Front Page Titles (by Subject) CHAPTER XIX.: ON SUDDEN CHANGES IN THE CHANNELS OF TRADE. - The Works of David Ricardo (McCulloch ed.)
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CHAPTER XIX.: ON SUDDEN CHANGES IN THE CHANNELS OF TRADE. - David Ricardo, The Works of David Ricardo (McCulloch ed.) 
The Works of David Ricardo. With a Notice of the Life and Writings of the Author, by J.R. McCulloch (London: John Murray, 1888).
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ON SUDDEN CHANGES IN THE CHANNELS OF TRADE.
A Great manufacturing country is peculiarly exposed to temporary reverses and contingencies, produced by the removal of capital from one employment to another. The demands for the produce of agriculture are uniform; they are not under the influence of fashion, prejudice, or caprice. To sustain life, food is necessary, and the demand for food must continue in all ages, and in all countries. It is different with manufactures; the demand for any particular manufactured commodity is subject, not only to the wants, but to the tastes and caprice of the purchasers. A new tax, too, may destroy the comparative advantage which a country before possessed in the manufacture of a particular commodity; or the effects of war may so raise the freight and insurance on its conveyance, that it can no longer enter into competition with the home manufacture of the country to which it was before exported. In all such cases, considerable distress, and no doubt some loss, will be experienced by those who are engaged in the manufacture of such commodities; and it will be felt, not only at the time of the change, but through the whole interval during which they are removing their capitals, and the labour which they can command, from one employment to another.
Nor will distress be experienced in that country alone where such difficulties originate, but in the countries to which its commodities were before exported. No country can long import, unless it also exports, or can long export unless it also imports. If, then, any circumstance should occur, which should permanently prevent a country from importing the usual amount of foreign commodities, it will necessarily diminish the manufacture of some of those commodities which were usually exported; and although the total value of the productions of the country will probably be but little altered, since the same capital will be employed, yet they will not be equally abundant and cheap; and considerable distress will be experienced through the change of employments. If, by the employment of 10,000l. in the manufacture of cotton goods for exportation, we imported annually 3000 pair of silk stockings of the value of 2000l., and by the interruption of foreign trade we should be obliged to withdraw this capital from the manufacture of cotton, and employ it ourselves in the manufacture of stockings, we should still obtain stockings of the value of 2000l., provided no part of the capital were destroyed; but instead of having 3000 pair, we might only have 2,500. In the removal of the capital from the cotton to the stocking trade, much distress might be experienced, but it would not considerably impair the value of the national property, although it might lessen the quantity of our annual productions.∗
The commencement of war after a long peace, or of peace after a long war, generally produces considerable distress in trade. It changes in a great degree the nature of the employments to which the respective capitals of countries were before devoted; and during the interval while they are settling in the situations which new circumstances have made the most beneficial, much fixed capital is unemployed, perhaps wholly lost, and labourers are without full employment. The duration of this distress will be longer or shorter, according to the strength of that disinclination which most men feel to abandon that employment of their capital to which they have long been accustomed. It is often protracted, too, by the restrictions and prohibitions to which the absurd jealousies which prevail between the different States of the commercial commonwealth give rise.
The distress which proceeds from a revulsion of trade is often mistaken for that which accompanies a diminution of the national capital and a retrograde state of society; and it would perhaps be difficult to point out any marks by which they may be accurately distinguished.
When, however, such distress immediately accompanies a change from war to peace, our knowledge of the existence of such a cause will make it reasonable to believe that the funds for the maintenance of labour have rather been diverted from their usual channel than materially impaired, and that, after temporary suffering, the nation will again advance in prosperity. It must be remembered, too, that the retrograde condition is always an unnatural state of society. Man from youth grows to manhood, then decays, and dies; but this is not the progress of nations. When arrived to a state of the greatest vigour, their further advance may indeed be arrested, but their natural tendency is to continue for ages to sustain undiminished their wealth and their population.
In rich and powerful countries, where large capitals are invested in machinery, more distress will be experienced from a revulsion in trade than in poorer countries where there is proportionally a much smaller amount of fixed, and a much larger amount of circulating capital, and where consequently more work is done by the labour of men. It is not so difficult to withdraw a circulating as a fixed capital from any employment in which it may be engaged. It is often impossible to divert the machinery which may have been erected for one manufacture to the purposes of another; but the clothing, the food, and the lodging of the labourer in one employment may be devoted to the support of the labourer in another; or the same labourer may receive the same food, clothing, and lodging, whilst his employment is changed. This, however, is an evil to which a rich nation must submit; and it would not be more reasonable to complain of it than it would be in a rich merchant to lament that his ship was exposed to the dangers of the sea, whilst his poor neighbour's cottage was safe from all such hazard.
