Modern Economic Problems Part 15

It is a striking evidence of the importance of the marginal principle[9] that insurance at such a cost should still be desired by men. The use of insurance would be much wider and its benefits greater if this "tare and tret" of doing the business could be reduced. It seems a reasonable hope, now that the experimental stages are pa.s.sed, that this may be done. In the case of all kinds of insurance as yet a large expense for agents has been necessary to educate men to see the value of insurance and to purchase it, as well as for many other compet.i.tive expenses. It has been found that much of this expense can be saved by insurance in groups (for all employees in an establishment), by compulsory insurance (as of all working men), and by central state administration serving to regularize and unify the organizations. This important question will be further considered in connection with "social insurance" as a measure to benefit the working cla.s.ses.

[Footnote 1: See Vol. 1, ch. 5, sec. 7.]

[Footnote 2: The Jeffries-Johnson prize-fight was insured, against rain, for $30,000. Frequently, race-horses, the fingers of pianists, the lives of ball-players, and the throats of singers, are now insured. Summer hotels in England regularly insure for large sums against more than so many days of rain per season.]

[Footnote 3: On the former, see Vol. I, pp. 365 and 374; and on the latter, below, sec. 14.]

[Footnote 4: See Vol. I, labor-incomes, in Index.]

[Footnote 5: There is an appearance of a slight discrepancy due to the omission of fractions of cents. If premiums are collected at the beginning of the year and losses are paid at the end of the year, and if interest can be earned meantime at the rate of 3-1/2 per cent, the natural premium for a one year term policy is about $8.64, that being the present worth of $8.95 due a year hence, interest being 3-1/2 per cent. In these calculations there is no allowance for expenses, the necessary "loading," on which see below, sec. 14.]

[Footnote 6: See Vol. I, p. 279.]

[Footnote 7: The following are the chief statistical facts regarding the life insurance business in the United States, Jan. 1, 1914, showing separately legal reserve and a.s.sessment companies, and the total.

------------------------------------------------------------------ | Number of | Policies | Insurance | Companies | in force | in force | | | Legal reserve ..| 260 | 38,206,000 | $20,256,000,000 a.s.sessment .....| 605 | 8,789,000 | 10,023,000,000 Total ..........| 865 | 46,995,000 | 30,587,000,000 ----------------------------------------------------------------- | Premium | Total | Per cent income | income | income | from premiums | | | Legal reserve ..| $715,000,000 | $946,000,000 | 75.6 a.s.sessment .....| 138,000,000 | 153,000,000 | 90.2 Total ..........| 853,000,000 |1,099,000,000 | 77.6 ---------------------------------------------------------------- | Payments to| a.s.sets | a.s.sets for each | policyholders| | 100 insurance | | | in force | | | Legal reserve | $470,000,000 |$4,659,000,000 | $22.66 a.s.sessment .... | 106,000,000 | 195,000,000 | 1.37 Total ....... | 576,000,000 | 4,854,000,000 | 15.87 ]

[Footnote 8: In 1913 the total premiums collected by all kinds of insurance companies reported (Statistical Abstract of the U.S., 1914, pp. 549-557) were about $1,512,000,000, and the amount returned to policy holders the same year was $918,000,000, or about 61 per cent of all premiums, the amount not returned ($584,000,000) being 39 per cent.

Premiums received Returned to policyholders Amount Percent

Life insurance reserve companies ..$715,000,000 $470,000,000 67 a.s.sessment companies 138,000,000 106,000,000 76 Other kinds ......... 659,000,000 342,000,000 52 ------------- ----------- -- Total ........... $1,512,000,000 $918,000,000 61 ]

[Footnote 9: See above, secs. 2 and 5.]

PART IV

TARIFF AND TAXATION

CHAPTER 13

INTERNATIONAL TRADE

-- 1. Political and trade boundaries. -- 2. Benefits of international trade. -- 3. Choice of the more advantageous occupations. -- 4. Persistence of differences between nations. -- 5. Doctrine of comparative advantages. -- 6. Equation of international exchange. --7. Balance of merchandise movements. -- 8. Cancellation of foreign indebtedness. -- 9.

