1911 Encyclopædia Britannica/Free Trade

FREE TRADE, an expression which has now come to be appropriated to the economic policy of encouraging the greatest possible commercial intercourse, unrestricted by “protective” duties (see Protection), between any one country and its neighbours. This policy was originally advocated in France, and it has had its adherents in many countries, but Great Britain stands alone among the great commercial nations of the world in having adopted it systematically from 1846 onwards as the fundamental principle of her economic policy.

In the economic literature of earlier periods, it may be noted that the term “free trade” is employed in senses which have no relation to modern usage. The term conveyed no suggestion of unrestricted trade or national liberty when it first appeared in controversial pamphlets;[1] it stood for a freedom conferred and maintained by authority—like that of a free town. The merchants desired to have good regulations for trade so that they might be free from the disabilities imposed upon them by foreign princes or unscrupulous fellow-subjects. After 1640 the term seems to have been commonly current in a different sense. When the practice which had been handed down from the middle ages—of organizing the trade with particular countries by means of privileged companies, which professed to regulate the trade according to the state of the market so as to secure its steady development in the interest of producers and traders—was seriously called in question under the Stuarts and at the Revolution, the interlopers and opponents of the companies insisted on the advantages of a “Free Trade”; they meant by this that the various branches of commerce should not be confined to particular persons or limited in amount, but should be thrown open to be pursued by any Englishman in the way he thought most profitable himself.[2] Again, in the latter half of the 18th century, till Pitt's financial reforms[3] were brought into operation, the English customs duties on wine and brandy were excessive; and those who carried on a remunerative business by evading these duties were known as Fair Traders or Free Traders.[4] Since 1846 the term free trade has been popularly used; in England, to designate the policy of Cobden (q.v.) and others who advocated the abolition of the tax on imported corn (see Corn Laws); this is the only one of the specialized senses of the term which is at all likely to be confused with the economic doctrine. The Anti-Corn Law movement was, as a matter of fact, a special application of the economic principle; but serious mistakes have arisen from the blunder of confusing the part with the whole, and treating the remission of one particular duty as if it were the essential element of a policy in which it was only an incident. W. E. Gladstone, in discussing the effect of improvements in locomotion on British trade, showed what a large proportion of the stimulus to commerce during the 19th century was to be credited to what he called the "liberalizing legislation" of the free-trade movement in the wide sense in which he used the term. "I rank the introduction of cheap postage for letters, documents, patterns and printed matter, and the abolition of all taxes on printed matter, in the category of Free Trade Legislation. Not only thought in general, but every communication, and every publication, relating to matters of business, was thus set free. These great measures, then, may well take their place beside the abolition of prohibitions and protective duties, the simplifying of revenue laws, and the repeal of the Navigation Act, as forming together the great code of industrial emancipation. Under this code, our race, restored to freedom in mind and hand, and braced by the powerful stimulus of open competition with the world, has upon the whole surpassed itself and every other, and has won for itself a commercial primacy more evident, more comprehensive, and more solid than it had at any previous time possessed."[5] In this large sense free trade may be almost interpreted as the combination of the doctrines of the division of labour and of laissez-faire in regard to the world as a whole. The division of labour between different countries of the world—so that each concentrates its energies in supplying that for the production of which it is best fitted--appears to offer the greatest possibility of production; but this result cannot be secured unless trade and industry are treated as the primary elements in the welfare of each community, and political considerations are not allowed to hamper them.

