Book IV

BOOK IV THEORY OF THE WORLD-ECONOMY § 81. THE WORLD ECONOMY The unity of national economy--Obstacles to equalization in world economy. Wagner, Grundlegung.-DietzeI, Theoretische SozialOkonomik, 1895.-Calwer, Einfilhrung in die Weltwirtschaft, 1906.-'-Harms, VOI~kswirtschaft und Weltwirt schaft, 19'12.-Lexis, Art. Handel, Schonberg Handbuch JI.-Sartorius von Waltershausen, Das volkswirtschaftlich'6 System der Kapitalanlage im Auslande, 1907.-Helfferich, Geld, 2. ed. 1910.-Knapp, Staatliche Theorie des Geldes, 1905.-Wieser, Der Geld'lV'ert und seine Verander'ungen, Sch. d. V. f. Soz., vol. 132.-Hertzka, Wesen des Geides, 1887.-Bastable, Theory of International Trade, 4. ed., 1903.-Hobson, International Trade, 1904.-Schiiller, Schutzzoll und F"reihandel, 1905.-Fellmeth, Zur I.lehre von der internationalen Zahlungsbilanz, 1877.-Pet.ritsch, Die Theorie von der sog. gilnstigen, und ungilnstigen Zahlungs bilanz, 1902.-A. Weber, Standortslehre und Handelspolitik, Archiv, vol. 32. Furlan, Die Standortsprobleme in der Volks-und WeLtwirtsckaftslekre, 'WeJ~ wirtsch. Archiv, 1913.-Harms, Wesen und Begriff der We ltwirtschaft , Welt wirtsch. Archiv, Rd. 13.-Wiedenfeld, Art. Weltwirtschatt, W. d. V. Dietzel, lVeltwirtsckaft und Volkswirtschaft, 1900.-A. Weber, Ueber den Standort der lndustrien, 2. ed. 1922.-v. Mayr, Volkswirtschaft, Weltwirtschaft und Kriegs wirtschaft, 1915.-Schultze, DieZerrilttung der Weltwirtsckaft, 2. ed. 1923. Oppenheimer, Weltwirtschaft undN ationalwirtschaft, 1915.-Foldes, Zur TheQfl'ie vom intern. Handel, Jahrb. f.N., Bd. 49.-'Zollinger, Die Bilanz der intern.

Wertilbertragungen, 1914.-Goschen, Theorie derauswiirtige-n Wechselkurse, 1915-Herzfelder, Die volkswirtschaftliche Bilanz und eine neue Theorie der ·Wechselkurse, 1919.-Cassel, Das Geldproblem der Welt, I 1921, II 1922.-Pesl, Das Dumping, 1921.-Marshall, Money, Oredit and Oommerce, 1923. The highest unifying agency in the national economy is the state. It guards the social legal order, protects common interests against conflicting private interests and manages public finances. The unity of the 'State's economic leadership and administration rests in a feeling of community or kinship, a sentiment which· is more powerful than the contrast of personal interests, strongly as the latter may make itself felt. This unity is supported by an apprehension of political homogeneity, uniting the entire people by the strong bonds of an historical force to which they submit without knowing that they are bound. In states of homogeneous nationality, it is fortified by a na tional consciousness. But at the same time it is sustained by the ex perience of the people that leads to a recognition of the value of eco nomic unity and the solidarity of interests, factors that have con tributed in calling forth an economic feeling of statehood which be comes imbued with the power of an historical force.

437 438 SOCIAL ECONOMICS The fact of unity finds its clearest expression, in the image of the social economy as already presented, at the heart of the capital city. A more thorough-going examination shows the marks of unity in all the numerous zones into which this image may be resolved. Their ar rangement obeys a historico-geographical law of localization. In all the zones, notwithstanding the great diversities occasioned qy the nature of the soil, changes of occupation, and the rich articulation and stratification of the people, there are the same types of men. In all places the same types of large entrepreneur, burgher, peasant and worker are found. Anyone changing the location of his acquisitive activity feels at home in the new place. It is not merely that he is still a citizen of the state. Economically he feels himself among his fellows; he finds the same types of companions, the same composition of upper and lower classes. Thus it happens that a tendency to equalization operates almost unimpeded throughout the entire national economy. Economic concepts, products, capital and human beings of all strata pass between all points. As they move, they disseminate uniformly the effect of progress or of retrogression.

In world economy there is no supreme political agency. Political power influence~ world economy only through treaties in which the con tracting parties unify their sovereign wills. Even as between small groups of sovereign states few matters have· been thus regulated by treaty. In this regard the respective governments follow the prevailing currents of popular sentiment. As between nations a hal'.. mony of interests is too little felt, while antagonistic contrasts of motives separate groups all the more sharply. To prepare a state administration of world economy by· a system of treaties is historically not tinlely; indeed it is as little so as would be an attempt at a po litical unification of the world by all~embracing treaties of alliance. The configuration of world economy shows the lack of unity in the fact that there is no capital city of world economy. Similarly there is no thorough-going localization of acquisitive centers from the point of view of world economy. The international division of labor has lagged behind the national one.· For a long time after a national community of acquisition had been developed in the more advanced states, the exchanges between countries were confined· to "parting with the superfluous in order to gain the indispensable." Whatever domestic products existed in excess of an effective domestic demand were surrendered for foreign products that could be used but were of a variety that could not be turned out at home.

The international division of labor has now passed far beyond these beginnings. All countries have adjusted themselves extensively to THE 0 R Y 0 F W 0 R L. D - E CON 0 M Y 439 foreign needs and foreign products. A country like England· has long been able to feed that large part of its population, whose incomes are derived by industrial production for export, only by importations of foodstuffs from distant lands and widely scattered parts of the globe. The collapse of foreign intercourse would inflict on such coun tries a catastrophe unparalleled in history. Even on less developed nations a crisis in the economic relations of the world would lead to serious disturbances. But taking all in all the domestic economic re lations are far the more important; the aggregate incomes derived from domestic commerce are much the greater. 'fhe difference between the two economies is not merely a matter of the amount of the commerce. There exists a difference in their essen tial nature. Each national economy is a unit bound tog'ether by the powers of historical growth. The world economy is not a unit.

Within it the most diverse types of national economy confront each other. They are widely separated by race, talents and historical background. Even civilized nations of the same race feel their his torical and national diversity as such. Within one nation there are great classes that stand in opposition to one another. But there is yet room to hope for an amicable adjustment of their relations and that the tragedy of an economic civil ,var may be spared to humanity. It is only infrequently that mankind witnesses what may be called an economic civil war. On the other hand the economic wars between nations have crowded many of the last centuries and are still present as striking examples of the incomparably more violent contrasts which cleave asunder the economics of different nations. If ,ve follow further into the details of the picture of the world economy, we shall look in vain for uniform social types. The typical entrepreneur, burgher, peasant and worker are different in the differ ent countries. Just as hostility arises from national sentiment, so international conciliation is obstructed by the diversity of the typical nature of the individuals. These differences least affect the flow of products. They restrict the flow of capital somewhat more. The greatest barrier is to the migration of men and the passage of ideas.

