Экономическая теория

Protectionnism and Free Trade in Economical Doctrines

      The theoretical basis of a study of international  economic  relations
in its modern form was formed as a result of a long and  difficult  process,
full of successes but, nevertheless, with important mistakes.
      The early roots are to be found, perhaps, in Antic Greece in the works
of Aristotel, Platon  and  Xenophon.  In  general,  the  antic  philosophers
opposed to the big commerce,  supporting  the  idea  of  a  closed  domestic
economy. The closed character of  the  production  of  a  self-supply  type,
dominating from the antiquity up to 15th  century  gave  no  incentives  for
developing any profound and constant  studies  on  international  trade.  In
these conditions is in no way occasional that  the  theorists  of  antiquity
and  Middle  Ages  (scholastics)  exaggerated   the   role   of   production
(especially agricultural) and pleaded against the  "art  of  making  money",
the chrematistics (after Aristotel).
      At the dawn of the Modern Age (16th century) there appeared the  first
trials of more systematic analyses of the international economic relations.
      Developed during the period of  the  downfall  of  feudalism  and  the
transition to capitalism, the mercantile  theory  was  the  first  trial  to
explain integrally the principles of international trade in  a  paradigm  of
the analysis of economic reality.

      Perhaps, the field of international trade was first closely studied by
men of affaires, in private or governmental employment, as no other  topical
area, as a part of an effort to increase the wealth and  the  power  of  the
nation, with which these men tended to  identify  their  own  welfare.  This
body of doctrines, later named by Adam  Smith  the  "mercantile  system"  or
"mercantilism",  insisted  that  the  acquisition  of  wealth,  particularly
wealth in the form  of  gold,  was  of  paramount  importance  for  national
policy. Mercantilists took the virtues of  gold  almost  as  an  article  of
faith; consequently, they never undertook  to  explain  adequately  why  the
pursuit of gold deserved such a high priority in their economic plans.
      The mercantilists held that economic policy  should  be  nationalistic
and aim to secure the wealth and power of the state. This concept was  based
on the conviction that national interests are inevitably in conflict -  that
one nation can increase its trade only at the expense of other nations.
      Thus  the  most  pervasive  and  most  emphasized  doctrine  was   the
importance of bringing about and  maintaining  an  excess  of  exports  over
imports, for that was the only way for a country  without  gold  and  silver
mines to increase its stock of the precious metals. In this way the  foreign
trade, after mercantilists, was reduced to the maximum exports of goods  for
gold and silver and some exports of raw materials and precious metals.
      The desire for a "favorable" balance  of  trade  was  never  based  by
mercantilist writers on a to see their countries engaged in capital  export,
to make investments abroad, as the majority of them were at  least  confused
as to the difference between money and wealth,  and  very  often  identified
these two terms.
      The idea was also that the state should provide its  citizens  with  a
monopoly of the resources and trade  outlets  of  its  colonies.  A  typical
illustration of the mercantilist spirit is  the  famous  English  Navigation
Act of 1651, which reserved for the home country the  right  to  trade  with
the colonies and prohibited the  import  of  goods  of  non-European  origin
unless transported in ships flying the English flag. This  law  lingered  on
until 1849. A similar policy was followed in France.

Thomas Mun

      Thomas Mun, as a representative of mercantilist school, was one of the
firsts to deal extensively with the balance of international trade  and  the
balance of international payments. He first  introduced  into  this  balance
such components as the sale of numerous services - freight earnings,  marine
insurance  payments,  travelers'  expenses,  and  many  more  -  to  foreign
      Among other adepts of mercantilist theory  we  can  name  also  Edward
Misselden, William Petty, and others.
      With the emergence  of  mercantilism  in  the  16th-17th  century,  an
extensive body of literature dealing with the international trade  appeared,
although we must add immediately that  it  yielded  relatively  few  lasting
contributions to international trade theory.
      Mercantilists' ideas often were  intellectually  shallow,  and  indeed
their trade policy may have been little more  than  rationalization  of  the
interests of rising merchant class that wanted wider  markets  coupled  with
protection against competition in the form of imported goods.