Stated in its simplest form, the principle which underlies the doctrine of free trade is almost a truism; it is directly deducible from the very notion of exchange (q.v.). Adam Smith and his successors have demonstrated that in every case of voluntary exchange each party gains something that is of greater value-in-use to him than that with which he parts, and that consequently in every exchange, either between individuals or between nations, both parties are the gainers. Hence it necessarily follows that, since both parties gain through exchanging, the more facilities there are for exchange the greater will be the advantage to every individual all round.[6] There is no difficulty in translating this principle into the terms of actual life, and stating the conditions in which it holds good absolutely. If, at any given moment, the mass of goods in the world were distributed among the consumers with the minimum of restriction on interchange, each competitor would obtain the largest possible share of the things he procures in the world's market. But the argument is less conclusive when the element of time is taken into account; what is true of each moment separately is not necessarily true of any period in which the conditions of production, or the requirements of communities, may possibly change. Each individual is likely to act with reference to his own future, but it may often be wise for the statesman to look far ahead, beyond the existing generation.[7] Owing to the neglect of this demerit of time, and the allowance which must be made for it, the reasoning, as to the advantages of free trade, which is perfectly sound in regard to the distribution of goods already in existence, may become sophistical,[8] if it is put forward as affording a complete demonstration of the benefits of free trade as a regular policy. After all, human society is very complex, and any attempt to deal with its problems off-hand by appealing to a simple principle raises the suspicion that some important factor may have been left out of account. When there is such mistaken simplification, the reasoning may seem to have complete certainty, and yet it fails to produce conviction, because it does not profess to deal with the problem in all its aspects. When we concentrate attention on the phenomena of exchange, we are viewing society as a mechanism in which each acts under known laws and is impelled by one particular force—that of self-interest; now, society is, no doubt, in this sense a mechanism, but it is also an organism,[9] and it is only for very short periods, and in a very limited way, that we can venture to neglect its organic character without running the risk of falling into serious mistakes.

The doctrine of free trade maintains that in order to secure the greatest possible mass of goods in the world as a whole, and the greatest possibility of immediate comfort for the consumer, it is expedient that there should be no restriction on the exchange of goods and services either between individuals or communities. The controversies in regard to this doctrine have not turned on its certainty as a hypothetical principle, but on the legitimacy of the arguments based upon it. It certainly supplies a principle in the light of which all proposed trade regulations should be criticized. It gives us a basis for examining and estimating the expense at which any particular piece of trade restriction is carried out; but thus used, the principle does not necessarily condemn the expenditure; the game may be worth the candle or it may not, but at least it is well that we should know how fast the candle is being burnt. It was in this critical spirit that Adam Smith examined the various restrictions and encouragements to trade which were in vogue in his day; he proved of each in turn that it was expensive, but he showed that he was conscious that the final decision could not be taken from this standpoint, since he recognized in regard to the Navigation Acts that "defence is more than opulence."[10] In more recent times, the same sort of attitude was taken by Henry Sidgwick,[11] who criticizes various protective expedients in turn, in the light of free trade, but does not treat it as conveying an authoritative decision on their merits.

