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crease of cheapness produces an exactly proportional increase of consumption: or, in other words, that the vaiuo expended in the commodity, the cost incurred for the sake of obtaining it, is always the same, whether that cost affords a greater or a smaller quantity i>{ the commodity.

Let us now suppose that England, previously to the trade, required a million of yards of linen, which were worth, at the English cost of production, a million yards of cloth. By turning all the labour and capital with which that linen was produced, to the production of cloth, she would produce for exportation a million yards of cloth. Suppose that this is the exact quantity which Germany is accustomed to consume. England can dispose of all this cloth in Germany at the German price; she must consent indeed to take a little less until she has driven the German producer from the market, hut as soon as this is effected, she can sell her million of cloth for two millions of linen; being the quantity that the German clothiers are enabled to make, by transferring their whole labour and capital from cloth to linen. Thus England would gain the whole benefit of the trade, and Germany nothing. This would he perfectly consistent with the equation of international demand: since England (according to the hypothesis in the preceding paragraph) now requires two millions of linen (being able to get them at the same cost at which she previously obtained only one), while the prices in Germany not being altered, Germany requires as before exactly a million of cloth, and can obtain it by employing the labour and capital set at liberty from the production of cloth, in producing the two millions of linen required by England.

Thus far, we have supposed that the additional cloth which England could make, by transferring to cloth the whole of tho capital previously employed in making linen, was exactly sufficient to supply tho whole of Germany's existing demand. But suppose ne*t that il ia juore than sufficient.

Suppose that while England could make with her liberated capital a million yards of cloth for exportation, the cloth which Germany had heretofore required was 800,000 yards only, equivalent at the German cost of production to 1,000,000 yards of linen. England thereforo could not dispose of a whole million of cloth in Germany at the German prices. Yet she wants, whether cheap or dear (by our supposition), as much linen as can be bought for a million of cloth: and since this can only be obtained from Germany, or by the more expensive process of production at home, the holders of the million of cloth will be forced by each other's competition to offer it to Germany on any terms (short of tho English cost of production) which will induce Germany to take the whole. What terms these would be, the supposition we have mado enables us exactly to define. The 800,000 yards of cloth which Gel-many consumed, cost her the equivalent of 1,600,000 linen, and that invariable cost is what she is willing to expend in cloth, whether the quantity it obtains for her be more or less. England, therefore, to induce Germany to take a million of cloth, must offer it for 1,600,000 of linen. The international values will thus be 100 cloth for 160 linen, intermediate between the ratio of the costs of production in England and that of the costs of production in Germany: and the two countries will divide the benefit of the trade, England gaining in the aggregate 600,000 yards of linen, and Germany being richer by 200,000 additional yards of cloth.

Let us now stretch the last supposition still farther, and suppose that the cloth previously consumed by Germany was not only less than the million yards which England is enabled t« furnish by discontinuing her production of linen, but less in the full proportion of England's advantage in the production, that is, that Germany only required half a million. In this case, by ceasing altogether to produce cloth, Germany can add a million, but a million only, to her production of linen, and this million being the equivalent of what the half million previously cost her, is all that she can he induced by any degree of cheapness to expend in cloth. England will he forced by her own competition to give a whole million of cloth for this million of linen, just as she was forced in the preceding case to give it for 1,000,000. But England could have produced at the same cost a million yards of linen for herself. England therefore derives, in this case, no advantage from the international trade. Germany gains the whole; obtaining a million of cloth instead of half a million, at what the half million previously cost her. Germany, in short, is, in this third case, exactly in the same situation as England was in the first case; which may easily be verified by reversing the figures.

As the general result of the three cases, it maybe laid down as a theorem, that under the supposition we have made of a demand exactly in proportion to the cheapness, the law of international value will be as follows :—

Tho whole of the cloth which England can make with the capital previously devoted to linen, will exchange for the whole of the linen which Germany can make with the capital previously devoted to cloth.

