SOME ELEMENTARY ECONOMICS.
[To THE EDITOR OT Pas " SPECTATOR."] Sue,—In your issue of August 6th you published a short article which indicated some current illusions, but, and a very big but, the greatest illusion of all is that the wealth of either an individual or a nation is necessarily increased by exchange. The author of the article cites a " wonderful " passage from
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Bastiat, and similarly John Ruskin wrote that " an exchange of British steel for Tuscan oil benefits both parties." Montesquieu proclaimed also that commerce had the virtue of conducting mankind towards peace, yet, as Leibertini has pointed out, " Industry and commerce do not appear to us in his time, or even later, as a peaceful means of exchange and distribution of the produce of labour among people, but rather in the nature of a trial of strength, seeking equality, oppres- sion, superiority." The fact is that all these philosophers,' from the time of Adam Smith as well as the author of the article, commit the terrible fault, so common to unscientific minds (and science is organized knowledge), of arguing from the particular to the general. That it benefits a nation to exchange what it can produce for that which it cannot produce, yet wants, is undoubtedly true, yet, as I shall show, the benefit derived is due to the efficiency of production, of which the exchange is merely the effect and not the cause.
Let us consider an exchange between two individuals of our country, between a man who grows potatoes and one who makes clothes. Which benefits? Why, the one whose cost is least. And what is his cost of production? Why, the labour-hours expended. The best producer, therefore, gains from the transaction; and if he be the latter the former would be better off making clothes. Similarly, a nation benefits by foreign exchange when it exchanges less for more labour hours, the products of skilled for those of unskilled labour. As an example, England amassed enormous wealth in the nineteenth century by its foreign trade, but the true cause of its advantage lay in the fact that it was the greatest indus- trial nation, and, in almost all cases, exchanged the labour of fewer Britisli workers for that of a greater number of foreigners. To-day, in the competitive exchanges Leibertini refers to, the conditions are just the reverse, and we lose when we import American motor-cars or German electrical machines (the L.C.C. has just placed an order worth £50,000 in Ger- many) and export textiles with which to pay for them. This truth is confirmed by the Census of Production, published in 1913, from which it appeared that the average wage paid in the engineering industry was more than 50 per cent. higher than that paid in the textile trade.
Consequently a nation's welfare lies in its own hands, and depends upon the quality of its production. indeed, in com- petitive trade, the larger market of one producer, e.g., textiles, is exactly offset by the smaller one of another, e.g., electrical machines. A child could see, and in this case the child is right and the economists wrong, that an exchange does not necessarily benefit both parties. For instance, was Esau better off for his exchange with Jacob? The contrary idea is due to the belief that articles have no value if no one wants them. This is true of luxuries, such as pearls, peaches, &c., but utterly false of those far more important commodities on which men live, or their necessaries of life. The value of these depends on the time they will support human life, and the daily necessaries of life of the average man with the average family are not a question of opinion but of fact, they being known and constant in any climate at any period. Let us call them N. The value of a surplus of necessaries A is definite, being A. The result is A days leisure in which we N N can produce luxuries. The value of the latter is not directly measurable, because one cannot measure pleasure. Nevertheless it is measurable relatively to N, bcause a man must sacrifice a surplus of necessaries in order to obtain a luxury (and only if he have a surplus can he do so, as alter- natively he will starve), although the amount he is prepared to sacrifice depends upon his opinion, or demand. The econo- mists, being again unscientific, never discovered this vital distinction in the goods produced by man's efforts, and, con- sequently, they were unable to measure wealth immediately upon its production, although no rational science can exist without a system of measurement of the matter with which it deals.
It should now be clear that, wealth being measurable, its exchange cannot increase its total value, but merely results in its transfer. The idea that the production of wealth depends upon credit is another illusion, and accounts for the power of international financiers. Capital is accumulated wealth and credit a loan thereof. But if a nation produce its own wealth it can laugh at credit, even if a lack of it may delay production for a season. For instance, if we obtain credit from U.S.A. we obtain goods in return, and snag be able to accelerate our production. Nevertheless we must paY back these goods some day, and we had by far better produce and save and avoid this liability.
If your readers desire to know what England ought to produce and how it can be effected, I would refer them to The Beal Wealth of Nations, recently published by G. G. Harrap and Co., Ltd. In your paper there are frequent
allusions to our Bolsheviks. Bolshevism, however, is only the claim of unskilled manual labour that it produces wealth, and, consesinently, has the right to control its distribution. But this illusion is also due to the economists, for, being unable to measure wealth, they invented the absurd idea that "carry- ing goods to those that want them " increases their value and creates wealth. And who carries goods but the least brainy if most brawny members of every community? On the other hand, if wealth be measurable immediately upon its produc- tion, it becomes evident that it is due to the brains and skill of producers, who should and must rule the world if it is to regain its sanity.—I am, Sir, yours, &c., J. S. Mem.
Fellow of the Royal Economic Society.
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