The national economy is not tied into the world economy in the same manner as are the economic zones into the national economy. Every national economy is a unit composed of coordinate zones. In the world economy, however, the national economies are the most impor tant; they are the great units of social economy and are themselves but slightly connected by international trade and an international community of acquisition. The economic condition of the world is to be described as a juxtaposition of unified national economies, inter440 SOCIAL ECONOMICS connected by trade relations only to a certain extent. The national economy on the other hand, even if it is not a single economy of the entire people, has uniformity and cohesion for all individual economies that are connected in trade. This is so quite irrespective of the homo geneity induced by a single state economy and by the single repre sentation of the common interests by the state, as well as by the unity of the dominating historical powers. This cohesion rests upon the unity of the market, of price-formation and exchange-value which offers a single base for the establishment of a social acquisition whose divisions are connected and whose localization has unity. Even in this restricted sense world economy is not a unit. And because it is not, many things happen differently from the way they occur in the national economy, starting with the formation of prices and running into the structure of international acquisition.

We have drawn an ideal picture of an extensive, unified, national economy that is actually not realized anywhere in its pure form. Owing to the historical cond.itions of its rise, there are irregularities of development in every national economy. Many have foreign sprinklings in the body of the people. A na tionally mixed state of such comparatively late rise as Austria-Hungary, entirely disregarding the newly acquired district of Bosnia-Herzegovina,l is far removed from the ideal type of the unified national economy. Austria-Hungary even lacks complete state unification in economic management as each of the two halves of the state follows its own course. But the various parts a,re further separated by contrasts of education and wealth, thus greatly impeding' economic freedom of movement within the country. There is an intermediate type of relationship between the colonies and the mother country. They are not fused into one national economy with the mother country. Still the relationship is greater than that which arises from the con tinuity of world economy alone. Moreover, it is necessary to distinguish two types: plantation colonies and white colonies. The plantation colonies ,are subordinate to the mother-country which combines, along with military and political superiority, advantages of race, civilization and wealth. The greater power of the mother-country may easily lead to abuse and economic exploitation; but under equitable adjustments the relation is of advantage to either side.

The migrations of men are confined to members of the leading classes of the 'mother-country. Climatic conditions bar mass migrations outward; a counter migration from the colonies faces a series of obstacles. The passage of ideas is limited by contrasts of racial characteristics. These exist despite the unity of the central government because both state and colony are controlled by widely disparate historical influences and face each other like strange worlds. The white colonies are less dependent politically on the mother-country as soon as they have somewhat gathered strength and self-reliance. There is also less 1 Trans. note: It will of course be realized that this was written before the war. The change of tense would not affect the theory. Austria-Hungary doesn't exist and Bosnia-Herzegovina has been taken away!

TH E 0 R Y 0 F W 0 R L D - E CON 0 M Y 441 economic dependence, though the colony may lag behind for a long time in its development. Such colonies are frequently the objectives of mass migration from the mother-country. The common nationality binds together the economic in terests of state and celony; but it is possible for a conflict of economic interest to develop to the point of hostility. Today the United States of America and a number of other colonial settle ments on virgin soil are the termini of the great migratory highways by which the surplus population of Europe seeks new homes. These goals of emigration are subject to special conditions so that the general rule is suspended and the migration to them meets less obstruction than do changes of domicile within the national economy itself. In commercial speech the unity of the national economy is too strongly em phasized. The customary statement that "England" or "Germany" buys or sells is misleading. England or Germany, as a whole, does not buy or sell. It is the individuals of the English or German national economy who buy or sell. At all times their personal motives, their personal appraisals are as important to in ternational trade as they are in domestic trade, although it must not be for gotten that one of the factors controlling their actions is the historical power of economic national consciousness. This force like all others the classical doctrine has wholly neglected in its individualistic striving. This theory looks beyond the boundaries of the national economy. In the theory of free-trade it fuses the national economies into a cosmopolitan world economy. The historical conditioning of national economies, the task of national economy and the in dividualistic bias of the classical doctrine were not fully understood until Friedrich List demonstrated them in his principal work already cited.

§ 82. THE INTERNATIONAL FORMATION OF PRICES Prioe-formation between localities in the national eoonomy-Obstaoles to the equalization of oosts in world economy. There are a number of local partial markets in every national econ omy. Prices are by no means the same in all of them. The localiza tion of industry under the division of labor always exerts its influence. 'rhe prices of wares differ between points of origin and the market by an amount that in the long run equals the costs of transportation and commercial handling. Generally the price of food is highest in the capital. Because of the large demand there, the provisioning of the city requires the maximum transportation with resulting high price, uriless the international imports that seek this secure and capacious market tend to keep prices lower. The lowest prices for foodstuffs are found in the most remote areas supplying the capital and exposed to the largest transportation and handling costs. In the intermedi ate zones the prices advance by the differences of these costs. The smaller urban markets that are within the sphere of the central district suffer from the influence of the great demand of the center 442 SOCIAL ECONOMICS which .enhances prices, while their own demand contributes to maintain the price. Neither in the prices of products nor of cost productivemeans can greater differences be maintained for any length of time than those justified by costs of transportation and commercial handling. Wages are adjusted to the local prices of the means of subsistence of the masses. All large departures from the normal are adjusted in every instance by shipments and migrations.

In each individual case the' actual conditions will depart more or less from these idealized conditions. We have outlined our illustra tions with this extreme precision in order that the contrast to condi tions of world economy may be seen. In international trade the distances to be covered are greater and the costs of transportation are usually higher, despite the lower rates on water-borne freight. Here and there prices are artificially in creased by the imposition of duties. ~1:ore important, though, than these facts that lead to' a quantitative difference in prices, is a quali tative difference in the relations of ·national and world economy. The local zones of national economy are partial markets of the great na tional economic market. But the national districts are not partial markets of a world market; ,they are principal markets, independent of each other for the most part and only connected with world com~ merce at certain points. There are particular goods for which a true world market exists and for which world-market prices, properly ~peaking, may be said to exist. There are a variety of wares that have conquered a limited international market and whose price is interna tionally determined. But there is no all-embracing world market; there' are not even market districts that unite limited groups of na tional economies. Therefore, in world economy as a whole and also in the international trade of narrower districts, there are lacking strong tendencies to equalization.

Even before a national community of markets and production had been evolved, the economy of men of the same nationality had always possessed a certain pervading type. In the districts inhabited bYi fellow nationals men of the same type could be found" experiencing the same needs, and exhibiting the same vital and practical energy in similar social organizations. These people, despite the fact ,that mutual exchange may have been restricted, assimilated the ideas of the period and developed them further in identical ways. In these cases the seeds of new growth fell upon_ similar soils. The same manner of life and labor resulted in approximately the same basic prices for the most important material and p~rsonal values. The relations of one nation to another are essentially different from THE 0 R Y 0 F W 0 R L D - E CON 0 M Y 443 those just described. It is not necessary that the homes of the people differ by contrasts of geographical position and climate nor that their historical development be separated by long periods of time. They themselves may not be separated by racial disparity. And yet by other habits of domestic economy the consumer's demand operates from different bases; different composition of the population or vary ing levels of civilization differently condition acquisition. Even the external aspect of the markets may be distinct; the natural values dealt in may not be the same and the fundamental prices· from which historical evolution progresses .may lie widely apart.