Or, still more generally,

The whole of the commodities which t he two countries can respectively make for exportation, with the labour and capital thrown out of employment by importation, will exchange against one aD other.

This law, and the three different possibilities arising from it in respect to the division of the advantage, may be conveniently generalized by means of algebraical symbols, as follows:—

Let the quantity of cloth which England can make with the labour and capital withdrawn from the production of linen, be = n.

Let the cloth previously required by Germany (at tho German cost of production) bo = m.

Then n of cloth will always exchange for exactly '2m of linen.

Consequently if n = m, tho whole advantage will be on the side of England.

If n = 2m, the whole advantage will be on the side of Germany.

If n be greater than m, but less than 2m, the two countries will share tho advantage; England getting 2m of linen where she before got only n; Germany getting n of cloth where she before got only m.

It is almost superfluous to observe that the figure 2 stands where it does, only because it is the figure which expresses the advantage of Germany over England in linen as estimated in cloth, and (what is the same thing) of England over Germany in cloth as estimated in linen. If we had supposed that in Germany, before the trade, 100 of cloth exchanged for 1000 instead of 200 of linen, then n (after the trade commenced) would have exchanged for 10m instead of 2m. If instead of 1000 or 200 we had supposed only 150, n

would have exchanged for only —m.

If (in fine) the cost value of cloth (as estimated in linen) in Germany, exceeds the cost value similarly estimated in England, in the ratio of p to </, then will n, after the opening of the trade,

exchange for 1-m.*

a

§ 8. We have now arrived at what seems a law of International Values, of great simplicity and generality. But we have done so by setting out from a

* It may be asked, why we have supposed the number n to have as its extreme limits,

m and 2m (or—m)? why may not n be less

? than m, or greater than 2m; and if so, what will be the result?

This we shall now examine, and when we do so it will appear that n is always, practically speaking, confined within these limits.

Suppose for example that n is less than m; or, reverting to our former figures, that the million yards of cloth, which England can make, will not satisfy the whole of Germany's pre-existing demand; thatdomand being (let us suppose) for 1,200,000 yards. It would then, at first sight, appear that England would supply Germany with cloth up to the extent of a million; that Germany would continue to supply herself with tho remaining 200,000 by home production; tr»t this

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purely arbitrary hypothesis respecting the relation between demand and cheapness. We have assumed their relation to he fixed, though it is essentially variable. We have supposed that every increase of cheapness produces an exactly proportional extension of demand; in other words, that the same invariable value is laid out in a commodity whether it be cheap or dear; and the law which we have investigated holds good only on this hypothesis, or some other practically equivalent to it. Let us now, therefore, combine the two variable elements of the question, the variations of each of which we have considered separately. Let us suppose the relation between demand and cheapness to vary, and to become such as would prevent tho rule of interchange laid down in the last theorem from satisfying the conditions of the Equation of International Demand. Let it be supposed, for instance, that the demand

portion of the supply would regulate the price of the whole; that England therefore would be able permanently to sell her million of cloth at the German cost of production (viz. for two millions of linen) and would gain the whole advantage of the trade, Germany being no better oiT than before.

That such, however, would not be the practical result, will soon be evident. The residuary demand of Germany for 200,000 yards of cloth furnishes a resource to England for purposes of foreign trade of which it is still her interest to avail herself; and though she has no more labour and capital which she can withdraw from linen for the production of this extra quantity of cloth, there must be some other commodities in which Germany has a relative advantage over her (though perhaps not so great as in linen): these she will now import, instead of producing, and the labour and capital formerly employed in producing them will be transferred to cloth, until the required amount is made up. If this transfer just makes up the 200,000 and no more, this augmented n will now be equal to m; England will sell the whole 1,200,000 at the German values; and will still gain the whole advantage of the trade. But if the transfer makes up more than the 200,f00, England will have more cloth than 1,200,000 yards to offer; nwill become greater than m, and England must part with enough of the advantage to induce Germany to take the surplus. Thus, the case which seemed at first sight to be beyond the limits, is transformed practically into a case either coinciding with one of the limits, or between them. And so with every other case which can be supposed, " I