From contingencies of this kind, though in an inferior degree, even agriculture is not exempted. War, which, in a commercial country, interrupts the commerce of states, frequently prevents the exportation of corn from countries where it can be produced with little cost to others not so favourably situated. Under such circumstances an unusual quantity of capital is drawn to agriculture, and the country which before imported becomes independent of foreign aid. At the termination of the war, the obstacles to importation are removed, and a competition destructive to the home-grower commences, from which he is unable to withdraw without the sacrifice of a great part of his capital. The best policy of the State would be, to lay a tax, decreasing in amount from time to time, on the importation of foreign corn, for a limited number of years, in order to afford to the home-grower an opportunity to withdraw his capital gradually from the land.∗ In so doing, the country might not be making the most advantageous distribution of its capital, but the temporary tax to which it was subjected would be for the advantage of a particular class, the distribution of whose capital was highly useful in procuring a supply of food when importation was stopped. If such exertions in a period of emergency were followed by a risk of ruin on the termination of the difficulty, capital would shun such an employment. Besides the usual profits of stock, farmers would expect to be compensated for the risk which they incurred of a sudden influx of corn; and, therefore, the price to the consumer, at the seasons when he most required a supply, would be enhanced, not only by the superior cost of growing corn at home, but also by the insurance which he would have to pay in the price for the peculiar risk to which this employment of capital was exposed. Notwithstanding, then, that it would be more productive of wealth to the country, at whatever sacrifice of capital it might be done, to allow the importation of cheap corn, it would, perhaps, be advisable to charge it with a duty for a few years.
In examining the question of rent, we found, that, with every increase in the supply of corn, and with the consequent fall of its price, capital would be withdrawn from the poorer land, and land of a better description, which would then pay no rent, would become the standard by which the natural price of corn would be regulated. At 4l. per quarter, land of an inferior quality, which may be designated by No. 6, might be cultivated; at 3l. 10s., No. 5; at 3l., No. 4, and so on. If corn, in consequence of permanent abundance, fell to 3l. 10s., the capital employed on No. 6 would cease to be employed; for it was only when corn was at 4l. that it could obtain the general profits, even without paying rent: it would, therefore, be withdrawn to manufacture those commodities with which all the corn grown on No. 6 would be purchased and imported. In this employment it would necessarily be more productive to its owner, or it would not be withdrawn from the other; for if he could not obtain more corn by purchasing it with a commodity which he manufactured than he got from the land for which he paid no rent, its price could not be under 4l.
It has, however, been said, that capital cannot be withdrawn from the land; that it takes the form of expenses which cannot be recovered, such as manuring, fencing, draining, &c., which are necessarily inseparable from the land. This is in some degree true; but that capital which consists of cattle, sheep, hay and corn ricks, carts, &c., may be withdrawn; and it always becomes a matter of calculation whether these shall continue to be employed on the land, notwithstanding the low price of corn, or whether they shall be sold, and their value transferred to another employment.
Suppose, however, the fact to be as stated, and that no part of the capital could be withdrawn;∗ the farmer would continue to raise corn, and precisely the same quantity, too, at whatever price it might sell; for it could not be his interest to produce less, and if he did not so employ his capital, he would obtain from it no return whatever. Corn could not be imported, because he would sell it lower than 3l. 10s. rather than not sell it at all, and by the supposition the importer could not sell it under that price. Although, then, the farmers, who cultivated land of this quality, would undoubtedly be injured by the fall in the exchangeable value of the commodity which they produced,—how would the country be affected? We should have precisely the same quantity of every commodity produced, but raw produce and corn would sell at a much cheaper price. The capital of a country consists of its commodities, and as these would be the same as before, reproduction would go on at the same rate. This low price of corn would, however, only afford the usual profits of stock to the land, No. 5, which would then pay no rent, and the rent of all better land would fall: wages would also fall, and profits would rise.
However low the price of corn might fall, if capital could not be removed from the land, and the demand did not increase, no importation would take place, for the same quantity as before would be produced at home. Although there would be a different division of the produce, and some classes would be benefited and others injured, the aggregate of production would be precisely the same, and the nation collectively would neither be richer nor poorer.
But there is this advantage always resulting from a relatively low price of corn,—that the division of the actual production is more likely to increase the fund for the maintenance of labour, inasmuch as more will be allotted, under the name of profit, to the productive class,—a less, under the name rent, to the unproductive class.
