In THE SCIENCE of economics, theory and practice are virtually divorced from one another - to the detriment of both. Economists condemn practical men as mere followers of routine who fail to appreciate either the truth or the grandeur of the doctrines enunciated by economists. Practical men, on the other hand, regard economists as mere doctrinaires who ignore the facts of life and inhabit a dream world of economic theories that exists only in their imagination.
Consequently the science of economics has failed to achieve its noblest aim which should be to elucidate economic practices and to show how they can be improved. And for their part practical men have not changed since they are as much children of routine today as they always have been in the past.
It is therefore certain that, in a more perfect world, economists would enunciate correct, reasonable and useful rules for practical men to fellow, while practical men would provide economists with facts and results which would confirm their theories and enable them to discover new doctrines.
Anyone who is both an economist and a practical man cannot deny that errors have been committed by both parties. Up to the present day all founders of new schools of economic thought and their disciples have failed to pay sufficient attention to experience gained in the world of affairs - experience which can be confirmed by all who have been engaged in practical activities. Economists have been overconfident concerning the conclusions of their reasoning - doubtless profound but the fruits of labours in the solitude of their studies - even when their conclusions are at variance with what people have always accepted as wise and correct. Even the worthy Adam Smith does not hesitate to brand as "an insidious and crafty animal" anyone who challenges his illusionary
theories by practical experience.1 And the French disciples and interpreters of this famous writer use equally opprobrious language when referring to practical men of affairs. Yet at all times in advanced nations there have been a great many men of affairs whose intelligence, experience, understanding and patriotism have earned them recognition as great leaders by their contemporaries. Can any impartial person doubt the value of their services or argue that men of this calibre have throughout the centuries played the part of idiots or fools?
On the other hand it must be admitted that, on the whole, practical men have been too ready to assess and to judge economic problems solely from their own point of view. They have scorned to make a thorough study of economic doctrines which would enable them to expose the errors of economists and to marshal the arguments with which they could refute the theorists on their own ground.
These assertions can be proved by taking as an example a French writer2 who combines theoretical knowledge with practical experience. His observations have often led to striking conclusions. Unfortunately his arguments are based upon principles which have long been shown to be erroneous.
There are three reasons why men in public life, who shoulder great responsibilities, are justified in rejecting the principles laid down by doctrinaire writers which are obviously incompatible with experience in everyday life.
A great many economic doctrines have been put forward and the author of the newest theory always denounces the ideas of his predecessors as inadequate and erroneous.
Since Colbert's day no one has succeeded in putting a new economic doctrine into practice.
Economists never agree among themselves.3
1. [The "insidious and crafty animal" condemned by Adam Smith was the "statesman or politician whose councils are directed by the monetary fluctuations of affairs" (Adam Smith, The Wealth of Nations, ed. E. Cannan, 2 vols., 1904, Vol. I, p. 432).] [The editor's notes are in square brackets throughout.]
2. M. Ferrier. [Francois Louis Auguste Ferrier was the director of customs at Dunkirk. His major works were: Du governement considere dansses rapports avec le commerce (Paris, 1805) and Du systeme maritime et commercial de I'Angleterre au XIX siecle (Paris, 1829).]
3. See the differences between the doctrines of J.B. Say and Adam Smith [p.21 below].
Thus the physiocrats proved the theories of the mercantilists to be untenable and then Adam Smith and J. B. Say exposed the inadequacies and errors of the physiocrats. In the United States two attempts to introduce free trade have failed. In France the treaties which Turgot concluded in the hope of moving as far as possible in the direction of free trade did not promote the welfare of the country but had exactly the opposite result. Germany has always followed the doctrine of free trade but far from deriving any benefit from this policy she has seen the collapse of the greater part of her productive powers.
Unfortunately the consequences of experiments made by doctrinaire economists are as uncertain as some of the results of medical experiments although in both cases the most recent theories have been put into practice. Whenever theoretical principles deviate from sound common sense and are opposed to what has been accepted as judicious, necessary and useful, it is prudent to refrain from taking any action which might be harmful to the welfare of society. It would be prudent to assume that the economic doctrine might be wrong and to delay making any hazardous changes until further research has either proved or disproved the validity of the theory.