of England for linen is exactly proportional to the cheapness, but that of Germany for cloth, not proportional. To revert to tho second of our three cases, the case in which England by discontinuing the production of linen could produce for exportation a million yards of cloth, and German}' by ceasing to produce cloth could produce an additional 1,600,000 yards of linen. If the one of these quantities exactlyexchanged for the other, the demand of England would on our present supposition be exactly satisfied, for she requires all the linen which can be got for a million yardu of cloth: but Germany perhaps, though sho required 800,000 cloth at a cost equivalent to 1,600,000 linen, yet when she can get a million of cloth at the same cost, may not require the whole million; or may require more than a million. First, let her not require so much; but only as much as she can now buy for 1,500,000 linen. England will still offer a million for these 1,500,000; but even this may not induce Germany to take so much as a million; and if England continues to expend exactly the same aggregate cost on linen whatever be the price, she will have to submit to take for her million of cloth any quantity of linen (not less than a million) which may be requisite to induce Germany to take a million of cloth. Suppose this to he 1,400,000 yards. England has now reaped from the trade a gain not of 600,000 but only of 400,000 yards ; while Germany, besides having obtained an extra 200,000 yards of cloth, has obtained it with only seven eighths of the labour and capital which she previously expended in supplving herself with cloth, and may expend the remainder in increasing her own consumption of linen, or of any other commodity.

Suppose on the contrary that Germany, at the rate of a million cloth for 1,600,000 linen, requires more than a million yards of cloth. England having only a million which she can give without trenching upon the quantity she previously reserved for herself Germany must bid for the extra cloth at a higher rate than 1G0 for 10Q, tthtil she readies a rate (say 170 for 100) which will either bring down her own demand for cloth to the limit of a million, or else tempt England to part with some of the cloth she previously consumed at home.

Let us next suppose that the proportionality of demand to cheapness, Aistead of holding good in one country but not in the other, does not hold good in either country, and that the deviation is of the same kind in both; that, for instance, neither of the two increases its demand in a degree equivalent to the increase of cheapness. On this supposition, at the rate of one million cloth for 1,600,000 linen, England will not want so much as 1,600,000 linen, nor Germany so much as a million cloth: and if they fall short of that amount in exactly the same degree; if England only wants linen to the amount of nine-tenths of 1,600,000 (1,440,000), and Germany only nine hundred thousand of cloth, the interchange will continue to take place at the same rHe. And so if England wants a tenth more than 1,600,000, and Germany a tenth moro than a million. This coincidence (which, it is to be observed, supposes demand to extend cheapness in a corresponding, but not in an equal degree*) evidently could not exist unless by mere accident: and in any other case, the equation of international demand would require a different adjustment of international values.

The only general law, then, which can be laid down, is this. The values at which a country exchanges its produce with foreign countries depend on two things: first, on the amount and extensibility of their demand for its commodities, compared with its demand for theirs; and secondly, on the capital which it has to spare, from the production of domestic commodities

* The increase of demand from 800,000 to WO.O00, and that from a million to 1,440,000, are neither equal in themselves, nor bear an equal proportion to the increase of cheapness. Germany's demand for cloth has increased one-eighth, while the cheapness is increased one-fourth. England's demand for linen is Increased ±1 per cent, while the cheapness is Increased 60 per cent.

for its own consumption. The more the foreign demand for its commodities exceeds its demand for foreign commo dities, and the less capital it can spare to produce for foreign markets, compared with what foreigners spare to produce for its markets, the more favourable to it will be the terms of interchange: that is, the more it will obtain of foreign commodities in return for a given quantity of its own.

