Providence and Trade, Mercantilism, and the Eighteenth-Century Rule

The Greek views on self-sufficiency as regards individuals, families or entire city-states, and the role of trade in overcoming it, continued in the Christian era when it was given a religious dimension.

God did not bestow all products upon all parts of the earth, but distributed His gifts over dif­ferent regions, to the end that men might cultivate a social relationship because one would have need of the help of another. And so he called commerce into being, that all might be able to have common enjoyment of the fruits of earth, no matter where produced. (Viner 1972: 36-7)

As was true of the Greek philosophers, some theologians warned about the less salu­brious consequences of trade, such as the accumulation of money and wealth. In the Middle Ages Libanius’ view continued to be supported by some scholastics, but was rejected by others for moral reasons based on the strictures against commercial transac­tions advanced by the Greek philosophers, and was corroborated by church teachings on the dangers to salvation arising from market transactions in general and foreign trade in particular. Some viewed self-sufficiency as preferable to economic dependence on foreigners and feared that the introduction of foreign goods could divert interest from the satisfaction of basic needs, channelling it toward ostentation, a taste for luxu­ries and money making, inequalities in wealth, envy and even wars.

With the Enlightenment, the moral and religious view of trade espoused by the Scholastic writers gradually lost its appeal in favour of a more secular outlook. The mercantilist period is not noted for substantial theoretical contributions to trade theory, but the doctrine of mercantilism was rife with implications for trade policy. Mercantilist writers defined and calculated numbers for a country’s balance of payments, identify­ing key components such as exports and imports. The difference between the values of exports and imports constitutes the “balance of trade”, another important concept of that period of interest to policymakers. If its value is positive, the country sells more abroad than it buys, and the difference is paid to it in the form of bullion or precious metals. If instead it is negative, the country loses gold and silver to foreign creditors and consequently faces a decline in its money supply if its monetary system is based on the gold standard. Policymakers thus aimed at a positive balance of trade, in the awareness that they were playing a zero-sum game where one nation’s gain implied another’s loss. The futility of this policy was perceived by the more enlightened writers of the time who favoured instead a policy of free trade. They included Pierre de Boisguilbert and the Physiocrats in France, and David Hume, Henry Martyn, Sir Dudley North, Josiah Tucker and others in Britain.

Among the early critics of mercantilist policies, Pierre de Boisguilbert supported laissez-faire and free trade, as reflected in the slogan laissez faire la nature et la liberte. His economic reasoning earned him Marx’s praise as one of the two founders (together with William Petty) of classical political economy.

Boisguilbert’s writings inspired physiocracy, whose etymological meaning is “rule of nature”. It was a notable manifestation of the French Enlightenment, and represents the first full-fledged school of political economy. Under the leadership of Franςois Quesnay, who contributed several articles to the Encyclopedie, the Physiocrats launched a frontal attack against mercantilist doctrine and (following Boiguilbert’s lead) they articulated a program of reforms for the French economy that included freedom of both domestic and foreign trade. During and after the short span of two decades (beginning in 1756) over which they were active, the Physiocrats influenced the British classical school and Adam Smith in particular, who spent three years in France from 1763 to 1766 and met several of them. Smith rejected their belief that agriculture is the sole productive sector of the economy in the sense of being the only one to yield a surplus over cost.

The enduring legacies of physiocracy include the characterization of a competitive economy as one in which individuals pursuing their self-interest allow society’s welfare to be maximized, and a depiction of the circular flow of commodities between the principal classes of society is described in Quesnay’s Tableau economique (1759). Capital expen­ditures in the form of advances to farmer-entrepreneurs constituted an integral part of the process of production, and laid the foundations for the classical theory of capital. Given the Physiocrats’ importance in the filiation of economic ideas, it is surprising and somewhat disappointing that they failed to take an interest in or contribute to the theory of international trade. While the mercantilists had given an overwhelming importance to a country’s foreign trade because (inter alia) of its favourable effects on the pattern of economic activity, the Physiocrats regarded foreign trade as a “sterile” activity, on a par with domestic trade and manufacturing. They even argued that a large volume of foreign trade is harmful, although this was tempered with the belief that this volume was in any case likely to shrink as the economy developed. They did recognize the benefits of specialization, granting that “each country was considered as endowed with ‘produits privilegies’ which, because of natural conditions or national aptitudes, it could produce more ‘cheaply’ than other countries” (Bloomfield 1938: 732). Moreover, they acknowl­edged the providentialist function of foreign trade in promoting international economic solidarity, and its usefulness in disposing of unwanted surpluses via exports, or offsetting through imports any shortfalls in production. However, these views were hardly novel or specific to them.