This is certainly true of the so called doctrine of free trade which has been fashionable since Quesnay's day. In the name of scientific progress doctrinaire economists have urged practical men to adopt the policy of free trade without even explaining clearly what the doctrine means. Yet in all countries, practical men faced with real problems have always found it both necessary and judicious to regulate commerce and to restrict trade in various ways.
Whenever a number of enlightened, experienced, and intelligent men of affairs are faced with a problem that does not affect their private interests and are satisfied that a particular course of action is both necessary and desirable then one may presume that their decision is based upon common sense. This is true even if their action is condemned as unreasonable and contrary to the very nature of things by people who enjoy the reputation of being clever and well educated but who lack any experience of practical affairs.
Attention may be drawn to two ways in which even the most judicious proposals for economic reform are received by the public. First, such proposals nearly always have to face prejudiced opposition from conservative people who act by rule of thumb. Secondly,
the reception of a new doctrine may be seriously hampered because it may be accepted and achieve popularity owing to its apparent simplicity - yet a great many of its supporters (lacking reasoning powers and hoping to be looked upon as knowledgeable people) will embrace the new theory without proof and without thought, so as to bask in the reflected glory of the originator of the doctrine. Thus the influence for good of the greatest reformers is to some extent counterbalanced by the fact that their errors gain popular acceptance as quickly as the truths which they have enunciated. Consequently the greater the skill with which a new and victorious doctrine is launched, the greater its apparent simplicity, and the greater the confidence that it inspires in men of knowledge and integrity, the more likely will it be that a critic will fail if he undertakes the difficult task of trying to draw attention to the errors of the theory. In many respects that is the position of the author of this treatise.
Although the writer fully acknowledges the great services that Adam Smith and J. B. Say have rendered, he believes that in order to answer the question posed by the Academy in a satisfactory manner, he must prove (i) that there are important deficiencies in the doctrines of these two great economists, (ii) that these deficiencies explain the incompatibility between the theory and practice of economics as well as the disputes between theorists and practical men, and (iii) that the truth lies somewhere between the dominant theory of free trade, and the normal commercial practice of the present day.
The writer appreciates the difficulty of the task that he has undertaken, since he himself acknowledges the exalted genius of the economists whom he presumes to criticise and he recognises that their doctrines have been accepted by many men of superior talents. Far from confident of his own abilities, he might hesitate to attempt such a difficult task were it not for his conviction that the Academy of Moral and Economic Sciences - by the form of the question it poses and by the advice given to competitors -apparently assumes that the doctrines of Adam Smith and J. B. Say are capable of being put into practice successfully.
In fact the history of all new ideas shows that human progress is not promoted by the uncritical acceptance of the doctrines of great thinkers. Such an attitude makes it impossible for their successors even to make good the deficiencies that occur in the writings of
these great men. With the passage of time, however, intelligent people everywhere are prepared to accept the fact that it is right for the doctrines of profound thinkers of the past to be completed and improved by their successors.1
However, since the writer is both an economist and a man of affairs he enjoys certain advantages which may make up for his intellectual limitations. For many years he has not only studied the doctrines of the various schools of economic thought but he has also examined the actual facts of life. He has visited all the advanced countries in the world and he has studied their trade, industry, finances, and agriculture.
The widest possible gulf separates the men of theory from the men of practice when it comes to discussing the question of free trade.
The doctrine of free trade was first advocated by Quesnay and his disciples, the Physiocrats. Their arguments were based
1. [List's note] My doubts concerning the infallibility of economic doctrines and my right to pass judgment even on the past distinguished masters of this branch of knowledge have been strengthened by reading what the leaders of various schools of economic thought have had to say about each other. J.B. Say calls the Encyclopaedists dreamers - and dreamers indeed they are. He attacks their inspired assertions, their sectarian spirit, and their dogmatic and abstract language.
