§ 6. Advantages confused with monetary costs. The doc trine of comparative advantages is always a hard doctrine for the popular mind, and particularly for the commercial mind endeavoring to carry on a business that cannot be made to "pay" in the face of foreign competition. 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 en joyed in the production of the two articles in question.
The difficulty of clear thinking in this matter is increased by the fact that this theory usually has been, and still is, presented under the name of "the doctrine of comparative costs." The word "costs" is very misleading in this con nection, because it is now generally applied to enterpriser's outlay. It seems best, therefore, to replace it in this phrase by the word "advantages." Of course, it never can be true that an article can be "profitably" imported when its monetary costs (all things considered, freights, insurance, merchant's profit, etc.) are higher in the exporting than in the importing country. Indeed, the importation of any article is proof con clusive that the importer thinks that the monetary costs of an article are higher in the importing than in the exporting country.
How does it happen that the monetary costs of any par ticular goods in one country are higher than those of another country? The answer to this can be made only in the light of the equilibrium theory of prices.° "Monetary costs" are but the prices reflected to agents from the products which 6 See, e. g., Vol. 1, pp. 71, 182, 213, 227, 399-404, 438.
they aid to produce. The relatively short factor in each of the trading countries is priced higher, the relatively long factor is priced lower, than in the other country. For ex ample, agricultural land in England is priced higher (in grains of gold) per acre than equally good land in America, and an ordinary day's labor in America is priced higher than similar labor in England. The manufacturer in America who is trying to manufacture something in which the labor ele ment is large has to go into the labor market and pay higher wages than his English competitor just because there are other industries that can afford to outbid him for that labor ; whereas the English farmer trying to produce wheat finds that he has to pay land rent per acre much higher than his American competitor in North Dakota whose wheat is sold in Liverpool. These differences in relative prices within
each country have important effects in the degree of inten siveness of utilization of economic agents, both human and material. Men often speak carelessly as if America were a country of uniformly high prices, compared with Europe, but that is because they are thinking only of the kinds of goods that we import. American (wholesale) prices of the things we export to Europe are lower than European prices; if they were not the things could not profitably be exported. These facts and principles are contrary to much of the pop ular and political opinion with regard to protective tariffs.
Let us begin with the proposition known as the equation of international exchange, which is sometimes given thus: The valuation (that is, the estimated total price) of the im ports of a country must in the long run equal the valuation 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 in international trade, created by whatever means, by a nation (including money actually sent abroad) must constantly just equal its total debits (including money im ported). Into the balance of accounts between any two nations enter many items: the cash values of the imports and ex ports of merchandise; freights, insurance premiums, and com missions; 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.