CHAPTER II: ADAM SMITH
Notwithstanding the originality and vigour displayed by the Physiocrats, they can only be regarded as the heralds of the new science. Adam Smith,[126] it is now unanimously agreed, is its true founder. The appearance of his great work on the Wealth of Nations in 1776 instantly eclipsed the tentative efforts of his predecessors. To-day the Physiocratic doctrines scarcely do more than arouse historical curiosity, while Smith’s work has been the guide for successive generations of economists and the starting-point of all their speculation. Even at the present day, despite many changes in the fundamental principles of the science, no economist can afford to neglect the old Scotch author without unduly narrowing his scientific horizon.
Several reasons account for the commanding position held by this book—a position which no subsequent treatise has ever successfully rivalled.
First is its supreme literary charm. It is above all an interesting book, bristling with facts and palpitating with life. The burning questions of the hour, such as the problems presented by the colonial régime, the trading companies, the mercantile system, the monetary question, and taxation, supply the author with congenial themes for his treatment. His discussion of these questions is marked by such mastery of detail and such balance of judgment that he convinces without effort. His facts are intermixed with reasoning, his illustrations with argument. He is instructive as well as persuasive. Withal there is no trace of pedantry, no monotonous reiteration in the work, and the reader is not burdened with the presence of a cumbersome logical apparatus. All is elegantly simple. Neither is there the slightest suggestion of the cynic. Rather a passion of genuinely human sympathy, occasionally bordering upon eloquence, breathes through the pages. Thanks to rare qualities such as these we can still feel something of the original freshness of this old book.
In addition to this, Smith has been successful in borrowing from his predecessors all their more important ideas and welding them into a more general system. He superseded them because he rendered their work useless. A true social and economic philosophy was substituted for their fragmentary studies, and an entirely new value given to their contributions. Taken out of their isolation, they help to illustrate his general theory, becoming themselves illuminated in the process.
Like most great writers, Smith knows how to borrow without impairing his originality. Over a hundred authors are quoted in his book, but he does not always acknowledge them. The names of some of the writers who exercised such influence over him, and opened up the path which he afterwards followed, deserve more than a passing reference.
The first place among these belongs, perhaps, to Hutcheson, Smith’s predecessor in the chair of Moral Philosophy at Glasgow. The divisions of the subject are almost identical with those given by Hutcheson, and many of Smith’s best known theories can be traced in the System of Moral Philosophy published by Hutcheson in 1755, but which we know was written long before. Hutcheson laid great stress upon the supreme importance of division of labour, and his views on such questions as the origin and variations in the value of money and the possibility of corn or labour affording a more stable standard of value closely resemble those of the Wealth of Nations.
David Hume is a near second. Smith refers to him as “by far the most illustrious philosopher and historian of the present age,”[127] and from 1752 onward they were the closest of friends. Hume was already the author of some essays on economic questions, the most important among them dealing with money, foreign trade, the rate of interest, etc. These, along with several other writings, were published in the Political Discourses in 1752. Hume’s examination of these problems displays his original penetrative thought, and there is evident the profundity and lucidity of treatment characteristic of all his writings. The absurdity of the Mercantile policy and of interfering with the natural tendency of money to adapt itself to the needs of each community, the sophistry of the balance of trade theory, and the impious consequences resulting from commercial jealousy among nations are exposed with admirable force in these essays. No doubt the essays left a great impression upon Smith. He quoted them in his lectures at Glasgow, and Hume consulted him before bringing out a second edition. It is true that Smith eventually became the stauncher Liberal of the two. Hume, in his essay on the Balance of Trade, recognized the legitimacy of certain protective rights which Smith wished removed altogether. Still it was to Hume that Smith owed his conversion to the Liberal faith.