Par of exchange. -- 10. International monetary balance and price-levels.

-- 1. #Political and trade boundaries.# By international trade is meant, in general, trade between persons resident in different countries; comparatively rare is the case in which one of the two parties to a trade is a whole nation acting through its government as a unit (e.g., in the purchase of munitions of war in neutral countries). Outside of a communistic group such as the family, trade is a necessary accompaniment of division of labor. As territorial division of labor began between neighboring tribes,[1] international trade was the earliest kind of regular interchange of goods. Indeed the very word "market" meant originally the boundary between tribes.

Thus, from primitive times when wandering savages gave bits of flint or copper in return for salt or fish, individuals have sought to adjust their goods to their desires through trade with men of other political groups. With the progress of the world in the means of communication and transportation, international trade has widened in extent and grown in volume.

Economic relations never have been coextensive with political relations. The economic groupings of men connected by a network of trades never have and never will correspond very nearly with political groupings of men bound together by common citizens.h.i.+p in particular states. Indeed it is not uncommon for many of the residents in two adjoining states to trade far more with each other than they do with their own fellow citizens. Lawmakers and rulers from the beginnings of formal governments have constantly tried to hinder this kind of trade.

They have done this chiefly because of their belief that they could strengthen their states in political and economic ways, and could favor some of their citizens, by confining economic relations within political boundaries--if not exclusively, more closely than when trade was left to take its natural course, guided by individual motives. The regulation of international trade, therefore, has always const.i.tuted an economic problem of great importance in the field of political action.

-- 2. #Benefits of international trade#. Now, bearing in mind that international trade is carried on by individual traders in any two countries, we may ask what motive impels men to trade across the political boundaries of a state. The simple answer is that each trader has something to give and desires to get something in return. Each is seeking to get something that has to him a greater value than the thing he gives, and believes he can do this in trade with a foreigner better than by trading at home. In any trade, both parties gain, or think they are gaining.[2] In international trade there is the same chance for mistake as in domestic trade, but no more. In a single transaction in either domestic or foreign trade one party may be cheated, but the continuance of trade relations is dependent upon continued benefits. The once generally accepted maxim that the gain of one in trade is the loss of another is now generally rejected, but often still it is a.s.sumed to be true of international trade.

The starting point for the consideration of this subject is in this proposition: Foreign trade is carried on by individuals, for individual gain, with the same motives and for the same benefits as are found in other trade.

The advantages of international trade are indeed but those of division of labor in general, in the particular case where it happens to cross political boundaries. The great territorial divisions of industry are determined first and mainly by natural differences of climate, soil, and material resources. Thus trade arises easily between North and South, between warm and frigid climates, between new countries and old, between regions spa.r.s.ely and regions densely populated.[3]

Territorial divisions of industry are determined secondly by social and economic differences such as those with respect to acc.u.mulation of wealth, amount of loanable capital, invention, organization and intelligence of the workers, and the grade of civilization.

Foreign trade normally imparts increased efficiency to the productive forces of each country. In most cases it is apparent that labor is more effective and gets a larger product when it is applied in those ways for which the country is best fitted and for which it offers the best and most bountiful materials; and that, further, when special branches of industry have developed at one place, they make possible the advantages of large production and of high specialization.

Certain erroneous explanations of the advantages of foreign trade may be dismissed with brief mention. It is said to give vent for surplus production and to give a wider market to what would otherwise go to waste. This involves the same fallacy as the "lump of labor notion,"

the destruction of machinery, and the praise of waste and luxury.[4]

If it were true that sale to backward nations were now necessary to give an outlet for products which would otherwise rot in the warehouses, a time would come at length when the world would have an enormous surplus unless neighboring planets could be successively annexed. Again it is said that the great purpose of foreign trade is to keep exports in excess of imports so that the money of the country may constantly increase in amount. The ideal of such theorists is an impossible condition where the country would constantly sell and never buy.[5] In the narrow commercial view of the subject the sole object of foreign trade is to afford a profit to the merchants, regardless of the welfare of the ma.s.s of the citizens.