      A strong reaction against mercantilist attitudes began to  take  shape
toward the middle of the 18th century. In France, the  economists  known  as
Physiocrats demanded liberty of  production  and  trade.  In  England,  Adam
Smith demonstrated in his The Wealth of Nations  (1776)  the  advantages  of
removing  trade  restrictions.  Economists  and  businessmen  voiced   their
opposition to excessively high and  often  prohibitive  customs  duties  and
urged the negotiation of trade agreements with foreign powers.
      This movement was later named liberalism and the very first economists
fighting against the mercantile ideas are regarded to as  the  pre-classical

Pre-classical Liberalism

      18th  century  is  often  remarked  through  the  development  of  the
scientific trend  in  studying  human  society.  In  this  way  through  the
association with such sciences as physics, medicine, astronomy, and  others,
it was proved that the society is ridden by the "natural  law".  Instead  of
being finalistic and normative, as in the Middle Ages,  the  human  sciences
became descriptive and explanatory. One of the first scientists which  tried
to follow these concepts are the pre-classical liberalists  and  among  them
such economists as Dudley (Douglas) North, Cantillon, Hume,  Condillac,  and

Dudley North

      North undertook a vigurous attack aimed at ridding the  discussion  of
foreign trade matters from mercantilist "superstitions".  He  has  fittingly
been called the first "free trader"  in  the  Smithian  sense.  Viewing  the
whole  world  rather  than  a  single  nation  as  an  economic   unit,   he
demonstrated that there's no  fundamental  difference  between  foreign  and
domestic trade. North also presented a concise formulation of the  automatic
and self-regulating mechanism that provides a nation with that sum of  money
required for carrying its trade.


      Cantillon deflated mercantilist tenets by showing that  if  a  country
continues to sell more than it buys from  abroad,  money  will  successively
will flow into it and, as a first consequence, land and labor in the export-
surplus country will become more expensive.


      Hume greatly helped to piece together the  theory  of  self-regulating
international trade, and he went beyond Cantillon  in  pointing  out  why  a
country could not permanently have  a  "favorable"  or  "unfavorable"  trade
balance. Specifically, he stated the  theory  of  self-regulating  mechanism
with a much greater degree of clarity and incorporated it more  consistently
with the remainder of his work than was the case with any of the earlier  or
contemporary  writers.  He   included   the   influence   of   exchange-rate
fluctuations  on  commodity  trade  in  the  mechanism  as   an   additional
equilibrating factor. Hume considered that the  exchange  rate  equilibrates
the trade balance of the country; this meaning that it grows, if  the  trade
balance tends to the unfavorable one and in this way  presses  the  imports,
and vice-versa.


      Condillac applied  his  utility  theory  to  international  trade  and
demonstrated that what holds  true  for  exchange  between  two  persons  is
largely applicable also to  commerce  between  nations.  The  inequality  of
subjunctive valuations he saw reflected, on a larger  scale,  in  the  total
exchange  transactions  between  nations.  He  decried  the  foolishness  of
establishing trade barriers because it is in the  very  nature  of  exchange
that both parties will benefit - what  is  offered  for  sale  always  being
valued less highly than what is acquired in return. If each nation  insisted
on selling only, they would all eventually wind  up  without  foreign  trade
and  deprive  themselves  of  its  benefits.  Condillac  went   beyond   his
predecessors Hume and Cantillon  in  showing  that  even  if  other  nations
continue  putting  up  obstacles  to  international  exchange,  it  will  be
advantageous for a particular country to adhere  to  free-trade  principles.
He concludes, somewhat optimistically, that  when  trading  enjoys  complete
and permanent liberty, wealth is bound to spread everywhere.

Classical Liberalism

      Classical liberalistic school gave us three  models  of  international
 > the physiocratic model
 > the absolute advantage theory
 > the theory of comparative advantage

Physiocratic model

      The mercantile policies imposed in the  16th  -  17th  century,  which
proclaimed the accumulation of wealth through trade, in the  form  of  money
capital, had ridden the most of European  countries  (maybe  except  Germany
and, in some measure, Britain) into a state of  a  downfall  of  production,
especially of agricultural one.
      Gradually there appeares the idea that the wealth consists  of  goods.
In this sense, physiocrats can be considered the pioneers.  Supporting  that
the wealth is the totality of agricultural goods,  physiocrats  leave  money
the role of a means of exchange only.
      In these conditions, the new conception about the international  trade
appears. Once the wealth derives from agriculture,  it  is  not  created  by
trade,  therefore  the  trade  must  be  based  only  on  the  exchange   of
equivalents, while money are no more than a means of exchange.
      The physiocrats oppose to the active  ("favourable")  balance,  as  it
results from the export of wealth (in the form of goods), and the import  of
money (which are not wealth). They fight to realise an equilibrated  balance
in international trade.


