Simplified Wealth of Nations by Adam Smith, Book 4, Chapter 5a: Effect of Export Bounties on Real Prices
Chapter 5a: Effect of Export Bounties on Real Prices
1 In Great Britain, export bounties are frequently petitioned for.
They are sometimes granted to particular domestic industries.
Through bounties, our merchants and manufacturers can pretend to sell their goods cheaper than their rivals in the foreign market.
They say more of their goods will be exported.
The balance of trade will then more favour our own country.
"We cannot give our workmen a monopoly in the foreign as we have done in the home market."
"We cannot force foreigners to buy their goods as we have done our own countrymen."
"The next best expedient is to pay them for buying."
This way, the mercantile system proposes to:
enrich the whole country
put money into all our pockets through the balance of trade.
2Bounties should only be given to trades which cannot be carried on without bounties.
Every trade where the merchant can sell his goods with ordinary profits can be carried on without a bounty.
Every such trade is on a level with all the other trades carried on without bounties.
Those trades cannot require more encouragement than others.
The only trades which require bounties are those where the merchant sells his goods at a loss.
The bounty is given:
to make up this loss, and
to encourage him to continue or begin a trade where the costs are more than the returns.
3 The trades supported by bounties are the only ones which generate losses in any considerable time.
Without the bounty, the merchant would find another trade that would bring him at least ordinary profits.
The bounties of the mercantile system forces the country's trade into a channel much less advantageous than natural.
4 The ingenious and well-informed author of the tracts on the corn-trade has shown very clearly that:
Since the bounty on corn exportation was established, the price of exported corn exceeded the price of imported corn which was valued very high.
The excess was more than the total of all the corn bounties paid during that period.
He imagines that this is a clear proof that this forced corn exportation is beneficial to the nation, since the exported value exceeds the imported value much more than the total cost of the bounty.
He does not consider that this bounty is the smallest part of the cost which that corn exportation really costs society.
The capital employed by the farmer in raising corn must likewise be taken into the account.
The society is a loser if the corn prices in foreign markets do not replace:
the cost of the bounty, and
the farmer's capital, together with the ordinary profits.
The national stock would be so much reduced.
But the insufficiency of the corn prices to replace the farmer's capital is the very reason the bounty is granted.
5 The average price of corn has fallen considerably since the bounty's establishment.
Average corn prices began to fall towards the end of the 17th century.
It has continued to fall during the first 64 years of the 18th century, as I have shown earlier.
But the fall in corn prices must have happened in spite of the bounty and not because of it.
It happened in France and England.
France has no bounty.
Until 1764, corn exportation was banned.
This gradual fall in the average price of grain, is probably ultimately not due to those regulations.
It is caused by the gradual and insensible rise in silver's real value.
I showed in Book 1 that this rise happened in Europe during the 18th century.
It seems impossible that the bounty could ever have lowered grain prices.
6 In years of plenty, the bounty creates an extraordinary exportation.
It keeps up the price of corn in the home market above what it would naturally be.
Raising the price was the avowed purpose of the institution.
In years of scarcity, the bounty is frequently suspended.
The great exportation it created in years of plenty must hinder the plenty of one year from relieving the scarcity of another.
Both in years of plenty and in years of scarcity, the bounty raises the money price of corn higher than natural in the home market.
7 In the actual state of tillage, the bounty undisputably has this tendency.
Many people thought that it encourages tillage in two ways:
By opening a more extensive foreign market to the farmer's corn, it increases the demand and production of corn.
By securing a higher price to the farmer, it encourages tillage.
that this double encouragement must increase corn production after many years, and
that its price may be lowered in the home market much more than the bounty can raise it.
8 I answer that whatever extension of the foreign market the bounty creates must be at the yearly expence of the home market.
The corn bounty and all export bounties impose two taxes on people:
The tax to pay for the bounty
The tax arising from the high price of the commodity in the home market
This tax is paid by the consumers of the commodity.
Every bushel of corn exported through the bounty would have remained at home if there were no bounty.
This corn which remains would:
increase local consumption, and
lower the local price of corn.
In corn, the second tax is much heavier than the first tax.
Let us suppose that a bounty of 60 pence on the exportation of the quarter* of wheat raises local wheat prices by only 6 pence the bushel, or 48 pence the quarter higher than without the bounty. [6 pence * 8 bushels]
The people must pay an extra 48 pence on every quarter of wheat they consume.
This is in addition to the bounty of 60 pence they must pay. [48 + 60 = 108 pence]
According to the very well informed author of the tracts upon the corn trade, the average proportion of exported corn to corn consumed at home is not more than 1:31.
For every 60 pence the people pay for the bounty, they must contribute 1,488 pence as payment on the higher price of corn. [48 pence * 31 = 1,488 pence]
This very heavy price of a basic food necessity must:
reduce the subsistence of the labouring poor, and
It reduces their ability to educate and raise their children.
It restrains the country's population.
create some rise in their monetary wages proportional to the rise in the monetary price of their subsistence.
It reduces the ability of the employers of the poor to employ many people.
It restrains the country's industry.
The extraordinary exportation of corn caused by the bounty yearly:
reduces the home market's consumption just as much as it increases the foreign market's consumption, and
restrains the country's population and industry.
Its final tendency is to:
stunt and restrain the gradual extension of the home market, and
reduce the whole market and consumption of corn in the long run.
* [1 quarter = 8 bushels]
9 It has been thought that this enhancement of corn's money price must encourage corn production by rendering corn more profitable to the farmer.
10 I answer that this might be the case if the bounty's effect was to raise the real price of corn.
But neither the bounty nor any other human institution can create any such effect.
The bounty only affects the nominal price of corn, not its real price.
The people derive very little advantage from the very burdensome tax imposed by the bounty.