On this matter of commercial liberty there was already, towards the end of the seventeenth and the beginning of the eighteenth centuries, a small but a growing band of Mercantilists who had begun to protest against the irksomeness of the Customs regulations. They were, of course, still largely imbued with mercantile prejudice, but they are rightly classed as “Liberals.” Just as in France Boisguillebert had foreshadowed the Physiocrats, so in England Child, Petty, Tucker, Dudley North, and Gregory King had been preparing the way for a more liberal policy in foreign trade.[128]
In addition to Hutcheson and Hume one other writer must be mentioned in this connection, namely, Bernard de Mandeville. He was not an economist at all, but a doctor with considerable philosophical interests. In 1704 he had published a small poem, which, along with a number of additions, was republished in 1714 under the title of The Fable of the Bees; or, Private Vices Public Benefits. The fundamental idea of the book, which caused quite a sensation at the time, and which was seized by order of the Government, is that civilisation—understanding by that term not only wealth, but also the arts and sciences—is the outcome, not of the virtues of mankind, but of what Mandeville calls its vices; in other words, that the desire for well-being, comfort, luxury, and all the pleasures of life arises from our natural wants. The book was a sort of apology for the natural man and a criticism of the virtuous.
Smith criticised Mandeville in his Theory of Moral Sentiments,[129] and reproached him particularly for referring to tastes and desires as vices though in themselves they were nowise blameworthy. But despite his criticism Mandeville’s idea bore fruit in Smith’s mind. Smith in his turn was to reiterate the belief that it was personal interest (in his opinion no vice, but an inferior virtue) that unwittingly led society in the paths of well-being and prosperity. A nation’s wealth for Smith as well as for Mandeville is the result, if not of a vice, at least of a natural instinct which is not itself virtuous, but which is bestowed upon us by Providence for the realisation of ends that lie beyond our farthest ken.
Such are the principal writers in whose works we may find an outline of some of the more important ideas which Smith was to incorporate in a true system.
Mere systematisation, however, would not have given the Wealth of Nations its unique position. Prior to Smith’s time attempts had been made by Quesnay and the Physiocrats to outline the scope of the science and to link its various portions together by means of a few general principles. Although he was not the first to produce a connected scientific treatise out of this material, he had a much greater measure of success than any of his predecessors.
Smith owed much to the Physiocrats, but he had little personal acquaintance with them beyond that afforded by his brief stay in Paris in 1765. Slight as the intimacy was, however, there is no doubt about the influence they had upon him. It is also very improbable that he had read all their works: Turgot’s Réflexions, for example, written in 1766, but only published in 1769-70, was probably not known to him. But frequent personal converse with both Turgot and Quesnay had helped him in acquiring precise first-hand knowledge of their views. We can easily guess which ideas would attract him most.
On one point at least he had no need to be enlightened, for in the matter of economic liberalism he had long been known as a doughty champion. But the ardent faith of the Physiocrats must have strengthened his own belief very considerably.
On the other hand, it appears that he borrowed from the Physiocrats the important idea concerning the distribution of the annual revenue between the various classes in the nation. In his lectures at Glasgow he scarcely mentions anything except production, but in the Wealth of Nations an important place is given to distribution. The difference can hardly be explained except upon the hypothesis of Smith’s growing acquaintance with the Tableau économique and the theory of the “net product.”
But admitting that he borrowed what was most characteristic and most suggestive in their teaching, his treatment of its many complicated aspects is altogether superior to theirs. The Physiocrats were so impressed by the importance of agriculture that they utterly failed to see the problem in its true perspective. They scanned the field through a crevice, and their vision was consequently narrow and limited. Smith, on the other hand, took the whole field of economic activity as his province, and surveyed the ground from an eminence where the view was clearest and most extensive.
The economic world he regarded as a vast workshop created by division of labour, one universal psychological principle—the desire of everyone to better his lot—supplying unity to its diverse phenomena. Political economy was at last to be based, not on the interests of a particular class, whether manufacturing or agricultural, but upon a consideration of the general interest of the whole community. Such are the directing principles that inspire the whole work, the guiding lines amidst what had hitherto seemed a mere chaos of economic facts. Contemporaries never counted upon the difficulties which the new science was bound to encounter, so great was their enthusiasm at having a fixed standpoint from which for the first time the complex interests of agriculture, industry, and commerce might be impartially surveyed. With Smith the study emerged from the “system” stage and became a science.