But other exponents of the doctrine have not been content to employ it in this fashion. They urge it in a more positive manner, and insist that free trade pure and simple is the foundation on which the economic life of the community ought to be based. By men who advocate it in this way, free trade is set forward as an ideal which it is a duty to realize, and those who hold aloof from it or oppose it have been held up to scorn as if they were almost guilty of a crime.[12] The development of the material resources of the world is undoubtedly an important element in the welfare of mankind; it is an aim which is common to the whole race, and may be looked upon as contributing to the greatest happiness of the greatest number. Competition in the open market seems to secure that each consumer shall obtain the best possible terms; and again, since all men are consumers whether they produce or not, or whatever they produce, the greatest measure of comforts for each seems likely to be attainable on these lines. For those who are frankly cosmopolitan, and who regard material prosperity as at all events the prime object at which public policy should aim, the free-trade doctrine is readily transformed, from a mere principle of criticism, till it comes to be regarded as the harbinger of a possible Utopia It was in this fashion that it was put forward by French economists and proved attractive to some leading American statesmen in the 18th century. Turgot regarded the colonial systems of the European countries as at once unfair to their dependencies and dangerous to the peace of the world. "It will be a wise and happy thing for the nation which shall be the first to modify its policy according to the new conditions, and be content to regard its colonies as if they were allied provinces and not subjects of the mother country." It will be a wise and happy thing for the nation which is the first to be convinced that the secret of "success, so far as commercial policy is concerned, consists in employing all its land in the manner most profitable for the proprietary, all the hands in the manner most advantageous to the workman personally, that is to say, in the manner in which each would employ them, if we could let him be simply directed by his own interest, and that all the rest of the mercantile policy is vanity and vexation of spirit. When the entire separation of America shall have forced the whole world to recognize this truth and purged the European nations of commercial jealousy there will be one great cause of war less in the world."[13] Pitt, under the influence of Adam Smith, was prepared to admit the United States to the benefit of trade with the West Indian Colonies; and Jefferson, accepting the principles of his French teachers, would (in contradistinction to Alexander Hamilton) have been willing to see his country renounce the attempt to develop manufactures of her own.[14] It seemed as if a long step might be taken towards realizing the free-trade ideal for the Anglo-Saxon race; but British shipowners insisted on the retention of their privileges, and the propitious moment passed away with the failure of the negotiations of 1783.[15] a Free trade ceased to be regarded as a gospel, even in France, till the ideal was revived in the writings of Bastiat, and helped to mould the enthusiasm of Richard Cobden.[16] Through his zealous advocacy, the doctrine secured converts in almost every part of the world; though it was only in Great Britain that a great majority of the citizens became so far satisfied with it that they adopted it as the foundation of the economic policy of the country.

It is not difficult to account for the conversion of Great Britain to this doctrine; in the special circumstances of the first half of the 19th century it was to the interest of the most vigorous factors in the economic life of the country to secure the greatest possible freedom for commercial intercourse. Great Britain had through her shipping, access to all the markets of the world she had obtained such a lead in the application of machinery to manufactures that she had a practical monopoly in textile manufactures and in the hardware trades; by removing every restriction, she could push her advantage to its farthest extent and not only undersell native manufactures in other lands but secure food, and the raw materials for her manufactures, on the cheapest possible terms. Free trade thus seemed to offer the means of placing an increasing distance between Britain and her rivals, and of rendering the industrial monopoly which she had attained impregnable. The capitalist employer had superseded the landowner as the mainstay of the resources and revenue of the realm, and insisted that the prosperity of manufactures was the primary interest of the community as a whole. The expectation, that a thoroughgoing policy of free trade would not only favour an increase of employment, but also the cheapening of food, could only have been roused in a country which was obliged to import a considerable amount of corn. The exceptional weakness, as well as the exceptional strength, of Great Britain, among European countries, made it seem desirable to adopt the principle of unrestricted commercial intercourse, not merely in the tentative fashion in which it had been put in operation by Huskisson, but in the thoroughgoing fashion in which it at last commended itself to the minds of Peel and Gladstone. The "Manchester men" saw clearly where their interest lay; and the fashionable political economy was ready to demonstrate that in pursuing their own interest they were conferring the benefit of cheap clothing on all the most poverty-stricken races of mankind. It seemed probable, in the 'forties and early 'fifties, that other countries would take a similar view of their own interests and would follow the example which Great Britain had set.[17] That they have not done so, is partly due to the fact that none of them had such a direct, or such a widely diffused, interest in increased commercial intercourse as existed in Great Britain; but their reluctance has been partly the result of the criticism to which the free-trade doctrine has been subjected. The principles expressed in the writings of Friedrich List have taken such firm hold, both in America and in Germany, that these countries have preferred to follow on the lines by which Great Britain successfully built up her industrial prosperity in the 17th and 18th century, rather than on those by which they have seen her striving to maintain it since 1846.