-- 3. #Choice of the more advantageous occupations#. Let us consider the cases of two countries somewhat differently situated, such as an old country like England and a newer country such as was the United States in the nineteenth century. Now the relative advantages of various industries in two such countries are very unlike. The newer country excels in its broad area, its abundant rich lands, its bountiful natural resources of forests and mines. These are the superior opportunities which give the economic motives for settlement and for continued immigration from the other lands. Most of the newcomers find it to their advantage to develop the peculiar opportunities of the new land, rather than to go on producing the same things in the same way as they did in the old country.[6] Thus they get a larger quant.i.ty of products per day's labor, and are able to gain by trading a part of these for the products of the older country.

Thus the characteristic industries of the two countries must differ.

Without any government supervision, therefore, but simply through the choice of enterprises, each seeking the best investment of capital for himself, industries are developed in which each country is either most markedly superior, or least inferior, to its neighbors. If either laborers or capitalists in the new country were to turn to the less-favored industries they would be forced to accept a smaller reward than they can earn in the more favored.

-- 4. #Persistence of difference between nations#. If both men and wealth interchanged between industries and between countries with perfect readiness and without any outlay whatever for transportation, these differences would soon disappear, and perfect equilibrium of advantage would everywhere result. In every country, in every occupation, labor and wealth of given quality and amount would receive the same reward. But the interchange of labor and of products between countries is never without friction.

The laborers, enterprisers, and investors in a naturally rich country are thus in a position of more or less enduring advantage relative to those of older and poorer countries. Differences of the same nature appear as between different parts of the same country, as between the Northern and the Southern states of the American union, between the Eastern and the Western states, and even between neighboring countries of the same state. The differences between two countries, however, are likely to be more marked, the circulation of factors being so active within a country that it is allowable to speak broadly of prevailing national rates of wages and of interest. Altho, as Adam Smith said, "a man is of all sorts of luggage the most difficult to be transported,"

the higher wages in a new country attract constantly from the older lands a portion of their laborers. The higher rate of interest in new countries constantly attracts investments from abroad; yet, despite these forces working toward equalization, the inequality may remain and, through the working of other influences, may even increase in the course of years.

-- 5. #Doctrine of comparative advantages.# It may be that two countries both possess the necessary technical conditions for making both articles that are to be traded for each other. It may even be that the people in one country would be able to make not only one of the two objects of trade, but both of them, more easily and with less sacrifice and effort than the people in the other. If, for example, American labor can produce two bushels of wheat in a day and English labor but one bushel a day; and American labor can produce just as much iron in a day as English labor--or more--the question always arises: Is it not foolish and wasteful not to produce both the wheat and the iron?

Now, exactly the same case is presented in almost every simple neighborhood trade. The proprietor may be able to keep his books better than does the bookkeeper whom he employs. The merchant may be able to sweep out the store better than the cheap boy does it. The carpenter may be able to raise better vegetables than can the gardener from whom he purchases. Yet the merchant does not turn to sweeping and the carpenter to raising vegetables, because if they did they would have to quit or limit by so much their present better-paying work, and would lose far more than they would gain.

So whenever the people in one country have a greater advantage in one article than in another, relative to another country, the foreigners, like the low-paid man, will be willing to exchange at a ratio that will make it profitable to specialize in the product wherein the greater superiority lies.[7]

But this is always hard doctrine for the popular mind, and particularly for the commercial mind endeavoring to carry on a business that can not be made "to pay" in the face of foreign compet.i.tion. It is easy to believe that a country ought not to import goods unless it is at an _absolute_ disadvantage in their production.