When in the course of time diminished costs of transportation per mit an expansion of exports, the majority of the products as they have been shaped for consumption are too closely adapted to domestic re quirements to be readily accepted in foreign countries. A large pro portion of the .productive .materials are permanently barred from shipment by low specific values that do not cover costs of transporta tion.Aside from agricultural staples there remain for export mainly the more valuable capital goods demanded everywhere, as for example, metallic productive materials, used in manufact~res throughout the world. Not until production is highly developed does it adapt itself to the manufacture of foreign forms of goods for export. Even today the sum of the material values made available· for export, which can not be transformed in domestic use, is only a rather trifling part of the entire production. Even the shipment of money capital and the migration of wage laborers meet so many obstructions that wages and the rates of interest on capital are by no means internationally equal ized. This fact itself has the further result that there is no decisive equaliza tion of· rates of cost.

In the lending of money capital through mercantile credits or for permanent investment costs of transportation do not enter as a practical consideration. But since capitalists must be careful of the security of their loans, it may be readily understood that the supply is conservative whenever the business practices of foreign countries are unfamiliar or the means of legal aid are not conveniently acces sible. The rates of interest for investment capital vary strikingly as between nations of different wealth; they are by no means equalized even between the richest European nations between which there is an active commerce. When even the supply of liquid money capital so haltingly follows the tendency to international equalization, the hesitancy of the body of workers to follow t~his tendency is all the more easily understood. The emigrant laborer is c<unpelled to change not only his habits of 444 SOCIAL E CON OMIC S life and his home associations; he must also adapt himself to foreign methods of working-that are not those to which he has been ac customed. Therefore, neglecting those countries in which migra tion plays an important part and also certain customary seasonal migrations and some particular branches of trade, the international exchange of workers is exceedingly limited. Every national economy possesses its own nationally characteristic labor which in the process of its evolution it develops further. The character of the English and the Russian worker differs radically in the racial predispositions of the two nationalities. Their diversity is still further accentuated by the unlike tendencies of the national economic education inherent in the con ditions of production and the general political and social environ ment. .All those factors which influence the rate of wages: the mini mum of existence, the standard of living, .the productivity of labor and organization vary from nation to nation. It is inconceivable, therefore, that wages of labor should not' be differently adjusted in various countries. Even the stream of emigration to the United States could never reduce to one level European and American wages.

Not even the entrepreneurs are sufficiently mobile as a group to spread themselves out uniformly over the world. The majority of entrepreneurs prefer-neglecting the relations of the mother country to her colonies-to send their products to foreign countries rather than to settle there themselves. § 83. EXCHANGE-VALUE AND CURRENT VALUES OF MONEY IN INTERNATIONAL TRADE Local variations of the value of money--National exchange-value of .money «Ina the quantity theory. The facts which have just led us to our conclusion as to the forma tion of prices in different localities find their expression in variations in the value of money in these places. In the financial centers price determinations converge for all values· found in the market and the exchange value of money reflects their aggregate position. When the exchange value of· money is high, the general price level is low and vice versa. Zones of low price level in the national economy are zones of high money value. The same is true of national economies ,vhen considered as. units in the world economy. The local variations of money value within the national boundaries are measured approxi mately by the costs of fransportation and the eommercHtl handling of warel$. But the international gradations of. money value are even THEORY OF WORLD ... ECONOMY 445 more numerous because the international differences of the price levels exceed even the costs of transportation and handling. The local varia tions within the llational economy have a regular structure. In sim ilar zones the money value is approximately the same; it is highest in the agricultural areas, and decreases towards the denser industrial populations in the urban centers. It drops in proportion as the prices of principal necessities of life are increased by the expenses of car riage. The international gradations of the value of money are not equally regular. It may safely be contended that the national money value recedes as the national wealth advances. As the natural econ omies are progressively absorbed and the influence of the law of dimin ishing returns from the soil sets in, the general price level rises. Be sides these factors, however, the national exchange value of money is everywhere historically conditioned. It may be influenced primarily by the evolution of the institution of money, by conditions in the pro duction of precious metals, or by the after-effects of more or less frequent and lasting manipulations of paper money.

The differences in the value of money between the zones of the national economy cannot be equalized~ They decrease as the costs of transportation diminish but they never disappear altogether unless we assent to· the utopian assumption that some day commerce and traffic will be carried on free of costs to the beneficiaries. It ill ust be ad mitted that the lower rural prices from time to time invite equalizing movements. Certain industrial establishments are transferred from the city to the country in order to profit by the lower wages of labor. The large cities seek to relieve the increasing pressure of· population by transferring hospitals, schools and other similar ~nstitutions to the country where their domestic economy is more cheaply nlanaged. For like reasons even various individuals living on fixed incomes and not tied to definite places of acquisition make their homes in rural sections unless they are restrained by the social attractions of large cities. But under present conditions these movements are not suffi..

cient to lead to a complete equalization in the density of settlement and wholly to disintegrate the urban centres. On the contrary, the movement toward the cities is becoming more pronounced and their increasing population necessitates ever-increasing supplies for their provisioning, with increased costs of transportation and larger varia tions of ·the price level and the value of money. To the extent to which there is a movement back to the country that increases the density of population, even there the price level rises and the value of money falls. The basis for the computation of the urban price level is thereby raised without doing away with the gradations as such.

446 SOCIAL ECONOMICS It is no more possible to equalize international. differences in the value of money, in so :far as these are due to the costs of transportation and handling. But over and above this fact, these gradations are sup ported by the historical powers that impede international movements of equalization. While these obstacles continue, the corresponding variations of national money values must continue. Only when the hindrances are no .longer felt that today bar an international equali zation of the rates of interest and wages and when all other barriers to the tendencies toward equalization of prices disappear, will the deviations of national exchange-values be reduced to the· standard given in the costs of transportation·. and handling. However, this is a condition that one cannot expect··to .nnd realized. until the national economies shall dissolve and become zones in a unified world economy.

This condition will not be realized until a world citizenship has effaced all national contrasts of. race and culture and political rivalry is lost in a unified republic of the world. The classical quantity theory, in contrast with this view, holds that the value of money is automatically equalized between nations. Like any other commod ity, money is said to tend constantly towards the centers of highest value, flow ing thither from the sections· of lower value. Two serious errors invalidate this doctrine. Both arise from the fact that the method of .idealizing simplification has been carried to an extreme. For one thing the contrast between wares and money has been obliterated. In every in stance wares are the objects of exchange, :Inoney its medium. The movement. of the latter is ancillary to that of the former. When the principal movement is limited beca.use there are not sufficient quantities of wares, the auxiliary flow is correspondingly small. It is obviously on this account that the higher money value of rural sections does not induce an equalizing movement of money from the cities: there are not enough goods in such regions for which the money may be exchanged.