Our examination of Smith’s views will be grouped around three points:
(I) Division of labour.
(II) The “natural” organisation of the economic world under the influence of personal interest.
(III) Liberalism.
I: DIVISION OF LABOUR
It was Quesnay who had propounded the theory that agriculture was the source of all wealth, both the State’s and the individual’s.[130] Adam Smith seized upon the phrase and sought to disprove it in his opening sentence by giving to wealth its true origin in the general activity of society. “The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour or in what is purchased with that produce from other nations.”
Labour is the true source of wealth. When Smith propounded this celebrated theory, which has given rise to so many misunderstandings since, it was not intended that it should minimise the importance of natural forces or depreciate the part which capital plays in production.[131] No one, except perhaps J. B. Say, has been more persistent in emphasising the importance of capital, and to the land, as we shall presently see, he attributed a special degree of productivity. But from the very outset Smith was anxious to emphasise the distinction between his doctrine and that of the Physiocrats. So he definitely affirms that it is human activity and not natural forces which produces the mass of commodities consumed every year. Without the former’s directing energy the latter would for ever remain useless and fruitless.
He is not slow to draw inferences from this doctrine. Work, employed in the widest sense, and not nature, is the parent of wealth—not the work of a single class like the agriculturists, but the work of all classes. Hence all work has a claim to be regarded as productive. The nation’s annual income owes something to everyone who toils. It is the result of their collaboration, of their “co-operation” as he calls it. There is no longer any need for the distinction between the sterile and the productive classes, for only the idle are sterile.
A nation is just a vast workshop, where the labour of each, however diverse in character, adds to the wealth of all. The passage in which Adam Smith expresses this idea is well known, but no apology is needed for quoting it once again.[132] “What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.”
Division of labour is simply the spontaneous realisation of a particular form of this social co-operation. Smith’s peculiar merit lies in placing this fact in its true position as the basis of his whole work. The book opens upon this note, whose economic and social importance has been so frequently emphasised since that it sounds almost commonplace to-day.
This division of labour effects an easy and natural combination of economic efforts for the creation of the national dividend. Whereas animals confine themselves to the direct satisfaction of their individual needs,[133] men produce commodities to exchange them for others more immediately desired. Hence there results for the community an enormous increase of wealth; and division of labour, by establishing the co-operation of all for the satisfaction of the desires of each, becomes the true source of progress and of well-being.
In order to illustrate the growth in total production as the outcome of division of labour, Smith gives an example of its effects in a particular industry. “The effects of the division of labour, in the general business of society, will be more easily understood by considering in what manner it operates in some particular manufactures.” It is in this connection that he introduces his celebrated description of the manufacture of pins. “A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day.”[134]
Such is the picture of man as we find him in society. Division of labour and exchange have resulted in augmenting production a hundredfold, and thus increasing his well-being, whereas left to himself he could scarcely supply his most urgent needs.
In a subsequent analysis Smith ascribes the gain resulting from division of labour to three principal causes: (1) The greater dexterity acquired by each workman when confined to one particular task; (2) the economy of time achieved in avoiding constant change of occupation; (3) the number of inventions and improvements which suggest themselves to men absorbed in one kind of work.
Criticism has been levelled at Smith for his omission to mention the disadvantages of division of labour which might possibly counterbalance its many advantages. The omission is the result of his method of treating the whole question, and it is not of much real importance. The disadvantages, moreover, were not altogether lost sight of, and it would be difficult to find a more eloquent plea for some counteracting influence than that which Smith puts forward in the fifth book of the Wealth of Nations. “In the progress of the division of labour,” he remarks, “the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations; frequently to one or two.” But “the man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.”[135]
This passage seems in contradiction with the ideas expressed above. At one moment constant application to one particular kind of work is regarded as the mother of invention, at another the unremitting task is branded as a fertile cause of stupefaction. The contradiction is, however, more apparent than real. An occupation at first stimulating to the imagination may, if constantly pursued, result in mental torpor. Smith’s conclusions are at any rate interesting. In order to remove the inconveniences resulting from over-specialisation he emphasises the need for bringing within reach of the people, even of imposing upon them, a system of education consisting of the three R’s[136]—such education to be supplied through institutions partly supported by the State. We can imagine the shock which such heterodoxy must have given to the prophets of laissez-faire. Fortunately it was not the only one they had to bear.
