Chapter 7l of Book 4

How Stock Is Naturally Distributed To Seek Employment Advantageous To Society Icon

March 23, 2020

172 I have shown in Book 2 that every country’s mercantile stock naturally seeks the employment most advantageous to its own country.

If the stock is employed in the carrying trade, its country becomes the emporium of the goods of all countries. But that stock’s owner necessarily wishes to dispose as much of those goods as he can dispose at home.

He saves himself the trouble, risk, and cost of exportation. He will be glad to sell them at home for a smaller price and profit than abroad. He naturally tries to turn his carrying trade into a foreign trade of consumption.

If his stock is employed in a foreign trade of consumption, he will be glad to=

dispose of those imported goods at home as much as he can, and turn his foreign trade of consumption into a home trade.

The country’s mercantile stock naturally=

  • courts the near employment and shuns the distant employment,
  • courts the employment where the returns are frequent and shuns that where they are distant and slow,
  • courts the employment where it can maintain the most productive labour where it belongs or where its owner resides, and
    • It shuns the employment where it can maintain the fewest.
  • courts the employment which is most advantageous ordinarily, and shuns that which is least advantageous.

The Invisible Hand Part 2

173 Let us say that, in ordinary cases, those distant employments are less advantageous to the country than the nearer employments.

If the profit in those distant employments rise more than that of the nearer employments, such profit will draw stock from those nearer employments into the distant employments, until the profits of all return to their proper level. This superiority of profit is a proof that:

  • those distant employments are understocked
  • the stock of the society is not distributed in the properest manner
  • something is either bought cheaper or sold dearer than it should
  • some class of citizens is oppressed by paying more or by getting less than the suitable equality between the different classes of people.

This equality is natural.

The same capital never will maintain the same amount of productive labour in a distant as in a near employment. But a distant employment may be as necessary for the society’s welfare as a near one.

The goods traded in the distant employment might be necessary for the nearer employments.

But if the profits of goods for distant employments are above their proper level, those goods will be sold dearer than they should, or above their natural price.

Everyone in the nearer employments will be oppressed by this high price. In this case, their interest requires some stock to be withdrawn from those nearer employments and turned towards that distant one, in order to:

  • reduce those profits to their proper level, and
  • reduce the price of those goods to their natural price.

This is an extraordinary case.

The public interest requires that stock be withdrawn from the nearer employments and turned towards the distant employments, even if ordinarily, the distant employments were less advantageous to the public. In this case, the natural interests of men is the same with the public interest as in all other ordinary cases. Their interests lead them to withdraw stock from the near and to turn it towards the distant employment.

174 Thus, the private interests and passions of individuals naturally dispose them to turn their stocks towards employments most advantageous to the society in ordinary cases.

But if from this natural preference, they turn too much stock, its profits will fall while making profits rise in all other employments.

This will immediately make them alter this faulty distribution. Without any intervention of law, the private interests and passions of men naturally lead them to divide and distribute the society’s stock among all the different employments most agreeable to the society’s interest.

The Mercantile System Destroys This Natural Distribution of Stock

175 All the regulations of the mercantile system deranges this natural and most advantageous distribution of stock.

The mercantile regulations of the trade to America and the East Indies derange it perhaps more than any other. Those great trades absorb more stock than other trades. The regulations which derange those two trades are not the same.

Monopoly is the great engine of both. But the monopoly of both trades are different.

Monopoly seems the sole engine of the mercantile system.

176 In the trade to America, every nation tries to engross the whole market of its own colonies by excluding other nations from any direct trade to them.

During the 16th century, the Portuguese managed the trade to the East Indies by claiming the sole right of sailing in the Indian seas because they first found the road to them. The Dutch still continue to exclude all other European nations from any direct trade to their spice islands. Monopolies of this kind are established against all other European nations. Those nations are excluded from a trade which might be convenient for their stock. They are obliged to buy the goods dearer than if they bought them directly from America and the Indies.

177 Since the fall of the power of Portugal, no European nation has claimed the exclusive right of sailing in the Indian seas.

The principal ports in India are now open to all European ships. Except in Portugal and France, the trade to the East Indies has been subjected to an exclusive company in every European country. Monopolies of this kind are established against the very nation which erects them. Most of that nation is excluded from a trade which might be convenient for their stock. They are obliged to buy the goods from that trade dearer than if it was open and free to all their countrymen. For example, since the establishment of the English East India company, other Englishmen were excluded from the trade. They paid in the price of the East India goods which they consumed= all the extraordinary profits from the monopoly of the company, and all the extraordinary waste in the fraud and abuse. These are inseparable from the management such a big company. The absurdity of this monopoly by exclusive company is much more manifest than the absurdity of the monopoly by country.

178 Both these monopolies derange the natural distribution of the society’s stock.

But they do not always derange it in the same way.

179 Monopolies by country always attract more of the society’s stock than what would go to that trade of its own accord. 180 Monopolies by exclusive company may sometimes attract stock and sometimes repel it according to different circumstances.

In poor countries, they naturally attract more stock than natural. In rich countries, they naturally repel more stock.

181 For example, poor countries such as Sweden and Denmark, would probably have never sent a single ship to the East Indies if the trade was not subjected to an exclusive company.

“The establishment of such a company necessarily encourages adventurers.” Their monopoly secures them against all competitors in the home market. They have the same chance at foreign markets with the foreign traders. Their monopoly shows them the= certainty of a great profit on a considerable amount of goods, and chance of a considerable profit on a great amount of goods. Without such extraordinary encouragement, the poor traders of such poor countries would probably never have thought of hazarding their small capitals in a very distant and uncertain adventure as the trade to the East Indies.