The second erroro£ the doctrine is that it neglects the historical obstacles to which individuals are constantly subjected in the national economy. When it is said that money and wares tend towards the centers of highest value, the as sumption is made that men are free of any kind of hindrance and execute· all productive and commercial transactions that 'conditions allow. But all people are under the spell of social historical powers. When these influences work as "free" powers, they intensify personal forces. But they also act as coercive powers and tend to narrow the field of personal activity. In even the most favorable case long periods are necessary before. the mass of the population over comes the obstacles to the movement of products and money. It is even more difficult to break down the barriers to the migration of men and to a qualitative and quantitative equalization of culture.

The quantity theory, moreover, requires important supplementation. It treats exclusively of the exchange-value of money. But in international payments still another form of the value of money makes its appearance, i. e., the rate of ex change. Fluctuations in the rate ·of exchange furthermore give rise to speculative THEORY OF WORLD-ECONOMY 447 transactions. that entail considerable international movements of money and are quite similar to speculation induced by fluctuating quotations on the Exchanges. Similarly extensive movements arise to profit by differences in the rates of in terest on commercial paper in the great money markets. For both purposes considerable sums of money are held in readiness by brokers, speculators and dealers in precious metals, sums which are available much more promptly for international transfer than would be possible by the. round-about method of producing and shipping wares. Thes.e capital movements have attained partic ular importance in the settlement of· international balances; to them the lead ing banks of issue refer their discount policy. We shall confine ourselves to the most general remarks concerning rates of exchange and the theory of rates on commercial paper. The details cannot be explained by mere theoretical in strumentsand are not considered here. Our primary interest attaches to the fundamental conditions under which the settlement of international balances takes place. Here is a problem deserving the most serious consideration and soluble only by the aid of theory.

Domestic money is money only in the country of··issue. In foreign countries it is merchandise and cannot be used to make money payments. Those who must make such payments abroad must first turn their 'domestic money into foreign money. On the money exchanges the various national currencies are traded one against the other. There we also find that other means of payment are exchanged especially foreign bills of exchange or drafts which have the ad vantage that they are more cheaply transported than cash. The international exchange value of money is expressed in its current price on the Exchange or in the rate of exchange of the foreign drafts. It is a special variety of exchange value; it is the value in terms of the rate of exchange which domestic money bears to foreign. The rates of exchange of ~ommercial paper and of foreign values generally obey the general law of prices. They follow the conditions of supply and demand as indicated at the time being by the international balance.

In the case of dealings in bills and drafts, we have to conceive of the supply and demand as graduated according to the urgency of the need of the foreign means of payment. As for any other price the marginal series is decisive. For countries on a paper standard or under present conditions for countries on a silver standard with restricted coinage, the fluctuations of the rates of exchange according to the balance of payments may be wide, more especially when specula tion enters into the transactions and evaluates the expectations of a future adjustment of the standard. For countries on a gold standard the regular fluctuations are narrowly limited, due to the influence of coinage for private ac count. The currencies of these countries are related. They are connec,ted by the homogeneity of the monetary material. The coins of each of these countries can be transformed into those of any other by incurring the moderate costs of shipment and recoinage. Like any other price in a free market the rate for drafts and acceptances is subject to the law of costs. Fluctuations of. these rates, therefore,· can never appreciably exceed the standard indicated by these costs so long as the private right of coinage may be practically exerciSed.

Fluctuations in the rate of international exchange· are strongly felt in the national economies affected. As in the case of domestic payments, so here the community should, at least for short periods of time, feel reasonably certain of the effect which may be anticipated on later paying out a sum of money that is received. Governments evaluate the stability of international !poney value so 448 SOCIAL ECONOMICS highly that they occasionally accept considerable sacrifices in order to steady the rates of currencies which are not, like those of the gold standard, more firmly secured by their material homogeneity. Even the less marked fluctuations which are unavoidable in the case of currencies related by the gold standard become a source of annoyance to persons who are held to payments in foreign money which they must purchase above par. The fluctuations of the money market become more distressing than usual whenever the demand for foreign means of payment grows so large that domestic gold reserves have to be resorted to in order to cover the demand. The most accessible means of covering the shortage is recourse to the gold· reserves of the banks of issue which are open to universal demand in pursuance of their duty of redeeming notes. But according to the banking law these reserves are the basis for the emission of notes, and· consequently for the entire credit structure of the country. These banks, therefore, are under the necessity of most careful guard ing their gold reserves. To accomplish this they raise the rate of discount when ever the withdrawal of gold becomes excessive. They thus not only restrain all demands for credit, but invite back to the domestic market all those capi'tal funds of which we have previously spoken that are ready fqr international loans.

The Austro-Hungarian Bank holds ready for call a large amount of foreign gold drafts to meet the demand for foreign means of payment without reducing its gold reserve. Both expedients have been shown in practice to be suited to their end, but· it is obvious that either way, even with the support which the govern mimt can lend for the protection of the domestic money market, the measures of relief are rather limited. Neither bank nor central government can provide means sufficiently large to satisfy a persistent demand for foreign payments. These expedients can bring relief only on the assumption that the funds are demanded for only a comparatively short period, and that even under this con dition the amounts are not excessively large. Reliance must be placed on the belief that after some reasonable time a counter movement will set in which will restore the equilibrium of supply and demand in the international money market.

Furthermore, one must trust that even during the period of disturbance the equilibrium will not. be too severely upset. Are such equalizing counter-flows actually effective and how are they in duced? This problem must now occupy our attention. § 84. THE EQUALIZATION OF THE INTERNATIONAL BALANCE OF PAYMENTS AND THE MOVEMENTS OF THE TRADE BALA'NCE The starting pbint of the dootrine of free-trade, oredit and debit balance of trade-International balanoe of payments; favorable and unfavorable balanoe of paymen ts-Orediitor-oountries, deb,tor-oountries. The classical school has taken its position on the problem just stated in its theory of free-trade. rrhe large interests of foreign trade aroused economic thought at an early date. The economic policy of the great rulers and statesmen of the mercantilistic era and the mer cantilist doctrine accompanying this policy were what the classicists first considered. In their polemics directed under the leadership. of THEORY OF WORLD-ECONOMY 449 Adam Smith against the mercantilists, the theory of international trade ranks foremost. Economic science is indebted for a number of its most important discoveries to the keen investigations carried on by the classical s'chool, in an attempt to establish their theory of freedom also for international trade. The mercantilists had con tended that commercial. policy should strive to increase the money wealth of the country. To this end it was necessary to bring about a surplus in the value of its exports when contrasted with imports.