Free trade was attractive as an ideal, because it appeared to offer the greatest production of goods to the world as a whole, and the largest share of material goods to each consumer; it is cosmopolitan, and it treats consumption, and the interest of the consumer, as such, as the end to be considered. Hence it lies open to objections which are partly political and partly economic. As cosmopolitan, free-trade doctrine is apt to be indifferent to national tradition and aspiration. In so far indeed as patriotism is a mere aesthetic sentiment, it may be tolerated, but in so far as it implies a genuine wish and intention to preserve and defend the national habits and character to the exclusion of alien elements, the cosmopolitan mind will condemn it as narrow and mischievous. In the first half of the 19th century there were many men who believed that national ambitions and jealousies of every kind were essentially dynastic, and that if monarchies were abolished there would be fewer occasions of war, so that the expenses of the business of government would be enormously curtailed. For Cobden and his contemporaries it was natural to regard the national administrative institutions as maintained for the benefit of the "classes" and without much advantage to the "masses." But in point of fact, modern times have shown the existence in democracies of a patriotic sentiment which is both exclusive and aggressive; and the burden of armaments has steadily increased. It was by means of a civil war that the United States attained to a consciousness of national life; while such later symptoms as the recent interpretations of the Monroe doctrine, or the war with Spain, have proved that the citizens of that democratic country cannot be regarded as destitute of self-aggrandizing national ambition.

In Germany the growth of militarism and nationalism have gone on side by side under constitutional government, and certainly in harmony with predominant public opinion. Neither of these communities is willing to sink its individual conception of progress in those of the world at large; each is jealous of the intrusion of alien elements which cannot be reconciled with its own political and social system. And a similar recrudescence of patriotic feeling has bee observable in other countries, such as Norway and Hungary: the growth of national sentiment is shown, not only in the attempts to revive and popularize the use of a national language, but still more decidedly in the determination to have a real control over the economic life of the country. It is here that the new patriotism comes into direct conflict with the political principles of free trade as advocated by Bastiat and Cobden; for them the important point was that countries, by becoming dependent on one another, would be prevented from engaging in hostilities. The new nations are determined that they will not allow other countries to have such control over their economic condition, as to be able to exercise a powerful influence on their political life. Each is determined to be the master in his own house, and each has rejected free trade because of the cosmopolitanism which it involves.

Economically, free trade lays stress on consumption as the chief criterion of prosperity. It is, of course, true that goods are produced with the object of being consumed, and it is plausible to insist on taking this test; but it is also true that consumption and production are mutually interdependent, and that in some ways production is the more important of the two. Consumption looks to the present, and the disposal of actual goods; production looks to the future, and the conditions under which goods can continue to be regularly provided and thus become available for consumption in the long run. As regards the prosperity of the community in the future it is important that goods should be consumed in such a fashion as to secure that they shall be replaced or increased before they are used up; it is the amount of production rather than the amount of consumption that demands consideration, and gives indication of growth or of decadence. In these circumstances there is much to be said for looking at the economic life of a country from the point of view which free-traders have abandoned or ignore. It is not on the possibilities of consumption in the present, but on the prospects of production in the future, that the continued wealth of the community depends; and this principle is the only one which conforms to the modern conception of the essential requirements of sociological science in its wider aspect (see Sociology). This is most obviously true in regard to countries of which the resources are very imperfectly developed. If their policy is directed to securing the greatest possible comfort for each consumer in the present, it is certain that progress will be slow; the planting of industries for which the country has an advantage may be a tedious process; and in order to stimulate national efficiency temporary protection—involving what is otherwise unnecessary immediate cost to the consumer—may seem to be abundantly justified. Such a free trader as John Stuart Mill himself admits that a case may be made out for treating "infant industries" as exceptions;[18] and if this exception be admitted it is likely to establish a precedent. After all, the various countries of the world are all in different stages of development; some are old and some are new; and even the old countries differ greatly in the progress they have made in distinct arts. The introduction of machinery has everywhere changed the conditions of production, so that some countries have lost and others have gained a special advantage. Most of the countries of the world are convinced that the wisest economy is to attend to the husbanding of their resources of every kind, and to direct their policy not merely with a view to consumption in the present, but rather with regard to the possibilities of increased production in the future.