      The founder of the Physiocratic School, Quesnay,  in  all  probability
heavily indebted to Cantillon, brought out the fact that the  state  of  the
balance of trade between nations is neither an indicator of  the  advantages
of foreign commerce nor that of the  wealth  of  nations.  But  he  was  the
author of theory which contained  the  idea  that  when  a  country  imports
luxury goods, selling the most necessary  or  most  useful  commodities,  it
prospers, because it means that the people are able to  produce  beyond  its
basic requirements.

The Absolute Advantage Theory

      The British school of "classical economics" began in no small  measure
as a reaction against the  inconsistencies  of  mercantilist  thought.  Adam
Smith was the 18th-century founder of this school;  his  famous  work,  "The
Wealth of Nations", is in part an anti-mercantilist tract.  In  "The  Wealth
of Nations", Smith emphasized the importance of specialization: in  a  world
where the  productive  resources  are  scarce  and  human  wants  cannot  be
completely satisfied, each nation should specialize  in  the  production  of
goods it is particularly well equipped to produce; it should export part  of
this production, taking in exchange other goods that  it  cannot  so  easily
turn out.

Adam Smith

      Adam Smith's attack was probably the boldest one  on  the  "mercantile
system" which was already tottering both because economic changes had  given
some of these doctrines an antiquarian  flavor  and  because  the  piecemeal
invalidations of  these  doctrines  by  the  many  forerunners  of  economic
liberalism hardly left it a  "leg  to  stand  on".  All  the  same,  without
Smith's vigurous, forceful, and systematic statement of its  weaknesses,  it
might have lingered much longer than it did.
      On the other hand, Smith was unfortunately not  capable  of  precisely
formulating  a  general  theory  of  international  trade.  Apart  from  his
building up an imposing structure of arguments  in  favor  of  freedom  from
restrictions on foreign trade activities, his contributions to  this  theory
are relatively minor, as Smith considered mistaken that a producer needs  an
absolute advantage to export its products.
      The basic concepts of Smith's teory  of  international  trade  may  be
considered the following:
      1. The  international  commerce  is  close  related  with  the  social
division of labor.
      2. The international trade after Smith is based apon  the  freedom  of
action and the incentives of economic agents.
      3. In international trade the competition is free and perfect (without
monopolies and any governmental restrictions in the  form  of  protectionist
      From  these  concepts  the  following  indications  on   international
economic relations result:
      1. In the result of labor  division  it  is  not  necessary  and  even
possible that every country produce inside all the products it needs. It  is
because different states are provided with  the  factors  of  production  of
different types and quality in different proportions. As  the  result  every
country must specialize in production of that goods, for which the costs  of
production are the lowest.
      2. Every country imports the goods for which it  pays  a  lower  price
than it would cost him in case it produced this product domestically.
      3. The difference between the domestic  cost  of  production  and  the
import price is the absolute advantage obtained  through  the  international
trade, this rule being general for all countries.
      4. At the domestic range the state must not interfere in  economy,  as
it always disturbs economic agents from seeking the most efficient  mode  to
invest factors of production it posesses.
      5. In the international trade must be  promoted  the  policy  of  free
competition (without  monopolies)  and  a  policy  of  free  exchange  (non-
      Much as Smith was aware of the benifits of free trade and was able  to
influence the British economic thought,  he  was  not  an  unqualified  free
trader. He singled out two primary cases which in  his  view  justified  the
imposition of barriers on imports for the purpose  of  encouraging  domestic
      First, some particular industries may be necessary for the defense  of
a country. From this point of view, the British  Navigation  Acts,  inasmuch
as they promoted the building up of a merchant marine to be  used  in  peace
and war alike, were perfectly sensible.
      The second case is an  application  of  the  principle  that  normally
competitive conditions should not be distorted by  government  intervention.
Consequently, it will be proper to place a burden  on  foreign  industry  if
this merely neutralizes  the  disadvantage  under  which  domestic  industry
operates because it is  burned  with  some  taxes  from  which  the  foreign
producers are exempt. After the imposition of a "matching"  tariff  duty,  a
form of equalizing adjustment  no  larger  portion  of  domestic  labor  and
capital would be devoted to the particular domestic industry  of  a  country
than what would naturally go to it. "It would only hinder any part  of  what
would naturally go to it from being turned away by  the  tax,  into  a  less
natural direction..." Smith does not underrate the difficulty  arising  from
the fact that imported commodities are seldom  perfect  equivalents  of  the
domestic produced variety.
      Adam Smith took up two secondary cases in which he held  it  to  be  a
"matter of deliberation" whether or not to follow a laissez-faire policy.
      The first deals with the advisability, pro  and  con,  of  imposing  a
retaliatory duty designed to bring about the repeal of a duty imposed  by  a
foreign country. The success of  taking  such  a  step,  Smith  holds,  will
always be open to guess; and unless the odds are distinstly  in  its  favor,
the "...transitory inconviniency of paying dearer during a  short  time  for
some sorts of goods" would not be justified.
      The second possibility, where the issue is not the imposition of a new
tax but rather the return to  free  trade  from  the  evils  of  protection,
centers around the need of preventing a sudden painful shock to  a  domestic
industry. This will be largely a  question  of  size:  only  when  a  "great
multitude of hands"  would  all  at  once  be  deprived  of  their  ordinary
employment and livelihood by the removal of high duties and prohibitions  in
some special regard to their welfare  in  order.  Indeed,  Smith  feels,  it
becomes a matter of equity in this case  that  the  return  to  exposure  to
competition from foreigners be undertaken "...slowly, gradually,  and  after
a very long warning".
      Bounties on exports, that is,  government  payments  to  exporters  of
goods who  could  not  otherwise  effectively  compete  with  their  foreign
rivals, were, as we might expect, another device of the "mercantile  system"
scorned by Smith. They can only warp the natural  allocation  of  resources.
Since a country cannot force the buying of its exports on  other  countries,
the next best expedient may be found in one country paying another  for  the
buying of exports. But doing so, through bounties, will  force  a  country's
trade in less advantageous channels than that  in which it would go if  left
alone. Domestic consumers will be  the  losers:  under  conditions  of  full
employment they would pay a higher price for a smaller portion of the  total
supply, and in addition they would have to  foot  the  bill  for  government
payments to exporters.
      Such  are  the  highlights  of  the  attack  on  the  absurdities   of
mercantilist restrictions, which had  flowered  too  long  to  suit  Smith's