182 On the contrary, a rich country such as Holland would probably send many more ships to the East Indies than it actually does, in the case of a free trade.

The limited stock of the Dutch East India company probably repels great mercantile capitals which would otherwise go to it. Holland’s mercantile capital is so great that it is continually overflowing into= the public funds of foreign countries loans to private traders and adventurers of foreign countries the most round-about foreign trades of consumption the carrying trade. All near employments are completely filled up. All the capital which can be placed in them are with profit are already placed in them. Holland’s capital flows towards the most distant employments. If the trade to the East Indies were free, it would probably absorb most of this redundant capital. The East Indies offer a bigger and wider market than Europe and America combined for= European manufactures American gold and silver other American products.

183 Every derangement of the stock’s natural distribution is hurtful to the society where it takes place whether by=

repelling from a trade the stock which would otherwise go to it, or attracting towards a trade, stock which would not otherwise come to it.

Holland would suffer a big loss if=

the exclusive Dutch company was suddenly removed and the trade of Holland to the East Indies suddenly became bigger. Holland’s capital would be excluded from that trade.

Sweden and Denmark would suffer a big loss if=

the exclusive Dutch and Swedish companies were suddenly removed and the trade of Sweden and Denmark to the East Indies suddenly became less. Their capital would be drawn into an unsuitable trade. Better for them perhaps to buy East India goods from other nations, even if those goods would be dearer, than to employ their small capital to a very distant trade where the returns are so slow. Their capital is better employed to maintain productive labour at home where productive labour is so much wanted. At home there is so little done and so much to do.

184 If a country would be unable to carry on any direct trade to the East Indies without an exclusive company, it does not mean that such a company should be established there.

It means that such a country should not trade directly to the East Indies. The Portuguese demonstrate that such exclusive companies are not necessary for trading to East India. They enjoyed it for more than a century without any exclusive company.

185 It is said that no private merchant could have capital sufficient to maintain agents in the East Indies.

Those agents provide goods for the ships which the merchant might send there. Unless he was able to maintain agents there, the difficulty of finding cargo to return might make his ships lose a season waiting. The expence of a long delay would eat up the whole profit of the adventure and create a very big loss. This argument that no single trade could be carried on without an exclusive company is contrary to the experience of all nations. There is no great trade where the capital of any private merchant is sufficient for carrying on all the subordinate branches required by the principal branch. But when a nation is ripe for any great trade, some merchants naturally turn their capitals towards the principal branch. Some merchants turn their capitals towards its subordinate branches. All the branches are carried on very seldomly by the capital of one private merchant. If a nation is ripe for the East India trade, some of its capital will naturally divide itself among all the branches of that trade. Some of its merchants will find in their interest to reside in the East Indies. They will employ their capitals there to provide goods for the ships sent by other merchants who reside in Europe. The European settlements in the East Indies presently belong to exclusive companies. If those settlements were put under the protection of their sovereign, the residence of its merchants would be safe and easy. If the capital of any country which naturally went towards the East India trade was insufficient for carrying on all its branches, it would be a proof that= That country was not ripe for that trade. It would be better for it to buy East India goods from other European nations even at a higher price than to import them directly from the East Indies by itself. What it might lose by the high price of those goods could seldom be equal to the loss it would bring by the distraction of its capital from more necessary, useful, or suitable employments than a direct trade to the East Indies.

186 Europeans possess many considerable settlements on the coast of Africa and the East Indies.But they have not yet established such numerous and thriving colonies there as those in America.

Africa and the East Indies are inhabited by barbarous nations.

  • They are not so weak and defenceless as the miserable and helpless native Americans.

Those barbarous nations were much more populous in proportion to their land’s natural fertility. The most barbarous nations of Africa or the East Indies were shepherds, even the Hottentots.

But the American natives, except Mexico and Peru, were only hunters. Given the same fertile territory, there would be much more shepherds than hunters.

In Africa and the East Indies, it was more difficult:

  • to displace the natives
  • to extend the European plantations

The genius of exclusive companies is unfavourable to the growth of new colonies.

  • It was probably the main cause of their little progress in the East Indies.

The Portuguese carried on the trade to Africa and the East Indies without any exclusive companies. Their following settlements were much depressed by superstition and bad government:

  • Congo
  • Angola
  • Benguela on the coast of Africa
  • Goa in the East Indies

Those settlements faintly resemble the American colonies. They are partly inhabited by Portuguese who have been established there for several generations.

South Africa and Jakarta

The Dutch settlements at the Cape of Good Hope and Jakarta [“Batavia”] are fortunate to presently be the biggest European colonies in Africa or the East Indies.

The Cape of Good Hope was inhabited by a people as barbarous and defenceless as the American natives.

  • It is the half-way house between Europe and the East Indies.
  • It is where almost every European ship makes some stay.
    • The supply alone of those ships with fresh provisions, fruit, and wine, affords a very extensive market for the surplus produce of the colonists.

“What the Cape of Good Hope is between Europe and the East Indies, Jakarta is between the principal countries of the East Indies.”

It lies on the most frequented road from India to China and Japan. It is nearly mid-way on that road. Almost all the ships that sail between Europe and China touch at Jakarta. It is the centre and principal mart of the East Indies trade carried on by Europeans and Indians. The vessels of the following countries are frequently seen in its port: China Japan North Vietnam Malaysia South Vietnam Indonesia

Such advantageous situations have enabled the Cape of Good Hope and Jakarta to surmount all the obstacles imposed by the oppressive genius of an exclusive company. They enabled Jakarta to surmount the additional disadvantage of perhaps the most unwholesome climate in the world.