Russel Wallace : Alfred Russell Wallace (sic)
(circa May 1879)
Although Sir Louis Mallet's letter is not very long, it contains much irrelevant matter--such as an argument against the 'balance of trade' theory, a discussion of the late Sir Robert Peel's opinions, and a denunciation of many foreign tariffs as "little less than criminal". The arguments adduced are comparatively few, and they are usually set forth in such general terms, and have such a specious appearance of logic, that it takes some little time to see what they really mean, and a good deal of consideration to detect the fallacies that underlie every one of them. It is to these definite arguments that I shall confine myself, and I undertake to show that they are all radically unsound. In most cases their whole force, as arguments, depends upon the tacit assumption of conditions totally unlike such as actually exist in this or in any other country. They ignore the existence of our enormous manufacturing and commercial population; they ignore the fact of the large capital locked up in buildings and machinery connected with our various manufactures; they ignore the great accumulation of wealth in the country; they sometimes even ignore the fact that we possess a currency, and depend entirely, for whatever forces they possess, on the assumption that all transactions take place by barter and that all payments are made in goods!
Let us take, as a first example of the kind of reasoning with which this letter abounds, Sir Louis Mallet's explanation of the causes of our commercial questions, at pages 23 to 26. He gives a table on page 23 & 26 of the progress of our exports from 1829 to 1872, showing a pretty regular increase from about 36 to 256 millions sterling; and gives no other cause for it than the progressive reduction of our import duties while he adduces it as a direct "proof of the effect of the Free Trade Policy on the national prosperity". Ignorant or unthinking readers of this pamphlet are left to believe that here is an undoubted instance of cause and effect. Not a hint is given that these 44 years witnessed a series of events of the most overwhelming magnitude, which effected a revolution in the creation and distribution of wealth such as never occurred before and can never, in all probability, occur again; and which all combined to increase our commerce and especially our exports. These events were-- the development of our railway-system from the opening of the Liverpool and Manchester line in 1829,-- and, the discovery of the gold fields of California in 1848 and of Australia in 1851, supplemented by continuous discoveries in New Zealand in 1861 and in Queensland in 1867.
Up to 1860, over 10,000 miles of railways had been made in Great Britain, using about three millions of tons of iron in rails alone. About the same length of railway was made on the continent, much of it with English iron; which was also supplied to India, America and Australia. We sent engines too, to all the world; and during the latter part of this period gold was pouring into our country at the rate of near a hundred tons annually, and we were supplying the rapidly growing populations of our Australian colonies with most of the necessaries of life. No wonder our exports advanced by 'leaps and bounds'; and it is not beyond the mark to assert that by for the larger part of the increase from 1840 to 1870, during which years it was most rapid, was directly or indirectly due to railways and goldfields, and would have occurred just the same, had no change whatever been made in our fiscal policy. That this is an understatement rather than an overstatement of the case is directly proved by the important fact blatantly ignored by free-trade enthusiasts, that almost all other commercial countries advanced equally with ourselves, while France and America who have systematically pursued a policy of protection actually surpassed us, their commerce increasing between 1850 and 1873 at a considerably more rapid rate than ours with our boasted free-trade!1 What are we to think of a teacher who is either ignorant of facts which are the very foundation of any sound argument on this question, or, if not ignorant, who keeps them out of sight and argues as if they did not exist?
The considerations now adduced not only explain the rapid increase of our commerce and wealth within the memory of the present generation, but also serve to account for a considerable part at all events of that commercial decadence and distress, which has afflicted this country for some years past, as well as, in a less degree, most other great trading communities. During the above named thirty years we were receiving the full benefit of railway-building and of gold-digging, the effects of which acted and reacted throughout the whole population, producing a demand for all commodities and for every kind of labour, and furnishing the means for extending our commerce to every part of the globe. But now, not only has this demand almost entirely ceased, but our former customers have become our competitors both at home and abroad. Instead of supplying all Europe with rails and engines, most countries supply themselves and compete with us in the foreign market and even sometimes in our own; while almost all civilized countries, including our own colonies, shut out our manufactures by heavy import duties in order to encourage domestic industry. We have here, I venture to [[maintain?]], a sufficient explanation both of the great development of our commerce since 1830, and of the comparatively recent but now long-continued commercial depression; and I can have little confidence in the teachings of political-economists who altogether ignore such stupendous facts in our industrial history.
