home could be increased only at a very great cost in labor and capital and a consequent increase in prices. The United States, for example, imports a large quantity of lead. If imports were cut off, it would be necessary to work poorer mines, and incur the necessarily greater costs, which, in higher prices, will obviously fall upon the consumers of lead.

As for exportation, the following are its advantages:

I. It utilizes natural resources and productive forces which, if there were no foreign outlet, would be superabundant, and therefore partially useless. Were it not for exportation, Peru would not know what to do with her nitrates, Australia with her wool, Spain with her wines, Pennsylvania with her iron and steel, nor the South with its cotton.

II. It develops a nation's industry. It is well known that the extent of the division of labor and the progress of large-scale production are proportionate to the size of the market. Division of labor cannot be at all detailed when the market is small, whereas with every extension of the market a more elaborate division of labor and the introduction of more expensive but in the long run more productive processes and machinery becomes possible. International trade, by creating world-wide markets for goods, tends to develop the division of labor; it leads to a fuller utilization of the possibilities of the soil and the population, to a completer development of acquired aptitudes, and hence to a great increase of the productive energy of humanity. England could never have become the great manufacturing nation it now is, did it not export to all parts of the world. The possession of an extensive market made it possible for her to make immediate and profitable use of the latest inventions and improvements in manufacturing.

134. The Law of Comparative Costs2

BY FRED M. TAYLOR

Here is a lawyer who very likely can mow his lawn, cultivate his garden, and take care of his furnace much better than the persons whom he hires to do these things. But what he does is to devote himself to his profession, and buy the services named from other people; and of course he acts wisely in so doing. It is clear that he gains most by devoting himself to the thing for which he is best fitted. He is not interested in the fitness or unfitness of his neighbor as compared with himself, but rather in the superiority of

"Adapted from Principles of Economics, 2d ed., 75-77. Copyright by the author. Published by the University of Michigan (1913).

his own fitness in one line as compared with his fitness in another line. So long as he can find a market for his output, it is better for him to devote his time to doing the things for which he is preeminently fitted, and get his supplies of other things from his neighbors, even though he can make those other things better than they.

It is evident that in this respect the case of the community or the nation is like that of the individual. The upper peninsula of Michigan produces little but copper and iron, getting most other goods through exchange with other communities. Yet it would be easy to prove that this section is really better fitted to produce some of the things which it buys than the sections from which it buys them. The explanation is to be found in what has long been known as the Law of Comparative Costs. It may be stated as follows:

Ignoring cost of transportation, two communities find it profitable to specialize respectively in the production of two commodities and to exchange those commodities each for the other, provided the comparative real costs of the two commodities in one community are different from their comparative real costs in the other community.

Let us illustrate. Letting labor represent all real costs, suppose that in England the cost of a ton of iron is 25 days' labor and the cost of a yard of broadcloth is 5 days' labor; while in America the cost of iron is 16 days' labor and that of broadcloth 4 days' labor. These costs may be expressed in the following proportions:

Eng. cost Iron: Eng. cost Cloth:: 25:5

Amer. cost Iron: Amer. cost Cloth:: 16:4

Since in England a ton of iron costs five times as much as a yard of cloth, it will naturally tend to be worth the same as five yards. of cloth; under which conditions England can afford to give iron for cloth if, and only if, she can get more than five yards per ton; or trade cloth for iron if, and only if, she can get it with less than five yards per ton. In America, on the other hand, a ton of iron tends to be worth four yards of cloth; under which conditions America can afford to trade iron for cloth if, and only if, she can get more than four yards per ton; or to trade cloth for iron if, and only if, she can get it with less than four yards. But the first hypothesis for England and the second for America are plainly shut out. England cannot get more than five yards of cloth for iron, since in America it is worth only four yards. So America cannot buy with less than four yards of cloth since it is worth five yards in England. On the other hand, the second hypothesis for England and the first for America fit each other perfectly. England can get iron for less than five yards, since it is worth only four in America; and America can

sell iron for more than four yards of cloth, since it is worth five in England. Accordingly, under the conditions supposed, an exchange of English cloth for American iron would be profitable.

It goes without saying that if one nation is absolutely inferior to its neighbor in respect to the production of one commodity and absolutely superior in respect to the production of another, then, obviously, the comparative costs of these commodities in one country are different from their comparative costs in the other, and so exchanging them will pay.

But, as the argument above has shown, it is equally clear that if a nation is absolutely superior to another in the production of each of two commodities, it will produce the one in which its superiority is the greater, and will import the latter. Likewise, if a nation is inferior to its neighbor in each of two commodities, it will produce the one in which its inferiority is less, and import the other.

135. The Theory of Free Trade

The theory of free trade is nothing else than a deduction from the advantages of foreign trade, or rather, of trade. The industrial policy of a people is concerned, not with the welfare of classes or the productive profits of particular individuals, but with securing for the people as a whole from the limited social resources at their command the largest amount of material wealth. This involves a problem of economic organization. This problem can be solved in two ways, logically antithetical, as well as in innumerable intermediate ways which combine the two primary solutions.