Despite their failure to advance the theory of international trade, the Physiocrats (fol­lowing Boisguilbert) were staunch advocates of freedom in both internal and external trade.

In 1752 the Scottish philosopher David Hume published a series of essays analysing a variety of commercial, developmental, monetary, fiscal and demographic issues relating to England, Scotland, France and other countries. Two more essays with an economic focus followed in 1758, including “Of the jealousy of trade” where he argued for free trade and against the petty mercantilist policies of that time where nation-states were concerned that competing economies would supplant them in world markets. Hume claimed instead that no country should worry that other countries could improve their production techniques to such an extent that they would no longer demand any of its products, seeing that “nature, by giving a diversity of geniuses, climates, and soils, to different nations, has secured their mutual intercourse and commerce, as long as they all remain industrious and civilized” (Hume 1955: 79).

In his earlier essay “Of commerce”, Hume (1955: 14) had observed that “commerce with strangers... rouses men from their indolence” and that “imitation soon diffuses all those arts; while domestic manufactures emulate the foreign in their improvements, and work up every home commodity to the utmost perfection of which it is susceptible”. In “Of the jealousy of trade”, he argued (1955: 78-9) that:

the encrease [sic] of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours... Every improvement, which we have since [two centuries ago] made, has arisen from our imitation of foreigners.... Notwithstanding the advanced state of our manufactures, we daily adopt, in every art, the inventions and improvements of our neighbours.

His contention that “imitation soon diffuses all those arts” was prescient, and two centuries later still reflects one of the chief benefits of international trade, the interna­tional diffusion of technology. Hume became even better known for his essay “Of the balance of trade” of 1752 where, utilizing the quantity theory of money, he depicted what became known as the price specie-flow mechanism, thanks to which any balance of trade surplus or deficit is automatically eliminated over time because of the impact of the resulting gold flows on the price levels and consequent trade flows between two trading countries. His point was that the mercantilist goal of maintaining a balance of trade surplus for an indefinite period of time was not just undesirable but impossible to attain. Hume’s essay drove a nail into the coffin that soon encased the obsession of some mercantilist writers and policymakers with realizing a positive balance of trade as the prime goal of policy.

Hume and Josiah Tucker also engaged in what became known as the “rich country/ poor country” debate, where they argued whether poor countries such as Scotland could catch up with or even surpass the standard of living of richer ones such as England. In opposition to Hume, Tucker maintained in a letter to Lord Kames (Rotwein 1955: 202-5) that the built-in advantages of rich countries are hard to reverse. Their argument is highly topical since one of the important issues that economists are still debating is whether present-day developed and developing countries are likely to converge in their per capita incomes over time, or destined to draw even further apart.

Although trade theory did not make much headway prior to the nineteenth century, several eighteenth-century writers speculated on how to conceptualize and measure the gains from trade. They made an important discovery that Jacob Viner dubbed the “eighteenth-century rule”, according to which “it pays to import commodities from abroad whenever they can be obtained in exchange for exports at a smaller real cost than their production at home would entail” (Viner 1937: 440). In his Considerations on the East-India Trade of 1701, Henry Martyn presented the following illustration of this rule:

If nine cannot produce above three Bushels of Wheat in England, if by equal Labour they might procure nine Bushels from another Country, to imploy these in agriculture at home, is to imploy nine to do no more work than might be done as well by three;... is the loss of six Bushels of Wheat; is therefore the loss of so much value. (Martyn 1701 [1954]: 583)

In his example wheat can be grown inefficiently at home, or the same labourers can be employed to produce an export commodity that can be exchanged for a lot more wheat on world markets. In France, three-quarters of a century later, A.-R.-J. Turgot also argued for free interregional trade within France by offering another instance of this rule. He pointed out that farmers in Brie “thought themselves thrifty by drinking bad wine from their own vineyards” (Turgot 1773 [1977]: 187) when they sacrificed good land suitable for wheat in order to grow vines. Had they devoted the land to wheat instead, they could easily have sold it in exchange for the best Burgundy. The eighteenth-century rule was subsequently used by both Smith and Ricardo to illustrate the gains from trade.