BUT before we can exhibit the way in which the orthodox academical economists utilize the mechanism of the Foreign Exchanges to support the perpetual-motion scheme which is so necessary for their defence of Free Trade, it is expedient that we should close up the back door of escape which they have left open for themselves, and which will to a certain extent require a somewhat different set of considerations from those advanced in the preceding chapter. So far we have only answered their general challenge to show cause why, even if one nation is the superior of another in the cheapness with which it can produce any and every commodity of trade, that trade should still not go on indefinitely by the effect on prices of the mere passage of gold between them. But now we have to deal not with this general doctrine, but with the modified form given to it by Stuart Mill, namely as to what will happen when one nation has the advantage over another in the production of every commodity, but when that advantage is more marked in the case of certain classes of commodities than of others.

And as the solution he gave has been universally accepted by the orthodox economists since his time, and has been brought out afresh by Mr. Pigou as a weapon in the Free Trade controversy, we must concentrate attention on it for a moment before passing on to our consideration of the mechanism of the Foreign Exchanges. Now this modified statement of the doctrine may be justified on the ground that it is more nearly in accordance with the actual facts of the productive capabilities of different nations; for there is scarcely a nation which has not some industry or industries in which it falls less far behind the industries of the foreign competitor than it does in others; or to put it more definitely, although one nation may beat another in everything, in some industries it may have, say, 20 per cent., in others 10 per cent., and in others, again, only 3, or 2, or 1 per cent, margin of superiority. But this modification, I contend, only complicates the problem without altering its essential principle; and has the effect only of first enmeshing the minds of the economists themselves in a network of logical subtleties and fallacies, and then of doing the same for their readers.

For the object of their demonstration, I need scarcely say, is the same as we saw in the last chapter, namely to get that principle of perpetual to-and-fro movement which is so essential to them in the last resort when they are very hard pressed in their defence of Free Trade. It is necessary, therefore, to close this door of escape before we can proceed further. Now the argument of the Free Traders in this modified form of their doctrine is quite simple, and runs to this effect; - that where a nation is superior to another in everything, but in different degrees in different commodities, it will pay it better to put the bulk of its capital into those concerns which give it the highest rate of profit per unit on the capital and labour employed, and to leave the rest to the inferior nation to produce, than it would to do all for itself, inasmuch as in this way it "diverts," as Mr. Pigou says, "its capital and labour from a less to a more advantageous occupation." And as before, as Mr. Pigou also avers, it is the shipments of gold backwards and forwards which "serve to bring price levels into conformity with this fundamental circumstance of international exchange," and so make the trade between the two nations when once started go on indefinitely and without end.

Now of this nothing more need be said than that its very statement involves two fundamental illusions which when pointed out will make all further discussion of it superfluous.

The first illusion is the assumption that the trade between nations is transacted by these nations themselves as units or wholes, instead of by particular individuals in each; the second is the old assumption that the quantity of capital in each nation is so fixed and inelastic that if it is to be concentrated in certain highly profitable industries, it must to that extent be withdrawn wholly or in part from the less profitable ones.

Now as regards the first assumption, it may seem a harmless truism to say that when we speak of the trade, for example, between Manchester and London, we do not mean between these cities themselves as entities, but between a certain indefinite number of individuals - merchants, manufacturers, retailers, or what not, - in Manchester, who buy or sell goods to certain other individuals in London. But it is not harmless when we represent International Trade as a trade between the nations themselves as units, instead of being, as it is, simply a trade between certain isolated individuals in each nation who are never two days the same, either in their persons or in the character and amounts of their purchases and sales. For by the image it unconsciously leaves in the mind (and which will be used as a premiss and presupposition for further abstract reasoning;, we are apt unless we are wary to be led into error at the very start. We shall be led to imagine that International Trade is arranged by a number of men sitting like a council around a green baize table, and representing the nations as wholes, and deciding, as the Free Trade argument tacitly assumes, which industries shall be given over to the foreigner, and which each nation shall keep to itself; whereas the truth is that it is merely a matter of a number of independent unrelated individuals, or groups of individuals, who know little or nothing of what others are doing or intend to do, but who sitting alone in their offices and scanning the trade lists of prices in different countries as they come in, decide, one to give an order to this country, another to that, one to open a manufactory here, another to start a chemical process there, and another again, to open up a mine at some other place, and so on, wherever they see, or think they see, an opening with a fair chance or a certainty of profit.