the plant. In the same way, a subsequent fall of one tenth in the value of the product would reduce the value of the plant by one half, while a fall of one fifth in the value of the product would destroy the value of the plant altogether. This may be stated as a general law to the effect that a slight fluctuation in the value of a product tends to produce a violent fluctuation in the value of the establishment producing it. Stated in still more general terms, the value of producers' goods tends to fluctuate more violently than the value of consumers' goods.

This law is capable of still further extension when we consider that producers' goods are themselves produced by other productive agents. The different parts of the shoe factory of the above illustration were produced in other factories, and the fluctuations in the value of the shoe factory would tend to produce still more violent fluctuations in the value of the establishments producing the different parts, for the same reasons as were given above. The law might therefore be extended so as to read, The farther removed the producers' goods are from some consumable product, and the more remotely their value is derived from that of some consumable product, the more violent the fluctuations in value tend to be.

This would be the tendency until that stage was reached where the producers' agents were no longer especially connected with one particular line of production, and were not therefore affected merely by changes in price of the one kind of consumable product.

It must be admitted that the fluctuations in the value of producers' goods were never actually so violent as the foregoing illustrations have supposed, mainly for the reason that not every rise or fall in the value of products is believed to be permanent. But where the high or low price of a product continues for some time, it invariably leads to a belief that it is likely to continue; and this raises or depresses the price of the productive agent out of proportion to the rise or fall in the price of the product.

In this connection it is well to observe that while the immediate demand for consumers' goods comes from consumers themselves, the immediate demand for producers' goods comes from investors. Since their willingness to invest depends, not upon the value of the gross product of the productive agent, but upon the excess of that gross product over and above the cost of using the agent, - which excess has been shown to fluctuate more violently than the total value, the instability of the investors' market is therefore not altogether due to psychological changes on their part, but in a large degree to the objective causes which affect the value of the things in which they invest.

A slight rise in the price of consumers' goods will so increase the value of the producers' goods which enter into their production as to lead to larger investment in producers' goods. The resulting large market for producers'

goods again stimulates the production of such goods and withdraws productive energy from the creation of consumers' goods. This for the time tends to raise the price of consumers' goods still higher, and this again to stimulate still further the creation of producers' goods. There is no check to this tendency until the new stocks of producers' goods begin to pour upon the market an increased flow of consumers' goods. This tends to produce a fall in their value, which in turn produces a still greater fall in the value of producers' goods; and so the process goes. There seems, therefore, to be a fundamental reason for the periodicity of industrial depression, which can only be removed by such a complete knowledge and understanding of the situation as would enable the business world to foresee the tendencies and take measures to overcome them.

These observations regarding the law of value as applied to different classes of goods may throw some light on the relative stability in the price of a consumable article, such as sugar, in comparison with the price of such an article as steel, which belongs to the class of producers' goods several steps removed from consumers' goods. The market for sugar is mainly a consumer's market, while the market for steel is mainly an investor's market. A consumer's market depends upon the willingness of the public to consume, while an investor's market depends upon their willingness to invest. As was shown above, there are reasons, other than psychological, why an investor's market must be more unstable than a consumer's market.

CHAPTER XXVIII

FREE TRADE

Advantages of exchange among individuals of the same country. Freedom of exchange between individuals is so clearly advantageous that practically no one advocates serious restrictions upon it. Freedom of trade between different sections of the same country also is generally approved. It would seem absurd for the South, which is peculiarly adapted to cotton, to try to be entirely self-supporting, and especially to produce certain things, such as wheat, for which its soil and climate are not so well suited as are those of other sections of the country. No one would seriously advocate an interference with the shipments of wheat and wheat flour to the South or of cotton to the North.

Advantages of exchange among individuals of different countries. It is argued by a large majority of the students of economics that the same arguments which favor a policy of freedom of exchange within the country are equally in favor of freedom of exchange between different countries. The lines which separate one country from another are frequently arbitrary political boundaries and do not necessarily interfere with the channels of advantageous commerce. These students would hold that there is no more reason why there should be an interference with freedom of trade across the St. Lawrence and the Great Lakes than across the Ohio River or the Mississippi. If there are individuals in Canada who desire products from the United States, and individuals in the United States who desire products from Canada, there is no more reason why they should be forbidden to make the exchange than there is why two citizens from different states of the United States should be forbidden to exchange their products.

The diversion of labor and capital from the more productive into the less productive industries. The positive argument in favor of freedom of trade rests upon one or two fundamental propositions. One of these is that the labor and capital of any region tends of itself to seek those opportunities and to develop those industries which are most profitable to themselves. From this it would follow that any interference with this process, or any attempt to develop an industry in a region where it would not develop without special favors, must necessarily be a mistake. It would merely divert labor and capital from the more productive to the less productive industry. Left to itself, labor and capital in the southern part of the United States will go into the growing of cotton without any governmental encouragement. This is a sign that cottongrowing is one of the most productive opportunities of that region. Any attempt to tax cotton-growing, and out of the proceeds to pay a bounty to some other industry, would merely mean that a certain amount of the labor and capital of the South would be diverted from the cotton industry, in which it is most productive, into an industry in which it would be less productive. If the new industry is not less productive, labor and capital would go into it anyway; if it is less productive, it would be a waste of resources to divert labor and capital into it instead of allowing them to go where they would naturally go.

Against this fundamental proposition of the free-trade school the protectionists have never been able to launch a successful frontal attack. They have, however, attacked the policy of free trade at other points. The arguments which they have been able to use have, on the whole, proved somewhat more popular than this severely simple doctrine on which the free-trade argument is based. There are six popular arguments in favor of protection, besides some others that are not so popular, though perhaps of greater scientific weight. These six arguments may be characterized as follows: (1) The balanceof-trade argument; (2) the home-market argument; (3) the

infant-industries argument; (4) the standard-of-living argument; (5) the anti-dumping argument; and (6) the necessityfor-military-supplies argument.

The balance-of-trade argument. By the balance-of-trade argument is meant the old theory that a nation is rich when it sells abroad more than it buys. There is a certain superficial analogy between the condition of the private individual and that of the nation. It looks at first thought as though the private individual who was selling more than he was buying was getting rich. This, however, is only an appearance. It is true that so long as he is selling more than he is buying he is accumulating money; but unless he invests that money sooner or later, it will do him no good. When he invests, he is really buying something with it; otherwise he merely becomes a miser and hoards his money instead of using it. The individual who saves or the individual who accumulates money for a time, say for a year, may be prospering in the sense that he is accumulating the power to purchase something else later on; but suppose that during the next year he invests all the accumulations of the preceding year, then it will happen that during this next year he will be buying more than he is selling. No one will claim that he grows poorer by the process.

Similarly with the nation that continually sells more than it buys, if it never buys anything from the outside with that money, the money is of no use to it; if it merely keeps it in circulation within its own boundaries, it will have more money in circulation, but no more goods. Everybody will merely mark up prices and call himself rich. Sooner or later, however, this process must come to an end, for if prices continue to rise within the country, it becomes a poor country in which to buy products. Foreign buyers will, so far as possible, go to other markets for their supplies. At the same time it becomes a good country in which to sell. Foreign producers will seek to sell their goods within the country where high prices prevail, and if the prices are high enough, the protective tariff ceases