Smith next proceeds to indicate the limits of this division of labour. Of such limits he mentions two: (1) In the first place it must be limited by the extent of the market. “When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.”[137] This is why foreign trade, including trade with the colonies, by extending the market for some products is favourable to further division of labour and a further increase of wealth. (2) The other consideration which, according to Smith, limits division of labour is the quantity of capital available.[138] The significance of this observation is not quite so obvious as that of the former one. Here it seems to us that a conclusion drawn from one particular trade has been applied to industry as a whole. It may be true of a private manufacturer that he will be able to push technical division of labour further than any of his rivals provided he has more capital than they; but taking society as a whole it is clear that the existence of division of labour enables the same product to be produced with less capital than is necessary for the single producer.[139]
Such is an outline of Adam Smith’s theory of division of labour—a theory so familiar to everyone to-day that we are often unable to realise its importance and to appreciate its originality, and this despite the fact that certain sociologists like Durkheim have hailed it as supplying the basis of a new ethic. Juxtaposed with the Physiocratic theory, it is not very difficult to realise its superiority.
To the Physiocrats the economic world was a hierarchy of classes. The agriculturist in some mysterious way bore the “whole weary weight of this unintelligible world” upon his own shoulders, giving to the other classes a modicum of that sustenance which he had wrested from the soil. Hence the fundamental importance of the agricultural classes and the necessity for making the whole economic system subordinate to them. Adam Smith, on the other hand, attempted to get a view of production as a whole. He regarded it as the result of a series of joint undertakings engineered by the various sections of society and linked together by the tie of exchange. The progress of each section is bound up with that of every other. To none of these classes is entrusted the task of keeping all the others alive; all are equally indispensable. The artisan who spares the labourer the task of building his house or of making his shoes contributes to the accumulation of agricultural products just as much as the ploughman who frees the artisan from turning the furrow or sowing the seed. The progress of national wealth cannot be measured in terms of a single net product; it must be estimated by the increase in the whole mass of commodities placed at the disposal of consumers.
One very evident practical conclusion follows; namely, that taxation should fall, not upon one class, as the Physiocrats wished, but upon all classes alike. As against the impôt unique, Smith advocates multiple taxation which shall strike every source of revenue equally, labour and capital as well as land; and the fundamental rule which he lays down is as follows: “The subjects of every State ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”[140] This is his famous maxim of equality so frequently quoted in every financial discussion.[141]
It is very curious that Smith should have failed to make the best possible use of this theory. Its full significance was lost upon him. The theory of division of labour alone was sufficient to dispose of the whole Physiocratic system. Nevertheless, in the last chapter of Book IV we find him still valiantly struggling to disprove the conclusions of the Physiocrats, by the aid of arguments not always very convincing. Forgetting his principle of division of labour, he even adopts a part of their thesis and finds himself entangled by the invalid distinctions which they had drawn between productive and unproductive workers. He simply gives another definition and describes as unproductive all works which “perish in the very instant of their performance, and seldom leave any trace or value behind them for which an equal quantity of service could afterwards be procured.”[142] All these services, which comprise the labours of domestic servants, of administrators and magistrates, of soldiers and priests, of counsellors, doctors, artists, authors, musicians, etc., Say classed together as “immaterial products.” By restricting the term “productive” to material objects only, Smith gave rise to a very useless controversy on the nature of productive and unproductive works—a controversy that was first taken up by Say and revived by Mill, but which to-day seems to be decided against Smith, thanks to a more exact interpretation of his own doctrines. It is, indeed, quite clear that all these services constitute a part of the annual revenue of the nation, and that “production” in a general sense would be diminished if some persons did not exclusively devote themselves to the performance of such tasks.