It is often declared that as our country can produce any kind of goods "as well" as foreign countries (meaning with as few days' labor), there is a loss on every unit imported. The fundamental principle of trade as applied to such cases shows that not the advantage which one country enjoys over the other as to a single product determines whether it will gain by producing at home, but the comparative advantages enjoyed in the production of the two articles in question.

As a simple example, suppose that a day's labor in country A will secure two bushels of wheat (2x) and two hundred pounds of iron (2y), whereas in B a day's labor will secure 1x or 2y. Then A's comparative advantage in producing x becomes a reason for A's not trying to produce y. Trade can take place (aside from transportation outlay) at any ratio between 2x = 2x (A's minimum) and 2x = 4y (B's maximum).

Evidently at any rate between these two ratios each party would gain something by the trade, e.g., at 2x = 3y A would get 3 instead of 2y by a day's labor, and B would get 1-1/3x instead of 1x for a day's labor (2x for 1-1/2 day's labor instead of for two days'). If, however, A could produce exactly twice as much of everything as B could, then there could be no motive on either side for trade. But this never happens.

-- 6. #Equation of international exchange.# Foreign trade of course can take place as barter, and in earlier times, particularly, very commonly did so. But in the existing monetary economy nearly all trades are expressed in terms of monetary prices. Both the prices of all the particular objects of international trade and the general levels of prices in any two trading countries come to be pretty definitely interrelated. Changes in the one country at once compel readjustments in the other. To understand in the most general way how this occurs, a knowledge at least of the elementary principles of foreign exchange is required, and to this we may now turn.

Let us begin with the proposition known as the equation of international exchange, which is sometimes given thus: the value of the imports of a country must in the long run equal the value of the exports. But this proposition (especially the words imports and exports) must be understood in a much broader sense than that of the movements of merchandise merely. The proposition might better be expressed: the total credits of a nation (including money actually sent abroad) must just equal its total debits (including money imported). Into the balance of accounts between any two nations enter many items: the cash values of the imports and exports of merchandise; freights, insurance premiums, and commissions; the expenses of citizens while traveling abroad; money brought in or taken out by immigrants; the cost of the governmental foreign services (such as the salaries of consuls and of diplomatic representatives); subsidies and war indemnities received from or paid to foreign nations; the investments of foreign capital; and credit items of many kinds, on both sides of the account.

The effect of loans upon the equation differs at different periods according as they are just being made, are continuing, or are being repaid. When foreign capital is first invested in a country, whether it is loaned to the government or to individuals or to corporations, either gold must be remitted to the borrowing country or goods be sent. But later the interest payments and the eventual repayment of the princ.i.p.al of the loan act in the opposite direction. Accruing interest must be offset annually by exports from the debtor country and the repayment of the princ.i.p.al requires that either money or goods be exported equal in value to the original obligations. In popular opinion an excess of exports of merchandise is an index, if not the real cause, of national prosperity; but evidently it is no true index whatever on this point. An excess of exports may at any given moment indicate that the country is rich and is lending abroad, or that it is in debt and is paying interest, or that it is repaying the princ.i.p.al.

On the other hand, an excess of imports may indicate either that a country is poor, and is borrowing from abroad, or that it is rich, with many foreign investments, and is receiving the income from them in the form of a regular s.h.i.+pment of goods from the debtors.

The following statistics of the foreign commerce (merchandise imports and exports) of the princ.i.p.al countries of the world are given in significant groupings which call for various explanations.

Figures are in million dollars ($1,000,000) and are mostly for the year 1908, (Stat. Abst. 1908, p. 769). At the present writing the war has altered all the lines of commerce.

COUNTRIES HAVING EXCESS OF IMPORTS OF MERCHANDISE

|Excess %|Imports.|Exports.| United Kingdom ..| 57 | 2886 | 1835 | Germany ..........| 20 | 1824 | 1523 | Netherlands ......| 30 | 1130 | 873 | France ...... | 12 | 1089 | 975 | Belgium ..........| 33 | 642 | 484 |