Consequently the supporters of today's dominant free trade doctrines have no cause whatever to complain of criticisms of their basic ideas. J. B. Say has opposed Adam Smith as vigorously as he has opposed the Encyclopaedists. Granted that in general he shows the dominant school of economic thought the respect it deserves, he nevertheless has no hesitation in attacking particular aspects of Adam Smith's doctrines. Say alleges that Adam Smith does not lay sufficient emphasis on the r61e of agriculture and capital; and that he actually exaggerates the significance of the division of labour - a principle which he was the first to discover. Say declares that Adam Smith places too much emphasis on labour as the main source of wealth. Say regards this point of view as too narrow and argues that Adam Smith should write "industry" instead of "labour." Say complains that Adam Smith gives no general account of the way in which wealth is divided. He considers that this aspect of economic theory has not yet been adequately explored. In short Say argues that Adam Smith's fundamental principles have not been proved. Say accuses Adam Smith of failing to make his position clear. Nevertheless, according to the introduction of Say's Discours preliminaire, while Adam Smith lays down "the most reasonable fundamental principles of economics" at the same time there is much confusion of thought in his book. There are plenty of accurate theories mixed up with positive facts. The uninitiated reader of Say's work really does not know what to think of so distinguished an economist as Adam Smith.
Consequently in France those whose opinion carries considerable weight have hardly felt able to support (any one of the) various rival economic doctrines. Charles Dupin, for example, writes: "I do not claim to have invented any economic doctrines or theories. I am not so foolish as to expect my countrymen to be taken in by my rambling speculations".
upon cosmopolitan principles. They put forward three propositions which are obviously erroneous and untenable - first that only agriculture produces wealth; secondly, that industry needs no protection; and thirdly that agriculture can flourish only if commerce is free from all restrictions.
Adam Smith reached the same conclusion by a different process of reasoning. He declared that the way to give the economy the most powerful stimulus was to leave it alone. Agricultural and industrial production and commerce should be left to private enterprise. Government intervention would only guide industry and capital into less profitable channels. Adam Smith considered that if a government wishes to increase national prosperity it has only to free production and foreign trade from all restrictions. He recommended that internal peace should be established as well as security for commerce and transport in order to secure the maximum welfare of a state. He believed that every nation possessed particular advantages, which would be fully exploited only if world free trade were established. He considered that exports were always balanced by imports of equal value and that there was no difference between trade in specie and trade in anything else. Adam Smith argued that Britain had become wealthy and powerful in spite of - and not because of - her restrictive commercial policy. He argued that import duties created privileges and monopolies which benefited particular groups of people but damaged the interests of consumers and of society as a whole. He denounced the levying of retaliatory import duties directed against the tariffs of other countries since such a policy harmed the country imposing the duties as much as the country that they were supposed to injure.
In view of these considerations Adam Smith, his disciples, and his successors have denounced every prohibition, every restriction, and every high import or export duty imposed to protect industry. They admit that, in present circumstances, the immediate total abolition of all commercial restrictions is impossible, but they urge the gradual removal of such restrictions. Merchants all over the world think only of their own private interests and agree with the theorists who advocate free trade but they make no effort to examine the validity of the arguments put forward in support of this fiscal policy. Since the profits of merchants come simply from exchanging products, they regard all imposts and restrictions as bad for business and they have invented and given their allegiance to the motto:
"laissez faire et laissez passer" - except for shipowners who consider bounties and privileges to be essential for merchant shipping and the fishing industry because - so they say - there can be no navy without a mercantile marine.
Those who earn salaries or draw pensions adopt the same attitude since it is in their interest to buy what they require in the cheapest market.
Manufacturers have very different ideas from farmers concerning free trade. Industrialists consider that freedom of commerce is desirable in foodstuffs, fuel, and raw materials because the lower the cost of these commodities, the better they are able to compete successfully with foreign rivals both at home and abroad. It is, however, difficult to satisfy the demands of manufacturers because there are so many definitions of what constitute "raw materials."
Farmers on the other hand consider that the welfare of society is seriously injured by every prohibition or restriction which increases the cost of manufactured goods. At the same time they argue that it is necessary to erect tariff walls to restrict the importation of foodstuffs. They put forward a thousand reasons to justify this demand. They declare that they pay higher wages and are burdened by higher taxes than their foreign competitors.