After criticising the Physiocratic distinction drawn between the wage-earning classes and the productive, Smith immediately admits that the labour of artisans and traders is not as productive as that of farmers and agricultural labourers, for the latter not only return the capital employed by them together with profits, but they also furnish the proprietor with rent.[143]
Whence this hesitation on the part of Smith? Where did he come by the idea of the special and superior productivity of agriculture? An attempt to account for it may prove interesting, and it will help us to give Smith his true place in a history of economic doctrines.
Notwithstanding his recantation, Smith was never quite rid of Physiocratic influence. Writing of the Physiocratic system, he described it as perhaps “the nearest approximation to the truth that has yet been published.”[144] So indelible was the impression which the Physiocrats left upon him that both they and their doctrines, even when the latter are directly opposed to his own, are always spoken of with the greatest respect. The most important evidence of their power over him is the thesis just mentioned which he attempted to defend, namely, that between agriculture and other industries lies an essential distinction, because in industry and commerce the forces of nature are never brought into play, whereas in agriculture they always collaborate with man. “No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing; man does all; and the reproduction must always be in proportion to the strength of the agents that occasion it.”[145] We almost think we are dreaming when we read such things in the work of a great economist. Water, wind, electricity, and steam, are they not natural forces, and do they not co-operate with man in his task of production?
Considerations such as these were allowed to pass quite unheeded, and Smith persisted in his error because he believed that this new doctrine furnished him with an explanation of rent, that strange enigma which had puzzled English economists for so long. How was it that while other branches of production gave a return only sufficient to remunerate the capital and labour employed, agriculture, in addition to these two revenues, yielded a supplementary income known as rent? It was because “in agriculture nature labours along with man: and though her labour costs no expence, its produce has its value as well as that of the most expensive workman.” Thus “rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.”[146] Had Smith arrived at a true theory of rent this recourse to the natural powers of the soil to furnish an explanation of the proprietor’s revenue would have been quite unnecessary, and in all probability he would not have so easily accepted the idea of the special productivity of the soil. But this false conception of nature has persisted in economic theory, and in it Smith thought he saw an additional reason for adhering to those errors which the Physiocrats had first induced him to commit.[147]
Apart from his personal attachment to the Physiocrats we must also remember that Smith more than shared their predilection for agriculture.
Nothing can be more incorrect, though it is frequently done, than to regard Smith as the prophet of industrialism and to contrast him with the Physiocrats, the champions of agriculture. When the Wealth of Nations appeared in 1776 the economic transformation known to history as the Industrial Revolution, which consisted in the rapid substitution of machine production for the old domestic régime, had as yet scarcely begun. Hargreaves and Arkwright had doubtless some inventions to their credit. The one had produced the spinning jenny in 1765, and the other had perfected the water frame in 1767, improvements that had given considerable impetus to the cotton trade. James Watt,[148] who was known to Smith, took out a patent for a steam-engine in 1769. But these inventions were as yet quite novel, and required time before they could modify the industrial system. The more important among them, Crompton’s “mule”[149] and Cartwright’s weaving machine, were as yet of the future. These dates are significant; they prove conclusively that the Industrial Revolution had scarcely begun when Smith’s great work appeared. Moreover, several of the more important themes treated of in the Wealth of Nations may be discovered in the course of lectures which Smith delivered at Glasgow about 1759, so that it is quite impossible to establish anything like an exact connection between the Industrial Revolution which was just beginning and the ideas embodied in the Wealth of Nations. One cannot even say that Smith was particularly enamoured of the manufacturing régime—apart from the mechanical advance which it implied. For, as Marx says,[150] the characteristic trait of English economic life, despite the undisputed advance that industry was making at that time, was commercial rather than industrial.[151] Especially was this true of Glasgow, where Smith made most of his observations. Glasgow then was an essentially commercial town, principally engaged in the importation of American tobacco.[152]