The one is the resolution of the economic world into a large number of infinitely small districts. In each district there is a body of people, a fund of accumulated capital, and land possessed of definite productive powers. The people, capital, and products of each district are to be kept clearly within the confines of the district. Commercial intercourse and personal movement from district to district are to be prohibited. Thus each district is called upon to solve its own problem in economic organization. It must directly satisfy the wants of its own people; to that end it is compelled to make the best possible accommodation of its labor and capital to its natural resources. It need not be said that under such a system of small selfsufficient units, few wants could be satisfied; little capital could be accumulated; the advantages of specialization would be lost; little natural skill could be developed; and only limited potentialities of the natural resources could be utilized.

The alternative is the treatment of the economic world as a single industrial unit. Population and capital are to be allowed

freely to move wherever they please; there is to be no barrier to the free exchange of goods. The problem of economic organization is to be worked out for the economic world as a single entity. Under freedom from interference, population and capital will gravitate towards those places where they can get the largest returns, or where they can best utilize nature's contributions. Where they go, industries will be established. The goods produced will not have to be consumed in the region in which they are produced; they will likewise naturally seek the places where they can command the highest prices. Under this system the people of any territory do not seek directly to supply all their own wants. They produce surpluses of the goods in the making of which natural resources or acquired skill make them pre-eminently fit, and exchange them for similar surpluses produced by their neighbors, far or near. Such an economic organization is nothing else than a territorial division of labor. It makes industry more efficient through the better utilization of natural resources, through the development of specialized skill, and through the larger volume of capital accumulated out of the larger earnings. The expenses of trade are a tax upon this system; but the exchange which trade makes possible pays at least its own expenses. If it failed to do so, it could not be carried on. In the majority of cases it yields, in addition, a surplus to both parties.

Neither of these alternatives can be perfectly realized. The former cannot be, because it is practically impossible to find a unit of territory logically small enough. The latter cannot be, because of the expenses of transportation. The cost entailed by distance will always involve the element of a scattering over wide territories of the establishments producing many separate goods. It will permit only a few localized industries to satisfy world-wide demands. But distance is to be looked upon, not as a friend, but an enemy, to material progress. Every invention in transportation which reduces the costs of carriage is to be regarded as a means to greater social economy, and as an effective device for extending still further the market, specializing more narrowly in production, and swelling the volume of material goods. On the contrary, everything which increases costs must be looked upon as a device tending to break society up into smaller groups, decrease the area of the market, and reduce the amount of material wealth. Now, protection is a system of taxes the object of which is to cause industrial society to be organized in a smaller group than otherwise it would be. It is nothing else than an increase in the costs of carrying goods from place to place. Consequently its interference with the establishment of a natural economic organization prevents the fullest utilization of limited

social resources and leads to the production of a smaller volume of goods than would be attained through free trade.

The theory of free trade is premised upon the proposition that a trade yields an advantage, not to one, but to both parties to the transaction. Since society is an aggregate of individuals, trade in aggregate yields a corresponding advantage. Political lines are artificially drawn. Their presence cannot affect either the nature or the advantages of trade. Therefore the way to fullest national prosperity, not for particular individuals or industries, but for society as a whole, is through the policy of untrammeled commerce.

B. THE MECHANISM OF INTERNATIONAL TRADE

136. The Theory of International Exchange

Let us try to determine how settlement is made by a country for goods bought abroad. It is evident that the trade in question is not between the countries involved, but between individuals living in these countries. To get to the heart of the matter, let us take a very simple illustration:

Suppose that Brown, a New York exporter of wheat, sells to Carpenter, a London importer of wheat, 10,000 bushels of wheat at the rate of five bushels for £1. Suppose, too, that at approximately the same time, Dixon, a London exporter of china, sells to Andrews, a New York china merchant, a consignment of china valued at £2,000. It is evident that as the matter stands, Andrews in the United States must remit £2,000 to Dixon in London, and that Carpenter in London must remit £2,000 to Brown in the United States. If each debtor sent the actual money to his creditor, the money would have to cross the ocean and come back again.

But, cannot some economy be devised to avoid the trouble and expense of this useless shipment? It can be done very simply. Brown, let us say, meets Andrews. He tells Andrews of his sale of grain; Andrews, in turn, tells him of his importation of china. Together they hit upon a plan of avoiding the shipment of gold to cancel the debts. Brown writes out an order on Carpenter instructing him to pay the sum due him to Andrews. This he presents to Andrews, who, in return, pays him in gold the American equivalent of £2,000. Since the amount of gold in one pound sterling is equal to $4.8665, this amounts to 2,000 times $4.8665. Andrews indorses the order which he has received from Brown and sends it to Dixon in payment for his china. Dixon, in turn, presents it to Carpenter, who pays him £2,000. Thus, it is evident, both Brown and Dixon have been paid in full the amounts due them, and Andrews and Carpenter