The arguments by which the classicists met this view were chiefly instrumental in broadening the scientific structure of economic theory. But by this very exposition, it may be shown that the classical doc trine did not penetrate to the roots of economic theory. As has al ready been pointed out in an earlier connection, so here, it is unde niable that the classical masters failed to carry their individualism to its final, consequences, and that they did not lay bare the ultimate individual bases for economic theory. They contend that a permanent excess of exports over imports is impossible. In international trade" goods must finally be paid for in goods"; no country can continually pay for its imports in money ex cepting only those countries which mine gold and silver and in which, therefore, gold and silver are practically wares. Even for short periods of time, no country can entirely divest itself of its money wealth. Where too much money has passed out to other countries, a rise in the value of money would necessarily induce a return flow.

This would establish the equilibrium of the international distribution of money as the export of goods from the country with lower prices to those. with higher ones would be increased until the equilibration resulted. These deductions assume that the major portion of international payment takes its rise in the exchange of goods. If we speak of the sum of imported and exported values of wares as the commercial balance, and of the sum of payments received and made as the inter national balance of payments, the condition assumed is such that the international balance of payments is primarily composed of those pay ments which are made for the values of the commercial balance. Such an assumption, however, does not do justice to the present facts. In international trade large sums of money are now paid to meet obliga tions of an entirely different nature. In. the traffic in goods, not only are the price payments for the values of the wares themselves to be considered, but allowance must also be made for those which arise from their transportation between countries. The related movements also in the commercial credit transactions are important items of the 450 SOC IA LEe ON 0 M I C S international balance 'of payments. Moreover, capital is loaned inter nationally for investment; from this there is a return flow of interest and sums repaid. International travel and the homeward transporta tion of emigrants bring large sums into circulation. As between the mother country and her colonies there is to be added the pension of officials who performed their services in the colonies but retired to the mother country. Occasionally the international balance of pay ments is increased by extraordinary payments: war-subsidies,. tributes, and .reparations. Especially the last items may set enormous'sums in motion. It may well be that a "country' '-meaning by country all the inhabitants who take an active. part in foreign trade-covers a large proportion of its imports not by. exports but from. other sources of the balance of payments without being obliged to send out money.

The affluent countries, England, France and Germany, have for some time shown a large debit balance of trade with excesses of imports which have been liquidated by these countries from other surpluses. As things are, we can have no doubt that if England, France, and Germany per~anently maintain their position as wealthy nations they will constantly show a debit balance of trade. The classical argument no longer applies in· the original form of its statement. In the more comprehensive balance of payments today, "goods are no longer paid for exclusively in goods." This is by no means the only objection to the classical doctrine of international equalization. It is far more unsatisfactory in that it fails to throw light on the manner in,vhich the credit and debit items of the international balance of payments are connected and adjusted. Even though the movements of wares in foreign trade were wholly to be interpreted in the exchange value of money, all appeal to this value· would be of no use in supplying the motives for the transfers of capital, the payments of interest, the homeward transportation of emigrants, or the movements of money in connection with interna tional travel. How is one to explain the mutual balance of all these multifarious payments, coming from thousands and thousands of individuals between whom there is no personal contact 1 We can un derstand how international receipts and expenditures of money may balance each other, when a relatively poor state places orders for its nlilitary requirements with foreign industrialists, and provides the means of doing so by contracting a foreign loan; or when bankers lend capital for foreign enterprises on condition' that· correspondingly large industrial· orders be placed with their domestic clients. But how are we to imagine a balancing of, accounts where items appear which have as little connection as the savings that Austro-Hungarian THEORY OF WORLD-ECONOMY 451 miners send home from America and the interest that the Austro Hungarian government pays to its creditors in France and Germany ?

There is surely no superior jurisdiction here, through which the equi librium might be restored. Tn what way is there a mediation between the determinations of such .large numbers of independe~t individuals so as to insure beyond any reasonable doubt the preservation of an equilibrium? Or is it conceivable .that the international balance of payments is in .constant danger of collapse; is it· merely accidental that an equilibrium is maintained Y In the face of doubts of this sort the classical exposition .leaves us hopelessly adrift. More than this, it is misleading. It proves to be one of these half-truths of genius which established the fame of the classicists and at the same time are their weakness. These semi verities offer insights that are seductive in their unparalleled simpli city but are subversive of penetration and truth. It is possible that the classical masters were the victims of that manner of speech which personifies native and :foreign countries, and all too easily refers to them as units neglecting the individuals who really count. In any event they have made too far-reaching a use of idealizing simplifica tion, the instrument of theory and exposition. They have described the conditions of the money economy as though they were simple, like those of the natural economy, where wares truly pay for wares, and where each trader surrenders his natural performance to the same per son from whom he receives a counter-service. But it is the essence of the money economy that the· natural values are surrendered to other persons than those from whom equivalent natural values are received.

This essential condition must not be overlooked in theoretical inquiry. Owing to this circumstance all personal relations are of broader scope; the theoretical problem presented is more comprehensive, including, as it does, the entire series of relationships between individual deter minations. Thus a theory that is expected satisfactorily to interpret the process must look correspondingly far afield. It must show how the unity of the economic resultant is finally realized despite the num ber of actively participating individuals. To this end the broad general exposition of the classicists, offering a primary· survey of the movements of the balance of trade is inadequate. The problem of an international balancing of accounts offers no fundamental difficulties for a theory that has reduced the national economic community of payment to the participating individuals. A solution is prepared by the results already arrived at in our investi gation of the national economic equation of supply and demand.

The individual is guided by the 3ame personal motives in his trade 452 SOC IA LEC 0 NOM I C S with foreign countries as he is in his. domestic trade. The interna .. tional balance of payments is nothing more than the sum of the per sonal balances of payment for all the people; the commercial balance is only a similar sum of the personal balances of wares. As soon as we have recognized the motives that lead to an equilibrium in the indi vidual economy, there can no longer be a riddle in world economic relations, for these are the aggregates of the personal relations. In the latter case, these are more numerous, extensive, and complex; but the same constructive individual force moves through them all, even though the individual may receive his reinforcement from historical powers, and these forces may interpose more effective obstacles. We may thus readily understand that a people may permanently maintain a credit as well as a debit commercial balance. In any individual economy the personal balance of wares, or for any group or such economies, the sum of the balances may be permanently a credit or a debit. In a national e,conomy whenever the debtor-owners preponderate, who' have to surrender more products than they may retain for themselves, this excess production must be turned over to foreign. nationals, and the commercial balance will close with a re peated excess of exports. 'In other words the balance will show a constant credit. The reverse relationship holds for economies in which money~d individuals preponderate, who draw more products than they surrender.

It is also possible to understand that the international balance of payments ofa nation constantly strives towards an equilibrium since this same desire may be assumed to activate each of the related indi vidual economies, however numerous they ,may be. Only those econ omies are excepted, that are conducted negligently or unskillfully or which suffer unmerited catastrophe-all exceptional cases that are not decisive. Even in these cases the equilibrium of incomes and ex penditures can be only, temporarily disturbed; for although no funds will be forthcoming to cover the e.xpenditures incurred by means of credit and the creditors will lose all or part. of their demands, in the long run even for the, ruined debtor-economies and the injured creditor-economies, a new equilibrium must be established. However, if we assume ideal' national economies, consisting of none other than well regulated individual economies, the equilibrium of all personal balances of payments, and consequently also the equilibrium of their net forefgn payments, i. e., the international balance of payments, must prevail undisturbed.