But these two influencing circumstances are in reality reducible to one: for the capital which a country has to spare from the production of domestic commodities for its own use, is in proportion to its own demand for foreign commodities: whatever proportion of its collective income it expends in purchases from abroad, that same proportion of its capital is left without a home market for its productions. The new element, therefore, which for the sake of scientific correctness we have introduced into the theory of international values, does not seem to make any very material difference in the practical result. It still appears, that the countries which carry on their foreign trade on the most advantageous terms, are those whose commodities are most in demand by foreign countries, and which have themselves the least demand for foreign commodities. From which, among other consequences, it follows, that the richest countries, cceteris paribus, gain the least by a given amount of foreign commerce: since, having a greater demand for commodities generally, they are likely to have a greater demand for foreign commodities, and thus modify the terms of interchange to their own disadvantage. Their aggregate gains by foreign trade, doubtless, are generally greater than thoso of poorer countries, since they carry on a greater amount of such trade, and gain the benefit of cheapness on a larger consumption: but their gain is less on each individual article consumed.

§ 9. We now pass to another essential part of the theory of the subject There are two senses in "'hioh a couotry obtain* commodities cheaper by foreign trade; in the sense of Value, and in the sense of Cost. It gets them cheaper in the first sense, by their falling in value relatively to other things: the same quantity of them exchanging, in the country, for a smaller quantity than before of the other produce of the country. To revert to our original figures; in England, all consumers of linen obtained, after the trade was opened, 17 or some greater number of yards for the same quantity of all other things for which they before obtained only 15. The degree of cheapness, in this sense of the term, depends on the laws of International Demand, so copiously illustrated in the preceding sections. But jn the other sense, that of Cost, a country gets a commodity cheaper, when it obtains a greater quantity of tho commodity with the same expenditure of labour and capital. In this sense of the term, cheapness in a great measure depends upon a cause of a different nature: a country gets its imports cheaper, in proportion to the general productiveness of its domestic industry; to the general efficiency of its labour. The labour of one country may be, as a whole, mach more efficient than that of another: all or most of the commodities capable of being produced in both, may be produced in one at less absolute cost than in the other; which, as we have seen, will not necessarily prevent the two countries from exchanging commodities. The things which the more favoured country will import from others, are of course those in.which it is least superior; but by importing them it acquires, even in those commodities, the same advantage which it possesses in the articles it gives in exchange for them. Thus the countries which obtain their own productions at least cost, also get their imports at least cost.

This will be made still more obvious if we suppose two competing countries. England sends cloth to Germany, and gives 10 yards of it for 17 yards of linen, or for something else which in Germany is tho equivalent of those

17 yards. Another country, as for example France, does the same. The one giving 10 yards of cloth for a certain quantity of German commodities, so must the other: if, therefore, in England, these 10 yards are produced by only half as much labour as that by which they are produced in France, the linen or other commodities of Germany will cost to England only half the amount of labour which they will cost to France. England would thus obtain her imports at less cost than France, in the ratio of the greater efficiency of her labour in the production of cloth: which might be taken, in the caso supposed, as an approximate estimate of the efficiency of her labour generally; since France, as well as England, by selecting cloth as her article of export, would have shown that with her also it was the commodity in which labour was relatively the most efficient. It follows, therefore, that every country gets its imports at less cost, in proportion to the general efficiency of its labour.

This proposition was first clearly seen and expounded by Mr. Senior,* but only as applicable to the importation of the precious metals. I think it important to point out that the proposition holds equally true of all other imported commodities; and further, that it is only a portion of the truth. For, in the case supposed, the cost to England of the linen which she pays for with ten yards of cloth, does not depend solely upon the cost to herself of ten yards of cloth, but partly also upon how many yards of linen she obtains in exchange for them. What her imports cost to her is a function of two variables; the quantity of her own commodities which she gives for them, and the cost of those commodities. Of these, the last alone depends on the efficiency of her labour: the first depends on the law of international values; that is, on the intensity and extensibility of the foreign demand for her commodities, compared with her demand for foreign commodities.

In the case just now supposed, of

* Three Lectures on the Cost of Obtaining Money.

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