This deliberate rejection of the doctrine of free trade between nations, both in its political and economic aspects, has not interfered, however, with the steady progress of free commercial intercourse within the boundaries of a single though composite political community. "Internal free trade," though the name was not then current in this sense, was one of the burning questions in England in the 17th century; it was perhaps as important a factor as puritanism in the fall of Charles I. Internal free trade was secured in France in the 18th century; thanks to Hamilton,[19] it was embodied in the constitution of the United States; it was introduced into Germany by Bismarck; and was firmly established in the Dominion of Canada and the Commonwealth of Australia. It became in consequence, where practicable, a part of the modern federal idea as usually interpreted. There are thus great areas, externally self-protecting, where free trade as between internal divisions, has been introduced with little if any, political difficulty, and with considerable economic advantage. These cases are sometimes quoted as justifying the expectation that the same principle is likely to be adopted sooner or later in regard to external trading relations. There is some reason, however, for raising the question whether free trade has been equally successful, not only in its economic, but in its social results, in all the large political communities where it has been introduced. In a region like the United States of America, it is probably seen at its best; there is an immense variety of different products throughout that great zone of the continent, so that the mutual co-operation of the various parts is most beneficial, while the standard of habit and comfort is so far uniform[20] throughout the whole region, and the facilities for the change of employment are so many, that there is little injurious competition between different districts. In the British empire the conditions are reversed; but though the great self-governing colonies have withdrawn from the circle, in the hope of building up their own economic life in their own way, free trade is still maintained over a very large part of the British empire. Throughout this area, there are very varied physical conditions; there is also an extraordinary variety of races, each with its own habits, and own standard of comfort; and in these circumstances it may be doubted whether the free competition, involved in free trade, is really altogether wholesome. Within this sphere the ideal of Bastiat and his followers is being realized. England, as a great manufacturing country, has more than held her own; India and Ireland are supplied with manufactured goods by England, and in each case the population is forced to look to the soil for its means of support, and for purchasing power. In each case the preference for tillage, as an occupation, has rendered it comparatively easy to keep the people on the land; but there is some reason to believe that the law of diminishing returns is already making itself felt, at all events in India, and is forcing the people into deeper poverty.[21] It may be doubtful in the case of Ireland how far the superiority of England in industrial pursuits has prevented the development of manufactures; the progress in the last decades of the 18th century was too short-lived to be conclusive; but there is at least a strong impression in many quarters that the industries of Ireland might have flourished if they had had better opportunities allowed them.[22] In the case of India we know that the hereditary artistic skill, which had been built up in bygone generations, has been stamped out. It seems possible that the modern unrest in India, and the discontent in Ireland, may be connected with the economic conditions in these countries, on which free trade has been imposed without their consent. So far the population which subsists on the cheaper food, and has the lower standard of life, has been the sufferer; but the mischief might operate in another fashion. The self-governing colonies at all events feel that competition in the same market between races with different standards of comfort has infinite possibilities of mischief. It is easy to conjure up conditions under which the standard of comfort of wage-earners in England would be seriously threatened.

Since the 9th edition of the Encyclopaedia Britannica was published it has become clear that the free-trade doctrines of Bastiat and Cobden have not been gaining ground in the world at large, and at the opening of the 20th century it could hardly be said with confidence that the question was "finally settled" so far as England was concerned. As to whether the interests of Great Britain still demanded that she should continue on the line she adopted in the exceptional conditions of the middle of the 19th century, expert opinion was conspicuously divided;[23] but there remained no longer the old enthusiasm for free trade as the harbinger of an Utopia. The old principles of the bourgeois manufacturers had been taken up by the proletariat and shaped to suit themselves. Socialism, like free trade, is cosmopolitan in its aims, and is indifferent to patriotism and hostile to militarism. Socialism, like free trade, insists on material welfare as the primary object to be aimed at in any policy, and, like free trade, socialism tests welfare by reference to possibilities of consumption. In one respect there is a difference; throughout Cobden’s attack on the governing classes there are signs of his jealousy of the superior status of the landed gentry, but socialism has a somewhat wider range of view and demands “equality of opportunity” with the capitalist as well.