Just as the balance of personal payments may at times be favorable and at times unfavorable, so may the international balance; but it THE 0 R Y 0 F W 0 R LD - E CON 0 M Y 453 can never be permanently a credit or a debit. At all times the equa tion of supply and demand must enforce itself in the markets; the excessive supply encounters an unsatisfied demand, the chain of ex changing pairs is closed, and a state of rest is reestablished in the market, though there may be certain permanent changes of quantity and price. This statement holds for the market or all products as well as for money. It obtains in domestic as well as foreign trade. In either case, there need be no radical changes of the general price level or the value of money to achieve this result. The only difference between domestic and foreign trade is that in the latter case the in tentions leading to exchange are formed and carried out against the stronger resistances offered by historical powers which impede the in ternational movement of products, capital funds, and human beings.

To overcome such resistance there must be comparatively large dis crepancies in the selling prices of goods and in the rates of interest On money. When the domestic market slumps and persons must turn to thei foreign market for the excessive supply or unsatisfied de mand, serious disturbances must occur; the balance of payments will become unfavorable in a relatively large number of individual econo mies until equilibrium is at last restored. The opposition of favorable and unfavorable balances of payment does not coincide strictly with the opposition of poorer and richer national economies. A poor nation may enjoy a favorable interna tional balance of payments if it has always adequately ~nticipated payments due to foreign countries. The balance may be temporarily or even permanently unfavorable for the richer nation, if its individ ual economies have not been sufficiently conservative in making loans to foreign countries and in foreign purchases. The strain on the international balance of payments will be· all the more severe, the smaller are the reserves of ready money retained for the credit pay ments of the country. Even a wealthy nation is seriously inconven ienced by an unfavorable fluctuation of the balance, when its system of payments rests upon a meagre foundation of ready money.

We have observed that the international market for negotiable paper recovers its· equilibrium in a comparatively short time and that it is the policy of ~he banks of issue to govern the adjustment with comparatively small means. 'Ve have now discovered the final explanation of these facts. Whenever the international balance of payments is unfavorable in a country, personal forces exert themselves in the individual economies affected and strive to reestablish the equilibrium. Business men seek to make sales in foreign cQuntries for goods which they could not sell at home, or an attempt is made to ob454 SOCIAL ECONOMICS tain from abroad capital funds for which credit could not be secured in the domestic market. The counter-movements that are thus called forth reestablish the international equilibrium coincidentally with the equilibrium of the' personal balances of payment. The discount policy of the banks of issue need only be invoked to control the situa tion .for comparatively short periods of time until the individual ef forts of the separate economies have consummated these counter movements. The banks' of issue are further supported by the fact that, in the money markets, large sums are always kept in readiness for international distribution. These funds follow the law of the largest gains; their flow is obstructed only by a possible .lack 'of se curity in granting loans ..

National economies are ordinarily classified as creditor and debtor countries. In the former, a surplus of loan capital is available and is placed abroad. Con sequently among the individual .economiei, the creditors outweigh the debtors. In the debtor countries, the debtor individual economies preponderate; the' de mand for capital not· being satisfied at home must-turn to foreign countries. Preponderancy, in these .cases, is determined not· by the number of economies but by the magnitude of the capital sums involved;. the single debtor economy' of the state itself may outweigh large numbers of private creditor economies. The balance of payments of debtor countries is somewhat more liable to tend to .a na~towly confined unfavorable condition. But under certain conditions it may be favorable: at the time when large sums of borrowed capital are paid in; or when the country' develops favorably, fulfilling its obligations as they fall due, and actually places capital in reserve. The obligations of indebtedness form only a single item in the total. balance of payments, an. item whose effects may be offset by other items; it would be as improper to argue from these obligations alone to an unfavorable balance of payments as to argue, let us say, from a credit commercial balance alone to a favorable balance of payments. The latter balance of creditor couutries is more likely to be favorable, but under' some con ditions, it may superficially appear unfavorable; for example,' when large money capital has just been loaned to foreign countries.

In debtor as well as creditor countries, the balance of trade may be formally credit or debit. A country whose economic development is in its infancy is un able to use in the home markets the purchasing power which it acquires through loans; it is compelled to buy the wares desired in foreign countries. Frequently, the necessity of purchasing foreign goods results in the contraction of debts. On .the other hand a debtor country developing its production favorably tends toward a credit commercial balance. The. domestic market stilf fails to provide purchasers for the increasing quantities of manufactured goods. The domestic purchasing power is impaired by the interest and the repayments of principal which the debtor citizens are required to pay to foreign countries. It may pos sibly be further reduced by taxes which the state, also indebted to foreign coun tries, is obliged to levy in order to meet its obligations. From the side of the supply, therefore, as well as from that of the demand, everything points te foreign countries, if tlle chain of exchanges is. to be closed. In proportion to the THE 0 R Y 0 F W 0 R L D - E CON 0 M Y 455 payments sent out in money form, natural values must be shipped abroad to cover the transactions.

A rich country developing still further to .become a creditor country and in.. creasing its production tends thereafter to a credit commercial balance. Its na tionals having gained increased purchasing power by their larger production do not employ this to absorb, themselves, the entire domestic product. Therefore, for the surplus of their production, they must seek purchasers abroad, just as it will be necessary for them to look to foreign countries to absorb loans of the money capital they save, because at home the supply of capital begins to exceed the .demand. Thus, again, exports made in money form run parallel with the covering natural values. With a further development of production and wealth, the body of industrial workers and the urban population· increase to such an extent that they can no longer be fed from domestic food stuffs. Food must be imported in large quantities, just as industrial raw·. materials must be brought in from foreign countries. Whereas, the importation of wares is thus increased, exports are not correspondingly enlarged. Cover for the former may be provided without necessitating .the shipment of natural covering values to foreign countries.

The payments which become due for interest on money capital invested abroad are. so large as to be ample to effect a· balance. They may even be largeenouglh to allow additional foreign investment. The natural values, covering these trans actions and running parallel with the payment of interest, are shipped by the debtor countries either in the form of increased export of goods to the creditor country or to countries where the latter may make new investments. These typical and fundamental forms that arise from the elements of the commercial balance and the credit relationships· are constantly being crossed or intensified by othetelements of the balance of payments. For example, the work men of a debtor country may cross the sea because the opportunities of employ ment at home are ill-paid and the demand of American entrepreneurs. promises high wages. These workers may then make remittances from their savings to the home country. In the balance of payments of the latter these remittances appear as considerable additions to receipts. The increased domestic purchasing power will bring in its train an increased demand for wares or an increased supply of capital. Both of these must ultimately turn to foreign countries 'if they cannot be satisfied . in the domestic market where the chain of exchanging pairs has already been closed. In a national economy of an ill-balanced com position, such as that of Austro-Hungary, the tendencies of one district may occasionally be offset by opposite ones in another. While the Austrian half of the empire has become a creditor country, Hungary still remains a debtor.