The Comparative Advantage Theory

      Smith did not expand these ideas at much length;  but  David  Ricardo,
the second great classical economist, developed them into the "principle  of
comparative advantage", a principle still  to  be  found,  much  as  Ricardo
spelled it out, in every textbook on international trade.
      The principle of comparative  advantage  is  based  on  what  kind  of
product  the  country  can  produce  best,  in  comparing  not  with   other
countries, but with the producing of other kinds of goods. In this case  the
country doesn't necessarily need an  absolute  advantage  to  specialize  in
producing and exporting it.
      The major purpose  of  the  theory  of  comparative  advantage  is  to
illustrate the gains from the international trade. Each country can gain  by
specializing in those occupations in which it is  relatively  efficient;  it
should export part of that production and take in exchange  those  goods  in
whose production it is, for whatever reason, at a comparative  disadvantage.
The theory of comparative advantage thus  provides  a  strong  argument  for
free trade - and indeed - for  a  laissez-faire  attitude  with  respect  to

      The supporting argument is simple; specialization  and  free  exchange
among nations yield higher real income for the participants.
      The act that a country will enjoy higher real income as a  consequence
of the opening up of trade barriers does not mean,  of  course,  that  every
family or individual within a country must share in that  benifit.  Producer
groups affected by import competition obviously  will  suffer  to  at  least
some degree. Comparative-advantage theorists concede that free  trade  would
affect the relative income position of such groups, and perhaps  even  their
absolute income level. But they insist that the special interests  of  these
groups clashes with the total national interest, and the most that they  are
usually willing to concede is the possible need for a  temporary  protection
against import competition, in order that  the  persons  affected  may  have
sufficient time to move to another occupation.