We will now pass to Sir Louis Mallet's direct arguments on the question of free-trade and reciprocity, which are almost all comprised on pages 6 and 7 of his letter. He says:--
He then goes on to say that, as all trade between two countries is really only exchange of commodities and that one sided trade is impossible, therefore,--
Let us first examine the marvellous assertion that the prohibitive duties of other countries protect the British manufacturer, and see how far it is applicable under existing conditions.
In the very same page from which we have quoted the above passages, Sir Louis Mallet maintains that the working of a principle is best seen by pushing it to its extreme limits. Let us do so with his principle above enunciated, and suppose that all foreign markets are closed to the British manufacturer by prohibitive duties. British trade has then, he says, the maximum of protection; the reason being, that there can be no one-sided trade, and that no foreign goods can come to us if we can send them nothing in return. British manufacturers will therefore have no competition in the home market; they will be able to fix their own prices, and the consumer alone will suffer.
That is the political-economist's theory, and a very pretty theory it is. But unfortunately it ignores a whole host of stubborn facts of the most vital importance. It is a fact that we have a vast accumulated capital in this country; and also that we pay wages and purchase goods with money, not with goods. Foreigners therefore would send us their surplus stocks so long as we had money to pay even though we sent them nothing; and as they would be working full-time and therefore with the greatest economy, while we, being restricted to house trade, would be working short-time and therefore at a disadvantage, they would undersell us, as they actually do now in many cases. Our manufacturers would then have to restrict production still further; mills would be shut up; workmen would go to the workhouse or emigrate; but the competition of foreign manufactured goods would continue till all our surplus capital was exhausted. But even that would not stop it, as long as there was any gold coin in the country as a medium of exchange; for the retail dealer must buy in the cheapest market, as the political economists are never tired of reminding us, and so long as there was any one country which having its own markets protected could produce any article in general use cheaper than we could, the competition would go on, and would only finally cease when our available capital of all kinds was expended, and we had to revert to a system of barter and payment in kind for want of a metallic currency. There at length the competition of the foreign manufacturer would finally cease; and the British manufacturer (if the species had not become extinct) would enjoy that full and complete protection against foreign competition, which, Sir Louis Mallet very truly assures him, is the logical and inevitable effect of foreign prohibitive duties!
We have traced out the necessary result in an extreme case, but we have at present a singular proportionate result from the amount of foreign prohibition that actually exists. Iron, and paper, and sugar, and silk, and a host of other articles, come to us from countries which impose what are practically prohibitive duties on those same articles, compete with our domestic products, ruin the manufacturers and beggar the workmen. And the reply of the free-traders when these facts are adduced, is,-- "You are altogether mistaken. These foreign protective duties are a benefit to you instead of an injury; for, according to the immutable laws of political economy you are thereby protected in your own market."
Now let us examine the other part of the argument as quoted above, that the only effect of the imposition of such duties by foreign countries is to render the transaction less profitable both to seller and buyer. And to make clear the question at issue we shall again adopt the plan of pushing the assertion to its legitimate results in an extreme case.
Let us then suppose first, that the manufactures and products of England have free access to all foreign countries--that there is in fact perfect free-trade. Under this system, a whole host of special industries grow up amongst us; an enormous capital is invested in buildings, plant, and machinery; a dense population of skilled artisans and workpeople come into existence, and fully one half of our population are directly or indirectly dependent on the prosperity of these varied industries, the products of which we export to all parts of the world. But now the various foreign countries with which we trade, wishing to develope their own industries and utilize their various natural products, put heavy import duties on all the goods with which we have been accustomed to supply them. This leads to a rapid growth of their manufactures, especially of those for which any country possesses natural advantages; and in a few years they are able to supply themselves with most of the goods for which they were before dependent upon us.