Again, in Austria the German portions with the rich metropolis are in strong contrast to the poorer Slavic districts. While· Hungary and the poorer dis tricts of the Austrian half of the Empire must still pass through the earlier stages in the formation of the commerciad balance, the richer districts have already reached a high level. .The interaction of such different developments may at times lead to far greater fluctuations than any shown bya well-balanced na· tional. economy. The payment of a war-indemnity always disturbs the international balance of payments. It is imposed on the national economy by external compulsion; there has been no preparation by internal movements of natural values. But even the payment of so large a sum as that demanded by Germany from France after the 456 SOC IAL, EC ON OMI C S war of 1870-711 was accomplished without.impairing the parallelism between the money~form of payment and its covering natural form. Even by this method of extreme compulsion a country cannot be stripped of its bullion resourc,es.

France raised its war~indemnity mainly by a loan which was largely subscribed by French citizens whos-ecured the necessary means by the sale of securities abroad. The French had to pay the interest on this loan by additional taxes whose payment reduced their purchasing~power and the natural values left for their' disposition. ~s their successors, the German states, enriched by the in~ demnity, then came forward. § 85. THE DEVELOPMENT OF NATIONAL AND WORLD ECONOMIES The international stratification and localization of industrie~Theoretical foundations for a foreign trade policy---Tariff for industrial education and the preservation of agriooltm-e-N ationaZ economic solidarity. The main problem of national economic policy relating to foreign trade is reflected in the controversy between free-trade and protective tariffs. As was to be expected, the classical school resolved this problem in favor of its controlling principle,-freedom. Its most important argument is derived from the epoch-making:concept of the division of labor whose success"causes its development from the free community.of exchange. The classical school argues that if the di vision of labor be in any case economically advantageous, it should also be so in world economy. Just as within the nation it creates opportunities to use their forces to the best advantage of all, thus in the world at large it should give each people the opportunity to em ploy its peculiar advantages for the greatest general welfare. Here is a truth of the broadest significance broadly stated; but again I the classicists did not wholly. grasp the full hnport of their theoretical dis covery. They did not proper ly observe the shadow of economic stratification which occasionally obscures the light of the international division of labor. Just as the social stratification within the national economy may become one of the gravest evils, so internationally stratification may subordinate the weaker people to its own injury as well as to that of all other nations.

In his acute observation Ricardo certainly did not miss the fact of international stratification. He considers it and endeavors to harmo nize it theoretically with his views. In his investigation, he has ex pressly dealt with the case of two countries who enter the community of exchange and invoke the division of labor, one of which countries is incontestably superior in every branch of production. But he in1 Tra.ns. note: "Nach dem Zetzten Kriege" should obviously be changed as it has been in the .text.

THEORY OF WORLD .. ECONOMY 457 clines to the opinion that even in this· case an international division of labor must further the interests of both countries. He finds an exact analogy in the case of two men, of· whom one is superior to the other in every type of acquisitive labor. They will both find it to their advantage to unite in a community of exchange under a division of labor in which the better workman confines himself to the produc .. tion of those specialties in which he most excels and the less capable one undertakes the remaining productive labors that .are beyond the available time and effort of his fellow. So also the two countries should derive advantage from a division of labor; the total product that may be distributed between would be enlarged. As . Ricardo formulates his assumption, an international division of-labor would necessarily be of advantage to both parties. It remains incontestably true that the free community of exchange between· primitive p.eoples and those more civilized is best for all concerned.

Ricardo did not fully probe the effects of international stratification. He stopped with the simplest assumption of astatic condition with out development. .He does not investigate the effects of economic evolution. The theorist must always· start from the static assump tion. It yields most readily to his ·idealizing··method. Dynamic ·re lationships cannot be clearly defined in his thinking until; after the static condition has been fully apprehended. .But the investigator falls into a serious error as soon as he applies conclusions deduced from a state of rest to a condition of evolution unless he remodels his conclusions by a process of decreasing abstraction. This error Ricardo and the classical school, generally, have made. They did not perfect a theory of world economic development. Nor as spokes men of the economically strongest nation, England, did they have any practical interest in the formulation of such a theory; for without further ado free trade offered to England the desired· opportunities for evolution, despite the fact that the free-trade theory rested on the static assumption. It was reserved to the economists of the eco nomically weaker continental countries to guard the interest of their national economies, at that time surpassed by England, and to· show that these countries needed protective' tariffs if their development were not to be permanently arrested by· the despotism of England.

This could never be accomplished by the economists unless they elab orated the static English theory and developed a dynamic theory. The protest against free trade was first made in the interest of industrial development. Friedrich List demanded adequate "duties for industrial education." These should run for periods of one or two generations in all national economies which possess the natural 458 SOCIAL ECONO~ICS and social prerequisHes .for the. development of a large industry but are retarded in this development by the historical headway gained by England. Under free· competition .. they could never over~ome this lead, but must inevitably succumb to the more powerful, older, finan· cially stronger industry working at considerably lower costs. List has here discovered a great truth. He has shown that we must dis· tinguish .between . the natural. conditions of production. and .those which' are historical. .The free-trade school. failed to ·recognize this.

It deals with thecaae in which one country is superior to another by virtue of its soil or climate, and the other case where ,its superiority consists in the head-start of ·its industry, as if the two were, in the same. category.' These theorists assert that governments endeavoring to develop their historically backward industries by protective tariff act as foolishly as, those who strive by this means to raise their production to competitive levels when., production is bllrdened by naturally disadvantageous conditions. In both· case~ it .is said that costs of pr~duction are needlessly thrown away, and grievously in creased prices forced upon cQnsumers. This chain of reasoning dis regards. the fact that natural disadyantages of production are perma nent,whereas th~ historical hf:lndicap of industrial backwardness may be removed by further .development. When with this end in view, industrial educational duties are imposed, increased costs of production. are exacted from. the national economy for the immediate future. .To begin with this is simply loss.

But it is a loss which will be repaid py la,ter increased yields. Free trade which meets the immediate interest of the consumers checks the aggregate development.N ascentdomes~ic industry cannot cope with the competition of foreign countries. The .individual efforts of ambitious entrepreneurs are in vain. Try as they may, they cannot pass the barriers of the national economic environment that hopelessly hems them in. An indi\l'~dual enterprise. is at all. times merely a link in the great community of acquisition. where labor is divided. In its development it can never exceed 'the .general condition of the national economy. In order .to raise the g.eneral level, and overtake the head start of foreign countries, there must be long continued and combined efforts. Helplessly exposed to overpowering competition, an infant industry cannot accomplish this. It will be unable to find foreign markets for its prodllct~ and will even be unable to keep foreign products out of the domestic market. Thus domestic indus· try, in such a. co:untry, is tied down to .locally restricted products or at best to th~ cultivation' of certain specialties. " III such a country awaiting industrial awakening, .~neral wealth .and ar~ble land will THE 0 R Y 0 F W 0 R L D - E CON 0 M Y 45'9 continue untouched; the industrial genius of workers and entre preneurs will remain dormant. In this general stagnation the agricul tural population suffers with the rest;. the great remunerative market never opens that would accompany the growth of domestic industry.