All governments are under conflicting pressures from these opposing interests. On the one hand they may favour greater freedom of trade yet at the same time they will realise the necessity of preserving and protecting existing interests so as to avoid any violent convulsion which might endanger the finances, credit or security of the state.
However enthusiastically they may pay lip service to the profundity of the doctrine of free trade, all governments recognise that it is much easier to declare their determination to establish free trade than it is to adopt a policy that will overcome all the difficulties and will achieve the object that they have in mind. They have neither the time not the desire to make a detailed examination of the doctrine of free trade and they are continually distracted by the demands of various pressure groups and by the actual situation in which the country finds itself. Faced with such an awkward and embarrassing situation it is quite natural that governments should take the easiest course open to them to surmount the difficulties with which they are beset. This accounts for the great gulf which separates their words from their deeds.
In England, where the free trade doctrine was born and received the greatest support, a recent attempt to put the theory into practice failed. After the advantages and drawbacks had been carefully weighed, it was decided to leave things as they were. It was evident that the claims of the supporters of free trade were unfounded.
What did the great champions of free trade - men like Canning and Huskisson - ever do to put into practice the doctrine which they so fervently supported? They caused a few laws to be passed which proved to be useless and are already a dead letter. They reduced a few import duties but always took care that the new duties were high enough to safeguard the home market for English manufacturers. They lowered unnecessarily high tariff walls but always made sure that import duties remained high enough to protect the country from a flood of imports. When they abolished some prohibitions they replaced them with import duties high enough to be equivalent to a prohibition. They even dealt with the Corn Laws in this way although the abolition of the import duties on cereals would have been of great benefit to their country. Did they ever do anything to reduce import duties on the products which France, Germany, or Switzerland would like to sell in the English market? No, they did not.
These men actually proclaimed that they had taken a great step forward towards free trade. But their hypocrisy was obvious since their true purpose was simply to trick those countries into making tariff concessions on the English goods which they imported. Even (the United States), the world's youngest state, which has applied the most modern principles and inventions of our age to achieve unparalleled economic growth, has not been able to adopt the policy of free trade.
Sensible impartial observers have to admit that although England preaches free trade, she practises something very different. What England means by free trade is the right to sell freely all over the world both her own manufactured goods and the produce of her colonies while at the same time she erects hostile tariff barriers to prevent foreign goods from competing with her own products in the home market. It must in fairness be admitted that the way in which England treats the rest of the world is no different from the way in which other nations treat their weaker neighbours who are in no position to retaliate.
There is therefore a real danger that the strongest nations will use
the motto "Free Trade" as an excuse to adopt a policy which will certainly enable them to dominate the trade and industry of weaker countries and reduce them to a condition of slavery.1
All over the world people misuse the term "Free Trade". They use it to deceive people while lining their own pockets under the cloak of patriotism. The vast mass of humanity cannot be expected to grasp the full implications of high politics or the differences between commercial, political, and social freedom.
Inside a country the policy of free trade is beneficial provided that it simply means that citizens are free to manufacture what they please and are not restricted when moving their produce from one place to another. But free trade in foreign commerce is far from beneficial. Indeed it is the equivalent of commercial slavery. Free trade in this sense - if introduced unilaterally - permits foreign competitors to ruin native industry while denying to native manufacturers the right to compete on equal terms with foreign rivals in markets abroad. Such "freedom" leaves us to the tender mercies of foreigners. Our industry and commerce are dependent upon their laws and regulations.
To answer satisfactorily the question posed by the Academy it will be necessary, first of all, to recommend certain changes which will reform both the theory and the practice of economics.
1. [List's note] Montesquieu in his Esprit des Lois writes: "Free trade is not a licence granted to merchants to do as they please. It is a servitude imposed upon them. If the state imposes restrictions upon the individual merchant, it does so in the interest of commerce in general. Trade is never subjected to greater restrictions than in free nations, and it is never subjected to fewer restrictions than in nations under despotic governments." And again: "England restricts the individual merchant but promotes commerce in general."