Bibliography.—Reference has already been made to the principal works which deal critically with the free-trade policy. Professor Fawcett’s Free Trade is a good exposition of free-trade principles; so also is Professor Bastable’s Commerce of Nations. Among authors who have restated the principles with special reference to the revived controversy on the subject may be mentioned Professor W. Smart, The Return to Protection, being a Restatement of the Case for Free Trade (2nd ed., 1906), and A. C. Pigou, Protective and Preferential Import Duties (1906).  (W. Cu.) 

  1. E. Misselden, Free Trade or the Meanes to make Trade Flourish (1622), p. 68; G. Malynes, The Maintenance of Free Trade (1622), p. 105.
  2. H. Parker, Of a Free Trade (1648), p. 8.
  3. (1787), 27 Geo. III. c. 13.
  4. Sir Walter Scott, Guy Mannering, chapter v.
  5. Gladstone, "Free Trade, Railways and Commerce," in Nineteenth Century (Feb. 1880), vol. vii. p. 370.
  6. Parker states a similar argument in the form in which it suited the special problem of his day. "If merchandise be good for the commonweal, then the more common it is made, the more open it is laid, the more good it will convey to us." Op. cit. 20.
  7. Schmoller, Grundriss der allgemeinen Volkswirtschaftslehre (1904), ii. 607.
  8. Byles, Sophisms of Free Trade; L. S. Amery, Fundamental Fallacies of Free Trade, 13.
  9. W. Cunningham, Rise and Decline of the Free Trade Movement, pp. 5–11.
  10. Wealth of Nations, book iv. chap. ii.
  11. Principles of Political Economy, 485.
  12. J. Morley, Life of Cobden, i. 230.
  13. "Mémoire," 6 April , in Œuvres, viii. 460.
  14. Jefferson, Notes on Virginia, 275. See also the articles on Jefferson and Hamilton, Alexander.
  15. One incidental effect of the failure to secure free trade was that the African slave trade, with West Indies as a depot for supplying the American market, ceased to be remunerative, and the opposition to the abolition of the trade was very much weaker than it would otherwise have been; see Hochstetter, "Die wirtschaftlichen und politischen Motive für die Abschaffung des britischen Sklavenhandels," in Schmoller, Staats und Sozialwissenschaftliche Forschungen, xxv. i. 37.
  16. J. Welsford, "Cobden's Foreign Teacher," in National Review (December 1905).
  17. Compatriot Club Lectures (1905), p. 306.
  18. J. S. Mill, Principles of Political Economy, book v. chapter x. § 1.
  19. F. S. Oliver, Alexander Hamilton, 142.
  20. The standard is, of course, lower among the negroes and mean whites in the South than in the North and West.
  21. F. Beauclerk, "Free Trade in India," in Economic Review (July 1907), xvii. 284.
  22. A. E. Murray, History of the Commercial and Financial Relations between England and Ireland, 294.
  23. For the tariff reform movement in English politics see the article on Chamberlain, J.. Among continental writers G. Schmoller (Grundriss der allgemeinen Volkswirtschaftslehre, ii. 64) and A. Wagner (Preface to M. Schwab's Chamberlains Handelspolitik) pronounce in favour of a change, as Fuchs did by anticipation. Schulze-Gaevernitz (Britischer Imperialismus und englischer Freihandel), Aubry (Étude critique de la politique commerciale de l'Angleterre à l'égard de ses colonies), and Blondel (La politique Protectionniste en Angleterre un nouveau danger pour la France) are against it.