All these ideas have been clearly set forth by List. He lacks only the ultimate explanation that clearly shows the opposition in the de velopment of. the national and international division of labor. The national economy and the world economy are differently composed. Within the national economy, because of its uniform composition, every advance spreads in all directions. It is imitated everywhere because the new accomplishments and newly acquired information spread without hindrance, unless it happens that the new development is affiliated by natural conditions to certain localities. In so far as this is the case,men and capital funds will assemble from all parts of the country at the .localities thus naturally assigned, for there are no hindrances to migration. Consequently, industrial centres are always relocated in accord with progress so that at their locations the .most favorable conditions may be found. Those historical pow..

ers which contribute within the national economy to the localiza tion of industry do not counteract natural conditions but act with them. This is not so in world .economy. Knowledge and experience, men and money capital do not move freely. The progress of more ad vanced people does· not flow in equal measure to the others. Inter nationally, there is an uneconomic localization of industry. Indus tries are massed in the more advanced country even when it does not possess the most favorable natural conditions. Other countries must neglect opportunities although the germs for exploitation are naturally provided. The total production of the world falls short of existing possibilities, and countries with a retarded development are the primary sufferers. That country which is the more fully devel oped accordingly gains aposition of superior power in interna tional stratification, a position· that exceeds that to which it is en titled by virtue of··its natural advantages. It assembles within its borders the peculiarly lucrative industries using much capital. It has an advantageous position that enables it to lessen or balance the evils which accompany capitalistic development, for it may raise many individuals .from among its workers to the well-paid higher levels.

Conversely, the more disastrous results accrue to those countries which are satisfied to cling to -the less remunerative industries that are forced to expose their laboring population to the most extreme efforts at minimum wages. These are the countries which, in the 460 SOCIAL ECONOMICS long.run, must bear the brunt of all the evils of capitalistic operation. List opposed protective duties for agricultural products. He feared that they would unfavorably influence industrial develop ment by increasing the prices to be paid by workers for the means of subsistence, and would furthermore increase the cost of labor it self through an increase of wages. Then, too, agriculture as the oldest domestic branch of production should not require educational duties. But when List wrote, it was not necessary to make allowance for con ditions that later arose when improved means of transportation and reduced· freights opened the markets of western and central Europe to the products of virgin trans~oceanic countries as well as of Russia. .Preservative duties are· necessary, in the face of the overwhelming competition which these countries wage against do mestic agriculture raising its produce at greater expense.

It may. also be shown that the national and international condi tions of labor are differently conditioned. In the home-country when virgin soil is brought under cultivation, or increased quantities of food stuffs are obtained at lower costs, because ·of improvements in cultivation or in the breeding of cattle, the prices of. agricultural products will be reduced so as to injure a number of farmers. But this disadvantage is·offset by other benefits that accrue to agriculture. Moreover, it is neutralized by counter effects that make their appear ance with comparative rapidity. Cheap food encourages domestic industry which finds new purchasers in the enlarged agricultural areas. As industry grows stronger, it sends back new purchasers to agriculture. In· old settlements, changes in the cultivation of land and prices are not abrupt; they work themselves out gradually and without shock. But the blows dealt by trans-oceanic and Russian competition have been great and prolonged. They have brought about severe disturbances and have threatened the greater part of European domestic agriculture in its very existence. Such a loss threatens domestic industry .as. well, because it removes from the market the most accessible and safest purchasers. It is impossible with sufficient promptness to accomplish an agricultural transition to the cultivation of special crops that may compete with foreign agriculture. Neither is it possible to transfer to industry the bank rupt owners, the laborers thrown out of employment, and the capital made to lie idle. Industry, on its part, is unable to find adequate compensation abroad for the loss of domestic purchasers. In do mestic disturbances, some relief may be found in equalization brought about by migrations and the relocation of industry. Internationally such equalization meets with greater obstructions. Fundamentally, THEOR YOF WORLD-ECONOMY 461 every national economy must rely upon its own resources. For all their importance, world economic relations are secondary. Once the internal structure of the world economy has been shaken, it is not possible so readily to prop it by a newly established world trade.

Such considerations make preservative duties for agriculture appear tully justifled. This is so true that even for an industry that is well developed such duties may be called for at times. Educational and preservative duties rest on a common basis. They are intended to protect the interests of the national economy against over-powerful forces exerted \from foreign economies that either possess a traditional supremacy or acquire it in later development. The first demand for these duties arises from a mysterious feeling of national economic solidarity. This origin may lead to their occasional misdirection, but they are also demanded by a logically correct funda mental idea. This feeling of economic solidarity is an indication of the peculiarly close connections that exist within the national com munity of acquisition because of its great density and the unifying free powers that guide its development. All external interference with this closely woven pattern must make itself widely felt. The experience becomes all the more disastrous when the equalizing movements towards the edges that are meant to remedy the distress can only be accomplished against powerful obstruction.

The state in its interests is bound to sympathize with such con ditions. Earlier than in other respects, the state felt called upon to use its power to protect domestic interests against the dangers of foreign economic domination. In this case also the classical individ ualism was indisposed properly to appraise the importance of the state's intervention. Here as elsewhere it espoused the cause of personal liberty; nay here more than elsewhere, since step by step it was here advocating the cause of the English national economy_ In international relations, the classical individualism recognized only one aspect of the relationships of power. It recognized only the con structive aspects of economic power that gained its superiority in social service. It failed to see that in this case also reason is re duced to absurdity when firmly rooted economic domination retards or prohibits foreign development. A well-considered system of pro tective duties secures to the domestic national economy threatened by foreign domination the widest possible economic margins of use.

Iu· so far as this system leads to the greatest possible equalization of development, it has a similar ultimate effect for the entire world economy. This presentation gives the theoretical foundation of a foreign pol462' SOCIAL ECONOMICS icy for the national economy. The detailed form that this policy will take depends too largely upon the circumstances involved to be opened to theoretical exposition. At this point, theory has accom plished its task; it now makes room for other forms of inquiry which are able to elaborate concretely its universally valid assumptions. THE END ABBREVIATIONS 1. Hermann, Untersuchungerv-v. Hermann, StaatswirtschaftUche Unter suchungen, 2. edt 1870. 2. Knies, Pol. Oek.-K. Knies, Die politische Oekonomie ·vom StarndpunJct der geschichtliohen Methode, 2. ed. 1882 (1. edt 1853). 3. Mill, Pol. Oek.-J. St. Mill, Grundsatze der politisohen Oekonomie, trans lated by Soetbeer.