The Doctrine of the Balance of Trade

Earlier formulations and internal criticisms

The science of trade invents neither the expression nor the idea of a balance of trade. Price (1905) traces the idea from the Middle Ages onwards, and, more clearly, from the modern era in Hales (1581 [1907]).

Frank Fetter (1935: 623) notes that the expressions “favourable balance” and “unfa­vourable balance” are also of late occurrence. They are most often attributed to James Steuart (1713-80). Previously other expressions were current: “against us”, “in our favour”, “to our advantage”, “wrong balance”, “advantageous”, “lucrative”, “on our side”, and so on. Like Viner, Fetter also emphasises that quite early on, the English writers were aware of the different constituent elements of the balance, in particular, the “invisibles”. Consequently, they referred to the costs, traders’ profits, war expenses, insurance payments and so on. Petty (1623-87) writes, for example: “The labour of seamen, and freight of ships, is always of the nature of an exported commodity, the over­plus whereof, above what is imported, brings home mony, etc.” (Petty 1690 [1986]: 260).

The locus classicus of the doctrine of the favourable trade balance is this sentence by Mun: “The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein wee must observe this rule; to sell more to strangers yearly than wee consume of theirs in value” (Mun 1664 [1986]: 5; author’s emphasis). The generally accepted argument was that public benefits came from exports rather than from imports, or that the former were considered to be more positive for the nation. The good policy that resulted from this contrast consisted, then, in encouraging exports by making them more secure and quicker, thanks to public infrastructure, by supporting them with a strong navy and garrisons, by reducing taxes on them, by subsidising them and by estab­lishing free ports where goods were stored for re-exportation. As for imports, the writers complained in general that they were mainly satisfying a demand for luxury goods and suggested limiting them or imposing high duties on them. This suspicion concurred with scholastic or Protestant positions on the harmful effects of corrupting luxury and the benefits of parsimony, but the prosaic interest had here partly replaced the moral and ethical arguments. Imports of luxuries actually related to goods that national manufac­turing did not rework and which consequently increased national consumption without increasing national production. Hence the proposals aimed at reducing or abolishing duties on exports, prohibiting imports or imposing high duties on them if they were not intended for re-export (ibid.: 12).

Thereafter some authors considered other measures to achieve a positive balance, for example, encouraging domestic production intended for export. Others considered the opposition between export and import to be excessive and criticised the idea of a favour­able balance but never thought of abandoning it permanently.

However, in the mind of Child there was no doubt that an examination of foreign trade went through a measurement of the balance of trade. It was rather the method usually retained to evaluate this balance that he questioned, that is, the comparison of the value of goods exported by a nation and that of goods imported. The difficulty, according to Child (1693 [1698]: 153), was that this valuation was imperfect, although it had “much of truth in it”. The concept of balance was difficult to put into practice from the viewpoint of general as well as particular trade, because the measures drawn from customs ledgers were not very reliable (ibid.: 154). It was therefore difficult to draw any general political conclusion, as was shown by the “paradox” (ibid.: 156) of Ireland - which Child took from Petty (1662 [1986]: 46) - which exported more than it imported and yet grew poorer. What applied to trade in general also applied to particular trades. Indeed, one trade sector could be an importer without necessarily being “destructive” (Child 1693 [1698]: 158) for wealth. This was the case, for example, with regard to imports from Denmark and Norway of wood for construction, tar and pitch, used by the English navy.

The best and most certain discovery... is to be made from the Encrease or diminution of our Trade and Shiping in general... if our Trade and Shiping encrease, how small or low soever the profits are to private Men, it is an infallible Indication that the Nation in general thrives. (Ibid.: original emphases)

Barbon took up the argument of the low reliability of measuring by means of customs records, which he reinforced through the argument of the vagaries of international trade, whose effects on the nation’s wealth were sometimes positive and sometimes negative. His explanation of enrichment was as follows: “the only way to know what sort of Goods and Trade are most profitable to a Nation, is, by examining which sort of Goods employ most hands by importing and manufacturing. For every man that works, is paid for his time; and the more they are employ’d in a Nation, the richer the Nation grows” (1696 [1995]: 178).

Thus it is the merchants who enrich the nation, in particular, because they provide work for the people. The “fear of importation” vanishes and it even becomes useful to import raw materials, if the country does not possess them naturally, to rework and then export them with higher value. If imports were to be in competition with domestic goods and hinder their consumption, a customs policy well calculated to limit these would be enough (Barbon 1696 [1995]: 179). Finally, the consumption of foreign products depends on opinion, mood and fashion. The French want to buy goods manufactured in England and vice versa. All this creates a trade that can be “beneficial to all Nations” (ibid.).