Protectionnism and Free Trade in Economical Doctrines

It was Jean Stuart Mill who explained the determination of the terms of trade and did so with great skill. He found that they are dependent on reciprocal demand and that the equilibrum exchange ratio is the ratio that equalizes the values of exports and imports for each country in a two-country two-commodity situation. With the "Equation of International Demand" as a tool, he proceeded to envisage more complicated situations and explain what modifications in assumptions their analysis necessitated. His work helped greatly in clarifying the intricate problems connected with the theory of international values and strengthened the foundations on which others could build. Among the other representatives of classical school we can pick up such economists as Nassau William, Senior, John Elliot Cairness, the Irish one Charles Francis Bastable, whose apport in developing theory of international trade was, perhaps, the boldest, as they tried to modify the Ricardo-Mill theory in more realistic way.

This change of attitudes led to the signing of a number of agreements embodying the new ideas, among them the Anglo-French Treaty of 1786, which ended what had been an economic war between the two countries. After Adam Smith, the basic tenets of mercantilism were no longer considered defensible. This did not, however, mean that nations abandoned all mercantilist policies. Restrictive economic policies were now justified by the claim that, up to a certain point, the government should keep foreign merchandise off the domestic market in order to shelter national production from outside competition. To this end, customs levies were introduced in increasing number, replacing outright bans on imports, which became less and less frequent. In the middle of the 19th century, customs walls effectively sheltered many national economies from outside competition. The French tariff of 1860, for example, charged extremely high prices on British products: 60 percent on politique economique ig iron; 40 to 50 percent on machinery; and 600 to 800 percent on woolen blankets. Transport costs between the two countries provided further protection. A triumph for liberal ideas was the Anglo-French trade agreement of 1860, which provided that French protective duties were to be reduced to a maximum of 25 percent within five years, with free entry of all French products except wine into Britain. This agreement was followed by other European trade pacts.

Resurgence of Protectionism In the period of a whole triumph of the doctrine of classical economic liberalism, in the first part of 19th century, there appears in Germany a diametrically contraire (at least apparently) doctrine of economic protectionism. The brightest representative of this new theory is, no doubt, Friedrich List (1789-1846), son of a German leatherworker. Not studying at any university, he made an academic career to become active in German politics. In 1819, he became leader of the General Association of Manufacturers & Merchants and the very soul of the movement to confederate the German states. Being controversed and pressed in course of his life, list was in no smaller measure appreciated and valued posthumously. Rare economists had such a great influence upon the course of economic events as List had, there are few systems of economic thought which were to such extend using in practice as the Listien one was. The economic and political unity that characterized much of Europe in the first half of 19th century was totally absent from Germany. The peace treaty that ended Germany's participation in Napoleonic wars left that country divided into 39 different states, most of which were individual monarchies economically and politically isolated from one another. Such isolation was primarily the result of a complex system of interstate tariffs that impaired the free and easy exchange of goods. At the same time, however, no import duties existed. Thus British surplus products (and those of other countries) found their way into German markets, where they were offered at extremely low prices. Under these circumstances the very existence of German manufacturing and mercantile interests was threatened, and by the 1830, there arose among the German states a general clamor for economic unity and uniform tariffs. It was this movement that consumed List's interests and energy. In his analysis of national systems of political economy, List applied a method of inquiry originated by Saint-Simon: the idea that an economy must pass through successive stages before it reaches a "mature" state. The historical stages of development detailed by List were: 1. Barbaric 2. Pastoral 3. Agricultural 4. Agricultural-Manufacturing 5. Agricultural-Manufacturing-Commercial Like Sismondi and Saint-Simon, List was as much interested in transition between stages of economic development as in the end result. He felt that passage through the first three stages will be brought about most speedily by free trade between states and nations, but that economies in transition between the last two stages required economic protection until the final stage was reached. Free trade justified once again, however, when the final stage of development was attained, "in order to guard against retrogression and indolence by the nation's manufacturers and merchants". By List's classification and testimony, only Great Britain had attained the final stage of economic development. While the Continental and American nations struggled to reach this apogee, however, cheap British imports were thwarting the development of domestic manufacturing. List felt that until all nations reached the final stage of development, international competition could not exist on an equal footing. Thus he favored protective tariffs for Germany until its greatest national economic power was attained. It is important to note that List was not an outright protectionist; rather, he felt that protection was warranted only at critical stages in history. His writings are replete with examples borrowed from history and experience showing that economic protection is the only way for an emerging nation to establish itself. List felt that the American experience offered vindication of his views, and he of course found ready support among United States protectionists, particularly Alexander Hamilton and Henry Carey.

List's Criticism of Classical Economics List strongly opposed the absolutist, cosmopolitian tendencies of the classical economists. They derived principles, he maintained, which were then assumed to hold for all nations and all times. By contrast, List's theory and methodology were strongly nationalistic and historical. His theory of stages in economic development, for example, was calculated to demonstrate the insufficiency of classical economics to recognize and reflect the variety of conditions existing in different countries and, most especially, in Germany. Like