cannot be an accurate measure of the length of other things, therefore a quantity which is always varying its own
ratio cannot be an accurate measure of the
ratio of other things. This is utter confusion of idea. We may measure a tree with a yard, because they are each of them single quantities;
but it is impossible that a single quantity can be the measure of a ratio. It is manifestly impossible to say that

But Smith says that ‘equal quantities of labour are always of equal value.’ What? If a man is paid five shillings for a certain amount of labour, is his labour of the same value to him as if he were paid £1,000? This certainly is a very comfortable doctrine for the employer, because, if he pays his workmen one shilling a week, according to Smith their labour is of just as much value to them as if he paid them twenty shillings a week. We doubt whether the workmen would acquiesce in this view.

Smith himself says that gold and silver vary in their value because they sometimes can purchase more and sometimes less of other things. But when labour sometimes earns more wages and sometimes less wages, does it not also vary in its value? How, then, can its value be invariable? How is its value to be determined on principles different from those which govern the value of gold and silver?

The fact is that Smith’s dogma that labour is an invariable standard of value is a pure mare’s nest. Neither labour nor any other single quantity can be a standard of value; and to suppose that it could, is only to betray utter ignorance of the mathematics of ratios.

The term value has been so confused by Economists that it will aid much in showing the confusion of Smith’s ideas to translate them into mechanical language, substituting the word
distance, which has not been so befogged in popular language, for value, thus—

Such is a fair translation into mechanical language of Smith’s ideas on value, merely substituting
distance for
value. Smith practically contends that if a railway station is fixed, and a train approaches, or recedes from it, the distance of the train from the station varies; but that the station is always at the same distance from the train! Can we wonder at the language of Horner? The cause of the confusion is obvious. Smith begins by holding the value of a product to be the quantity of
other things it will purchase: and then he suddenly changes his concept of value to the quantity of labour embodied in obtaining the product itself: and he has not the slightest idea that these are utterly inconsistent ideas.

Exactly the same confusion runs through the whole of Ricardo. His conception of value is vitiated by the same utter want of unity.

He also falls into exactly the same confusion on value that Adam Smith does. He begins by saying—’The value of a commodity,
or the quantity of any other commodity for which it will exchange.‘ Also—’The exchangeable value of these commodities, or the rule which determines
how much of one shall be given in exchange for another‘: and several other passages to the same effect.

But he very soon slides into the same pitfall as Smith does; and he calls the ‘quantity of labour bestowed on a commodity under many circumstances an invariable standard indicating correctly the variations of other things.’

He then maintains that, ‘if a commodity could always be produced by an invariable quantity of labour, its value would be invariable, and it would be eminently well calculated to measure the varying value of all other things’; and in a subsequent part of his work he says: ‘The labour of a million of men in manufactures will always produce the same value. That commodity is alone invariable which at all times requires the same quantity of toil and trouble to produce it.’ Now, Ricardo’s doctrine is that when manufactures have been produced they are of exactly the same value, whether they sell for a large sum of money or cannot be sold at all. We doubt whether the manufacturers of Manchester would acquiesce in this doctrine.

He then says: ‘I cannot agree with M. Say in estimating the value of a commodity by the abundance of other commodities for which it will exchange.’ Thus Ricardo, in this last sentence, not only disagrees with the whole world, but he flatly contradicts himself.

Ricardo, then, having excluded all commodities from his inquiry which are not the produce of human labour, roundly declares that labour is the foundation of all value.

McCulloch is the bondslave of Ricardo; he also asserts that labour is the sole cause of value. Carey, the American Economist, says: ‘Labour is the sole cause of value,’ and he adds, it is so in nine hundred and ninety-nine cases out of a thousand; and if there be one case in a thousand where there is value without labour it is just the exception which proves the rule. Carey had queer notions of natural philosophy, for it is an axiom of natural philosophy that if there be a single case which is irreconcileable with a theory it is fatal to it.

Now the superlative importance of this doctrine is that it is the foundation of socialism and all its consequences. Socialists avowedly base their doctrines on Adam Smith and Ricardo, and just as the astounding consequences which the Economists drew from their doctrine, that in an exchange neither side gains or loses, caused Condillac and Smith to inquire into its truth; so the portentous consequences which the socialists draw from the Smith-Ricardo doctrine, that labour is the cause of all value, demand the strictest inquiry into its truth, because it has become a very prevalent dogma among working men, and a good many others besides, that working men are the creators of all value and of all wealth.