Far from constituting a prophetic manifesto of the new age, Smith’s work reveals even to the most superficial reader a thorough abhorrence of traders and manufacturers. All his sarcasm is reserved for them, all his criticism levelled at them. While the interest of landed proprietors and workers appears to him always to accord with a country’s general interest, that of traders and manufacturers “is never exactly the same with that of the public,” the manufacturers having “generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”[153]
Again, when it comes to choosing between capitalists and workmen the issue is not long in doubt. It is quite clear from more than one passage that Smith’s sympathy was wholly with the workers. Several paragraphs could be cited in proof of this. Suffice it to recall the very sympathetic way in which he speaks of the high wages of workmen and contrast it with his discussion of profits. “Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged.”[154] The tune changes when he comes to speak of profits. He is of opinion that high profits raise the price of commodities much more than high wages, and he dismisses the consideration of the problem with this ironical remark: “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”[155] The contrast is significant. It is still more deeply marked in that phrase which one is surprised not to see more frequently quoted by the champions of labour legislation. “Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.”[156]
This is not the tone of most of his contemporaries. Nor do we meet with this note in the writings of the appointed champions of the industrial system—the MacCullochs, the Ures, and the Babbages of the next fifty years. His words ring with that generous pity which proved a source of inspiration to Lord Shaftesbury and Michael Sadler in their efforts to secure the passing of the Factory Act of 1833.
Smith cannot, accordingly, be regarded as the herald of dawning industrialism. He clung to agriculture with all the tenacity of his nature, and no opportunity of showing his preference was ever missed. The difficulties of agriculture are quite beyond those of any other craft. “After what are called the fine arts, and the liberal professions, however, there is perhaps no trade which requires so great a variety of knowledge and experience.”[157] Not only is it more difficult, but it is also more useful. Between agriculture, manufacture, and commerce he draws a long comparison (to which we shall have to make reference again) purporting to show that of all employments agriculture is the most profitable field of investment, and the one most in accord with the general interest. For the more progressive nations “the natural course of things” would seem to suggest the investment of capital firstly in agriculture, in the second place in industry, and finally in foreign trade. The whole of Book III is an endeavour to show how the policy of European nations had for many centuries been hostile to agriculture and how the natural order had been inverted in the interests of merchants and artisans. Agriculture had always been the victim. In his theory of taxation he shows how a portion of the taxes on profits and wages ultimately falls upon property. In his discussion of duties on imported corn—those duties which aroused the indignation of Ricardo against the landlords—he reveals the same partiality. And he even goes the length of saying that it is not because of their personal interest, but owing solely to a badly conceived imitation of the doings of merchants and manufacturers, that “the country gentlemen and farmers of Great Britain so far forgot the generosity which is natural to their station, as to demand the exclusive privilege of supplying their countrymen with corn and butchers’-meat.”[158]
Smith’s preference for agriculture and agriculturists need not be further insisted upon. Despite his own theory of division of labour, he still cherished a secret regard for the Physiocratic prejudice. He never subjected agriculture to the indignity of equal treatment along with other forms of economic activity. In his work at least it still retains its ancient pre-eminence.
II: THE “NATURALISM” AND “OPTIMISM” OF SMITH
In addition to the conception of the economic world as a great natural community created by division of labour, we can distinguish in Smith’s work two other fundamental ideas, around which his more characteristic theories group themselves. First is the idea of the spontaneous origin of economic institutions, and secondly their beneficent character—or, more briefly, Smith’s naturalism and optimism.
The two ideas, though frequently intermingled and sometimes even confused in Smith’s work, must be carefully distinguished by the historian of economic thought.