In the mean time what is the effect upon ourselves? At first we still supply them pretty largely, but at a much smaller profit owing to the heavy duties our goods have to pay. Very soon however, as their own produce increases they are able to purchase less and less of ours. In the struggle to keep going our manufacturers force down wages and practise every economy; but the demand diminishes yet further, and then we have to decrease the production. But a decreased production, involves loss. The weaker capitalists become bankrupt; others work short time or at less than the full power of their machinery and are then still less able to compete with the foreigners, whose factories are now in full swing working with the maximum of economy, and sending their surplus stocks to us, to be sold at prices which we cannot compete with. Yet we are told, that whatever loss occurs is equally shared between the foreigners and ourselves, quite forgetting that even if this were so as regards the dealings between buyer & seller, yet it is the foreigner who gets the benefit of the duty in diminished taxation and to that extent has the advantage of us. It is however far more important to look at the comparative effects of this policy on our general prosperity and as that on the protected countries. They with their whole population employed, and their manufacturers thriving owing to the market we keep open for their surplus stocks. We, with thousands out of work--and utterly unable to find work (as by the hypothesis all industries are in the same state) with manufacturers ruined, and with a population which under the new state of things cannot be supported in the country, and must therefore emigrate or starve. "But the consumers get the benefit", cry our opponents-- "they get these imported surplus stocks cheaper". But what is the good of cheap manufactures to a starving man. When thousands can barely get the four necessaries of life--house, food, fire, and clothing, what matters it whether the comforts and luxuries of life are 5 per cent dearer or cheaper? The poverty and ruin of our manufacturing population reacts upon every trade and occupation in the country, making all so much poorer that their loss is quite out of proportion to the benefit derived from a few cheap luxuries to those who can afford to purchase them.
Just as the other argument we examined was only valid on the supposition that we had no capital and no money, so this one is only valid on the supposition that we have no great manufacturing districts to be ruined, no millions of workmen to whom these special industries are the sole means of existence. What mockery to talk of "equally sharing the tax between them in the long run, when a prohibitory import duty on our cotton or our iron throughout the world, would necessarily condemn an important section of our population to famine disease and death, from which all our accumulated wealth would in vain endeavour to save them. This is of course an extreme supposition; but it is by extreme cases alone that we can, as Sir Louis Mallet himself tells us, test the truth of principles in political economy. By this test his own statements as to the effects of foreign import duties are shown to be utterly unsound and unmeaning, except under conditions which nowhere exist, and probably never have existed.
A little further on we have another of these unreal arguments, which is yet evidently thought to be conclusive and crushing. "If", it is asked, "foreign countries are content to accept 50 worth of British goods in exchange for 90 worth of their own, are we to complain of their generosity?" I reply that such generosity is injurious to us in many ways as enforced and misplaced generosity often is. It makes paupers and paralyzes industry, and it puts the interests of large sections of our population at the mercy of foreign governments. It disturbs the natural relations of producers and consumer, rendering the investment of capital in any industrial enterprise a lottery; and the instability thus caused far outweighs any benefit the community derives from a fractionally cheaper article. Sir Louis Mallet then goes on: "The preacher of the new gospel of reciprocity would apparently answer in the affirmative. 'Our policy' they say, 'is to induce foreign countries to take more of our goods, and give us less of theirs in return.'" Our policy on the contrary is to insist that nature, not governments, shall determine the exchangeable value of our products and those of other countries. If the import duties or bounties of foreign governments had always been fixed and unchangeable as the apocryphal laws of the Medes and Persians, or as the actual laws of nature, and our various industries had grown up under their influence, they would ignore us no more than does the fact that America can grow wheat and France silk cheaper than we can. It is because they are liable to increase or decrease at the caprice of a foreign government, and may thus ruin a trade that has grown up under the influence of freer competition, that these duties; although giving us various articles fractionally cheaper, are so wholly and entirely injurious. But these essential conditions of the problem are utterly ignored by the theoretical free-trader, who reasons as if England was one great communist society in which wealth was equally distributed, and where it was not possible for that which is gain to some to be the absolute ruin of others and ultimately injurious to all.