Let us now test the dogma that working men are the creators of all value and of all wealth.

We may premise that by the term wealth, in accordance with the argument contained in an earlier portion of this paper, we mean anything whatever whose value can be measured in money; anything which can be bought and sold; anything which has purchasing power.

Now let us take a few examples of wealth:

(1) The simple space of ground upon which a great city stands has enormous value and is wealth. Did working men create the ground upon which a city stands and give it value?

(2) Herds of cattle, sheep, pigs, fowls, and other animals fit for food have value and are wealth. Did working men create all these kinds of animals and give them value?

(3) Timber trees standing on the ground, which no human being ever touched, often have very great value, and are bought and sold. Did working men create these timber trees and give them value?

(4) A whale was stranded on the shore of the Frith of Forth. As it lay on the beach it was sold for £70. Did working men create the whale and give it value?

(5) An aerolite fell in Sweden. The curator of the national museum bought it for £84. Did working men create the aerolite and give it value?

(6) Mr. Buckland says that at the Zoological Gardens the
dejecta of the snakes sold for nine shillings the pound. Did working men create the
excreta of the snakes and give them value?

(7) The manager of a great commercial company, such as a bank or a railway, often earns by his business capacity an income of several thousand pounds a year. His business qualities, therefore, have great value, and are wealth to him. Did working men create his business qualities and give them value?

(9) Mill says justly that everything is wealth which has purchasing power. Merchants and traders purchase commodities almost exclusively with their credit, i.e. by giving a promise to pay at a future time; and these promises to pay have value, because they will be paid at maturity. Merchants and traders make a profit by trading with their credit: their credit has great value to them and is wealth. Did working men create the credit of our merchants and traders and give it value?

(10) The express purpose of a bank is to create credit, i.e. to issue promises to pay several times the amount of cash they hold in reserve. The floating rights of action issued by all the banks in Great Britain, and at present in circulation, are about £1,000,000,000. These thousand millions of circulating credits have all the effects of an equal amount of gold. They have value and are wealth. Did working men create the credit of our great banks and give it value?

We must now say something about credit, because the dogma that labour is the cause of all value has made the subject absolutely unintelligible.

We shall first explain what credit is.

Thus the whole mass of circulating credits or debts is a mass of exchangeable property just like any other, such as gold, silver, corn, manufactured goods, or any other. These credits, debts or rights of action have value for exactly the same reason that any other commodities have value, because at the proper time they will be exchanged for money or its equivalent. The whole commerce of the country is now carried on by them, except only to an infinitesimal degree, and the aggregate of money and all these credits under various forms constitute the circulating medium, or currency of the country, or the measure of prices.

The whole system of credit is based upon this principle—that every future profit, from whatever source arising has a
present value, and that this present value may be bought and sold like money or any other chattel.

Thus we see that the whole basis of socialism, founded on the Ricardian doctrine of value and incorporated as the leading idea of Karl Marx’s
Capital, is utterly overthrown.

Labour, like everything else, has value in so far as it is exchangeable. Attempts to raise the price of labour by artificial restrictions on its sale are destructive of the mechanism of exchange, from which alone value is derived. The theory of Economics here developed contains a complete vindication of the equity and beneficence of the principle of free exchange as applied to all forms of wealth, to Labour, to Credit, and to material commodities.

English Economics can never emerge from its present deplorable state until we utterly discard the doctrine that labour is the basis of value, and dismiss from our mind the concept of Economics as the ‘production, distribution and consumption of wealth,’ by which it is impossible to create it a science. When we shift the basis of value to exchange-ability, and revert to the original concept of Economics as the science of commerce, or exchanges, scientific order succeeds to chaos, everything becomes clear and simple, and we have a definite, positive, and intelligible science. Economics is the theory of value, which, next to civil government, is the most important thing in human affairs. It may be summed up in words which M. Michel Chevalier did me the honour to say contained the best definition of the science which has yet been proposed
—’Economics is the science which treats of the laws which govern the relations of exchangeable quantities.‘