Spontaneity and beneficence were intimately connected for Smith. In the eighteenth century anything natural or spontaneous was immediately voted good, and the terms “natural,” “just,” and “advantageous” were often used as synonymous. Smith did not escape the confusion of ideas. Having shown the natural origin of economic institutions, he imagined that at the same time he had demonstrated their useful and beneficent character.[159] The confusion is no longer permissible. To give a scientific demonstration of the origin of social institutions and to gauge their value from the point of view of the general interest are two equally legitimate but very different intellectual pursuits. We may agree with Smith that our economic organisations, both in their origin and functions, participate of the spontaneity of natural organisms, but we may at the same time reserve judgment as to their real worth. Pessimism no less than optimism may be engendered by contemplation of the spontaneous character of economic institutions. While this conception of the spontaneity of economic institutions seems to us just and fruitful, the demonstration given of their beneficent character appears insufficient and doubtful. The former conception is a commonplace with all the greatest economists; the latter is rejected by the majority of them.
These two ideas which have played such an important part in the history of economic doctrines must be separately examined.
The conception of spontaneity is the one to which Smith refers most frequently. Il mondo va da se. Here at any rate he and the Physiocrats were entirely at one. There is no need for organisation, no call for the intervention of any general will, however far-seeing or reasonable, and no necessity for any preliminary understanding between men. Such are the reflections that the study of the economic world suggests ever anew to our author. The present aspect of the economic world is the result of the spontaneous action of millions of individuals, each of whom follows his own sweet will, taking no heed of others, but never doubting the ultimate result. The noble outlines of the economic world as we know it have been traced, not by following a plan issuing complete from the brain of an organiser and deliberately carried out by an intelligent society, but by the accumulation of numberless deeds designed by a crowd of individuals in obedience to an instinctive force wholly unconscious of the work which it was encompassing.
This idea of the spontaneous constitution of the economic world is in some aspects analogous to the conception of an “economic law” of a later period. Both ideas suggest the presence of something superior to individual wills, and imposed upon them even despite their resistance. The differences are equally marked, however, the scope of the former being far greater than that of the latter. The words “natural law,” in the first place, suggest regularity and repetition—the constant recurrence of the same phenomena under similar conditions. This is not the aspect that particularly struck Smith. He insists less upon the constancy of economic phenomena and more on their spontaneity, their instinctive and natural character. Say’s delight was to compare the economic and the physical worlds. Smith loves to regard the economic world as a living organism which creates for itself its own indispensable organs. Nowhere is the term “economic law” employed, but his delineation of the chief economic institutions and the account of their functions always results in the same conclusion.
First of all take division of labour, which we have just studied, and which more than any other institution contributes to the increase of wealth.
This marvellous institution is “not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion.” “It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”[160] This tendency itself is the outcome of personal interest. “Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.”[161] This gives rise to exchange, and with exchange comes division of labour. “And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.” Division of labour is the outcome of a tendency common to all men, the tendency to barter; and this tendency itself is spontaneously developed under the influence of personal interest, which acts simultaneously for the benefit of each and all.
Next comes money, and nothing has so facilitated exchange or so greatly increased wealth. Every economic treatise since Smith’s has demonstrated its advantages in terms almost identical with his. But how did money first come to be employed? It was not by the act of a public body, nor was it the outcome of a nation’s reflective judgment. It is simply the result of the operation of a collective instinct. Some men who were keener than others saw the inconveniences of the truck system. And “in order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.”[162] Money is thus the product of the simultaneous though not concerted action of a great number of people, each obeying his personal inclination. The intervention of the public authority is much later, and its object is merely to guarantee by means of a design the weight and purity of such coins as are already in circulation.
Take another well-known phenomenon—capital.[163] With the exception of division of labour and the invention of money, Smith thought there was no phenomenon of greater importance and no more essential fount of national wealth than capital. The larger the store of capital, the greater the number of productive workers, makers of tools and machinery—the essentials of increased productivity—the further will division of labour extend. To increase a nation’s capital is to expand its industry and to further its well-being.[164] In some passages the growth of wealth appears not merely as the chief but as the only method of augmenting a nation’s wealth. “The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue.”[165] In short, capital limits industry,[166] a phrase that was destined to become classic, and one that was repeated by every economist down to Mill. Capital is the true source of economic life. Let capital increase and industry will expand in every direction; diminish it and a bar is set to all improvement. Capital fertilises the earth, whereas the labour of man simply leaves it a weary waste.