I have now replied to every tangible argument in Sir Louis Mallet's letter. I have shown that so far as they are arguments at all, they can apply only to some unknown Utopia and not to the actual world in which we live, since they ignore all the essential facts which appertain to us as a densely peopled manufacturing community. The whole letter is, besides, pervaded with a general assumption that trade is an end in itself, not merely a means by which to supply the wants and add to the well-being of our population and that the cheapening of any article whatever is so great a good to the public at large that no amount of ruin or distress to any section of the people should prevent our taking every step to obtain it.
Sir Louis Mallet's "Letter" was written simultaneously with my article in the current number of the "Nineteenth Century", but it in no way anticipates my arguments or has any bearing on the scheme of strict and logical "reciprocity" I have therein proposed. I have received several letters approving of that scheme, but have as yet seen no valid objections to it; while I venture to think I have now absolutely refuted the best arguments which the chosen champion of the Cobden Club has been able to adduce, in support of our present slavery to the Juggernaut of unreciprocal free-trade.
Alfred R. Wallace.
1. A writer in "Blackwood" for April gives the following figures. Trade of the United States (exports and imports) increased from 60 to 235 millions, and of France from 74 to 291 millions, both almost exactly four-fold in the twenty-four years, while that of England increased from 185 to 570 millions, or a little over three-fold in the same period; and he well remarks: "The three prime factors in this industrial movement have been gold, railways, and steam-navigation. These combined agencies have vastly widened every man's and every nation's sphere of action, bringing distant countries into close contact, and thereby opening new markets for goods, and consequently giving to both labour and capital a new motive for energetic employment". It may be said, that though our proportionate increase of trade has been less than in France and America, our absolute increase has been very much greater. This is no doubt true; but we started in the race far ahead of them, and had advantages in our developed iron and cotton manufactures and our insular position which they did not possess.
Copyright: Alfred Russel Wallace Literary Estate.
This analysis should be seen in the context of Wallace's overall position on trade policy. Wallace argued neither for free trade nor protection but for reciprocity. This is entirely consistent with the modern approach to tariffs which has sought to extend free trade by the "most favoured nation" principle and by negotiated "rounds" of reductions, initially under the auspices of the GATT and later the WTO. The underlying principle here is that free trade is a good thing but only if pursued by all simultaneously.
The view attacked by Wallace was the unilateral free trade view of Mallet and the Cobden Society: that it would be in Britain's interest to adopt free trade even if other nations did not. Wallace argued that this proposition might have held at a time of Britain's ascendancy but could not hold with the industrial strength of other nations (America, France and Germany) growing rapidly and contributing to the "Depression" in British manufacturing. That is to say, the argument has to be set in its proper historical context. In particular he attacked Mallet's extreme view that, since trade was a two-way process, foreign protection necessarily increased Britain's protection. In Mallet's view a complete foreign ban on British goods would necessarily lead to Britain not importing their goods either. But, Wallace argued (challenging Mallet on his own ground), this would be to ignore the potential dumping of foreign goods on the British market until our gold reserves had run down.
Wallace was surely correct in arguing that increased economic prosperity could not, as the Cobden Society argued, have been due entirely to the unilateral free trade policy which had been progressively adopted through Pitt-Huskisson-Peel and Gladstone. He cited the railway booms and gold discoveries as major factors (the latter because of its role in stimulating demand-related investment). Free trade arguments which abstracted from economic reality confirmed Wallace's contempt for Political Economy.
As always in his writings Wallace concerned himself with income distribution, which tended to be ignored by the free-traders. In so doing Mallet implicitly assumed that Britain was "one great communist society"! "What is the good of cheap manufactures to a starving man?" Wallace asked.
The article is a good example of Wallace the trenchant controversialist. But he was not just making debating points. To summarise, Wallace's advocacy of reciprocity now looks distinctly modern as does his insistence on setting arguments for trade policy in their real world context. His stress on the distributional effects of liberalisation is still largely ignored, however.