David Ricardo

      In his theoretical researches D.Ricardo did not  base  apon  extensive
empirical researches but mainly engaged in abstract  reasoning.  In  working
out his international trade theory, he also founded his conclusions  apon  a
set of postulates which he considered as first approximations  of  the  real
world. The conclusions he drew, being valid  within  the  framework  of  his
assumptions only, had of course to be modified before they could be  applied
to actual circumstances.
      The  same  is  also  true  for  Jean-Stuart  Mill,  whose  studies  in
international trade theory completed the  framework  built  by  Ricardo.  In
spite of many attacks and emandations, the main structure  of  the  Ricardo-
Mill theory of international trade remained basically unimpared untill  well
into the 20th century.
      He left however, much unfinished business for  his  successors,  since
his statements did not  explain  how  the  actual  ratios  of  international
exchange determine international prices.
      Ricardo has been attacked  on  many  grounds:  his  statement  of  the
doctrine in terms of labor costs only; his assumption of  constant  cost  of
production; and, of course, his artificial  assumptions  of  perfect  factor
mobility  within  a   nation   as   against   complete   factor   immobility
internationally.  Many  feel  that  these  demerits  are   minor   and   are
overshadowed by the fact that  his  new  approach  opened  up  entirely  new
vistas for further research, for example, a restatement of the principle  in
terms of opportunity costs.

John Stuart Mill

      Ricardo's contribution left unanswered the question of how the  actual
ratios at which goods exchange are determined. 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 Sismondi, List subordinated economics to politics in  general.  In  his
view, it was not enough for the statesmen to know that the free  interchange
will increase wealth (as demonstrated by the classical economists); he  must
also know the ramifications of such action for his own  country.  Thus  List
argued that free trade that displace either population or domestic  industry
is undesirable. Moreover, List  would  not  sacrifice  the  future  for  the
present. He maintained that  the  crucial  economic  magnitude  in  economic
development is not wealth (as measured by exchange  values)  but  productive
power. In his own words, " The power  of  producing  wealth  is...infinitely
more important than the wealth itself".  Thus  economic  resources  must  be
safeguarded so that their future  existence  and  development  are  assured.
This  view  constitutes  further  justification  for  List's   protectionist
arguments; it also  lies  at  the  root  of  the  popular  "infant-industry"
argument in support of protective tariffs.
For List,  the  ultimate  goal  of  economic  activity  should  be  national
development and the accretion of economic power. In this, he  (as  Marx  was
to do later) perceived industry as more than the mere result  of  labor  and
capital. Rather, he  conceived  industry  as  a  social  force  that  itself
creates and improves capital and labor. In  addition  to  effecting  present
production, industry gives an impetus and a direction to future  production.
Therefore,   List   recommended   the   introduction   of   industry    into
underdeveloped countries even at the expense of temporary loss.
List's  originality  in  economic  theory  and  method  consisted   in   his
systematic use of historical comparison as  a  means  of  demonstrating  the
validity of economic propositions and in his introduction of new and  useful
points of view in contradistinction to the economic orthodoxy  of  classical
liberalism. In stretching the dynamic fabric of  classical  economic  growth
by representing economic development as a succession of  historical  stages,
he provided a methodological  rallying  point  for  the  economists  of  the
German historical school. Thus List  may  appropriately  be  considered  the
forerunner of that school.
This reaction in favor of protection spread throughout the Western World  in
the latter part of  the  19th  century.  Germany  adopted  a  systematically
protectionist policy and was soon followed by most  other  nations.  Shortly
after 1860, during the Civil  War,  the  United  States  raised  its  duties
sharply; the McKinley Tariff Act of 1890  was  ultra-protectionist.  England
was the only country to remain faithful to the principles of free trade.
But the protectionism of the last quarter of the 19th century  was  mild  by
comparison with the mercantilist policies that had been common in  the  17th
century and were to  be  revived  between  the  two  World  wars.  Extensive
economic liberty prevailed by 1913. Quantitative restrictions  were  unheard
of,  and  customs  duties  were  low  and  stable.  Currencies  were  freely
convertible into gold, which  in  effect  was  common  international  money.
Balance-of-payments problems were few. People who wished to settle and  work
in a country could go where they wished with few  restrictions;  they  could
open businesses, enter trade, or export capital  freely.  Equal  opportunity
to compete was the general rule, the sole exception being the  existence  of
limited customs preferences between certain countries, most usually  between
a home country and its colonies. Trade  was  freer  throughout  the  Western
World in 1913 than it was in Europe in 1970.

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