This is true, even if the capital cannot be withdrawn from the land, and must be employed there, or not be employed at all; but if great part of the capital can be withdrawn, as it evidently could, it will be only withdrawn when it will yield more to the owner by being withdrawn than by being suffered to remain where it was; it will only be withdrawn then, when it can elsewhere be employed more productively both for the owner and the public. He consents to sink that part of his capital which cannot be separated from the land, because with that part which he can take away he can obtain a greater value, and a greater quantity of raw produce, than by not sinking this part of the capital. His case is precisely similar to that of a man who has erected machinery in his manufactory at a great expense, machinery which is afterwards so much improved upon by more modern inventions that the commodities manufactured by him very much sink in value. It would be entirely a matter of calculation with him whether he should abandon the old machinery, and erect the more perfect, losing all the value of the old, or continue to avail himself of its comparatively feeble powers. Who, under such circumstances, would exhort him to forego the use of the better machinery, because it would deteriorate or annihilate the value of the old? Yet, this is the argument of those who would wish us to prohibit the importation of corn, because it will deteriorate or annihilate that part of the capital of the farmer which is for ever sunk in land. They do not see that the end of all commerce is to increase production, and that, by increasing production, though you may occasion partial loss, you increase the general happiness. To be consistent, they should endeavour to arrest all improvements in agriculture and manufactures, and all inventions of machinery; for, though these contribute to general abundance, and therefore to the general happiness, they never fail, at the moment of their introduction, to deteriorate or annihilate the value of a part of the existing capital of farmers and manufacturers.
Agriculture, like all other trades, and particularly in a commercial country, is subject to a reaction, which, in an opposite direction, succeeds the action of a strong stimulus. Thus, when war interrupts the importation of corn, its consequent high price attracts capital to the land, from the large profits which such an employment of it affords; this will probably cause more capital to be employed, and more raw produce to be brought to market than the demands of the country require. In such case, the price of corn will fall from the effects of a glut, and much agricultural distress will be produced, till the average supply is brought to a level with the average demand.
∗Among the most able of the publications on the impolicy of restricting the Importation of Corn may be classed Major Torrens' Essay on the External Corn Trade. His arguments appear to me to be unanswered, and to be unanswerable.
[∗]“Commerce enables us to obtain a commodity in the place where it is to be found, and to convey it to another where it is to be consumed; it therefore gives us the power of increasing the value of the commodity, by the whole difference between its price in the first of these places, and its price in the second.”—M. Say, p. 458, vol. ii.—True, but how is this additional value given to it? By adding to the cost of production, first, the expenses of conveyance; secondly, the profit on the advances of capital made by the merchant. The commodity is only more valuable, for the same reasons that every other commodity may become more valuable, because more labour is expended on its production and conveyance, before it is purchased by the consumer. This must not be mentioned as one of the advantages of commerce. When the subject is more closely examined, it will be found that the whole benefits of commerce resolve themselves into the means which it gives us of acquiring, not more valuable objects, but more useful ones.
[∗]In the last volume of the supplement to the Encyclopædia Britannica, article “Corn Laws and Trade,” are the following excellent suggestions and observations:—“If we shall at any future period think of retracing our steps, in order to give time to withdraw capital from the cultivation of our poor soils, and to invest it in more lucrative employments, a gradually diminishing scale of duties may be adopted. The price at which foreign grain should be admitted duty free may be made to decrease from 80s., its present limit, by 4s. or 5s. per quarter annually till it reaches 50s., when the ports could safely be thrown open, and the restrictive system be for ever abolished. When this happy event shall have taken place, it will be no longer necessary to force nature. The capital and enterprise of the country will be turned into those departments of industry in which our physical situation, national character, or political institutions fit us to excel. The corn of Poland and the raw cotton of Carolina will be exchanged for the wares of Birmingham and the muslins of Glasgow. The genuine commercial spirit, that which permanently secures the prosperity of nations, is altogether inconsistent with the dark and shallow policy of monopoly. The nations of the earth are like provinces of the same kingdom—a free and unfettered intercourse is alike productive of general and of local advantage.” The whole article is well worthy of attention; it is very instructive, is ably written, and shows that the author is completely master of the subject.
[∗]Whatever capital becomes fixed on the land must necessarily be the landlord's, and not the tenant's, at the expiration of the lease. Whatever compensation the landlord may receive for this capital on re-letting his land, will appear in the form of rent; but no rent will be paid if, with a given capital, more corn can be obtained from abroad than can be grown on this land at home. If the circumstances of the society should require corn to be imported, and 1000 quarters can be obtained by the employment of a given capital, and if this land, with the employment of the same capital, will yield 1,100 quarters, 100 quarters will necessarily go to rent; but if 1,200 can be got from abroad, then this land will go out of cultivation, for it will not then yield even the general rate of profit. But this is no disadvantage, however great the capital may have been that had been expended on the land. Such capital is spent with a view to augment the produce—that, it should be remembered, is the end; of what importance, then, can it be to the society, whether half its capital be sunk in value, or even annihilated, if they obtain a greater annual quantity of production? Those who deplore the loss of capital in this case, are for sacrificing the end to the means.