International trade and finance - Chapter 8

American Journal of Economics and Sociology, The, Dec, 2002

Introduction

IN THE AREA OF INTERNATIONAL TRADE AND FINANCE, Brown published articles and texts early in his career. Two of the influences on his thinking with regard to a theory of international trade were William Graham Sumner and, to a lesser extent, Henry George. Although Sumner and George were decided opponents on the issue of the single tax, they were uncompromising advocates of free trade in the classical tradition of Smith, Ricardo, Mill, et. al. Whether Brown actually studied with Sumner at Yale is uncertain as he never recorded that he had done so, although E. W. Kemmerer, in a review of one of Brown's text, mentioned that Brown had been Sumner's pupil. (1) Brown at least shared Sumner's fondness for Thomas Buckle's The History of Civilization in England and quoted from it on occasion. (2) Brown recommended George's Protection and Free Trade as a "very readable exposition." (3) In the area of foreign exchange he drew heavily from the works of Franklin Escher and George Goschen. (4)

International Trade and Exchange

BROWN'S INTERNATIONAL TRADE AND EXCHANGE was published first in 1914 and subsequently republished in two volumes in 1920 and 1921 as Foreign Exchange and International Trade respectively. (5) In 1916, he had combined a condensed version of these books with a section on transportation costs to make up his Principles of Commerce. (6) In addition to Kemmerer, Frank Taussig, Sumner Slichter and C. F. Bickerdike reviewed Brown's books.

Brown introduced his discussion in Foreign Exchange with chapters on the laws of money and the nature of bank credit along the lines of Fisher's interpretation of the quantity theory. Taussig objected that such an introduction was not necessary. (7) In the analysis of foreign exchange, exchange rate determination and specie flows, the reviewers found Brown to be fundamentally sound. However, they did not think he made any original contributions other than an emphasis on the possibilities of countries having different standards of value. A reviewer in the Economic Journal, Hartley Withers concurred and stressed its similarity to Escher's Elements of Foreign Exchange, but to be more abstract and theoretical and as a result was more "academic and doctrinaire." (8)

For his International Trade Brown was credited by Taussig and Bickerdike with having presented the orthodox or "British School" view of trade theory with consistency and precision. Taussig himself was considered heir to this line of thought, but he found fault with Brown's assumption that specie flow would take place quickly and would have a rapid effect on prices. Taussig did not doubt the conclusions of orthodox theory but felt it was poorly adapted to the problems of real, day-to-day trading situations. Taussig also mentioned that he did not agree with the contemporary criticisms of German economists of the comparative advantage approach. Bickerdike found Brown's analysis superior to that of J. S. Mill in its examination of the gains and losses from protective tariffs and similar to Edgeworth's more recent treatment, although lacking his graphical apparatus. (9)

A few years later Frank Graham attacked the comparative advantage rationale for free trade. (10) He specifically mentioned Brown's assertion (deduced from Mill's treatment) that the greater the variety of goods a country can offer for export, the better was the country's position in trade. (11) Graham argued that this was untrue and that greater variety was more likely to result in less favorable terms of trade unless totally new goods accounted for the variety. Brown, however, had argued that the statement was true only in general terms and that the greater variety of goods and services would imply a greater volume of trade, with all its attendant benefits.

Brown dedicated much of the text to question of free trade, which he advocated with little or no concession to protectionists' arguments. As mentioned by Kemmerer and Taussig, this view was the traditional one but had been challenged by economists both here and abroad for several years. For example, in 1890, Simon Patten had based a case for protection on dynamic considerations not treated in the classical approach. Taussig commented that

there is more to be said on the workings of protective duties in detail, and on the conceivable advantages to be secured by them, than Professor Brown is ready to grant. The controversy between Agrastaat and Industriestaat is not to be dismissed so lightly as is done by Professor Brown; and the possible advantages from protection to young industries is underrated by him. (12)

Brown found the effect of a protective tariff on national wealth to be negative. He argued that in the long run export trade would be restricted by the tariff barrier to importation. A misallocation of resources was another consequence. He maintained that the gain to the protected industries would be more than balanced by the loss to others in the country. He found improbable but conceivable that a tariff would allow an industry to attain economies of scale so as to compete internationally. He recognized (following Mill and others) a possible indirect gain from improved terms of trade but concluded that this would only be temporary, as normally alternative outlets for the exports of the trading partners would be found. Citing the example of Great Britain, he showed that countries with low tariff barriers could compete successfully with countries with high tariffs and not be forced to raise their own rates.