Criticism has been freely levelled at this extravagant importance which capital is made to assume. It is certainly somewhat curious that labour should now be treated as altogether subordinate to capital, whereas earlier in the volume labour alone was regarded as the great wealth-producing agent. But we are not here concerned with the revival of these threadbare controversies.[167] We merely wish to note that Smith finds in this accumulation of capital a new illustration of spontaneity. The saving of capital is not the result of any foresight on the part of society, but is solely due to the simultaneous and concurrent actions of thousands of individuals. These individuals, urged on by a desire to better their situation, are spontaneously urged to save their earnings and to employ those savings productively.
“The principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave.… An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire.” This desire is so powerful that even the greatest follies perpetrated by Governments have never succeeded in annulling its beneficial effects. “The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor.”[168]
But the idea of the spontaneity of economic institutions finds its most interesting illustration in the theory of demand and supply, upon which we must dwell a little.
In a society based upon division of labour, where everyone produces for a market without any previous arrangement with his fellow producers and without any external direction, the great difficulty lies in adapting the amount of goods supplied to the amount demanded. How, as a matter of fact, are these producers to know at any particular moment what they ought to produce and in what quantities? Moreover, who is to direct and who can restrain them? It is true that Smith was careful to point out that they are not concerned with the satisfaction of all needs, of whatever kind they may be. Their duty lies towards what he calls the “effectual,” not the “absolute,” demand. By effectual demand we are to understand the demand of those who are capable of offering not merely something in exchange for the products which they desire, but of offering at least enough to cover the expenses of raising those products.[169] Society founded upon division of labour and exchange implies that nothing can be gratuitous and every loss involves a sacrifice on the part of some person or other.[170] But if production is carried on in this haphazard fashion how are we to avoid an occasional over-production or an accidental under-supply?
Before we can understand this we must acquaint ourselves with Adam Smith’s theory of prices.
In the preceding chapter we had occasion to note how Condillac in 1776 put forward a theory of value which was altogether superior to the Physiocrats’. Smith’s book, also published in 1776, betrays not the least sign of Condillac’s influence, and the new theory never comes up for discussion. The very success of the Wealth of Nations had eclipsed the fame of the French philosopher, and Smith’s theory, though quite inferior to Condillac’s, held the field for so many years simply because it won the allegiance of the English economists, whose influence was paramount throughout the first half of the nineteenth century. Its popularity only waned with the publication of the works of Walras, Jevons, and Menger. Its historic interest is further enhanced by the fact that it had the singular good fortune to win the approval both of the socialists and the Liberal economists. It is the fate of writers like Smith, remarkable for wealth of ideas rather than for logical presentation, to impel minds along different and sometimes even opposite paths. Unfortunately the theory of value is not the only one that presents a somewhat hazy outline. We cannot here enter into the details of the theory, but must content ourselves with a mere sketch of it. Even this, however, will immediately enable us to understand its insufficiency, and appreciate the twofold influence which it exercised upon subsequent doctrines.
Smith opens his treatment by emphasising the fundamental distinction which exists between “value in use” and “value in exchange.”[171] By value in use he means almost[172] exactly what we understand by utility, or what other writers call subjective value, desirability, or ophelimity.
Present-day economists when treating of prices—the exchange value of things—chiefly rely upon this conception of “value in use.” The explanation of the “ratio of exchange” of commodities is based upon a previous analysis of their utility for those who exchange them. Smith proceeds in a different fashion. “Value in use” is mentioned, but only for the purpose of contrasting it with value in exchange. It is then dismissed without further consideration. The two notions seem to have no point of contact. Value in exchange was the only one that was of any interest to Smith; hence there was all the more reason for denying its derivative character.[173]
Thus from the very first the only avenue that might have led to a satisfactory solution of this problem of prices was closed. One could easily have predicted that this was bound to land Smith in difficulty; as a matter of fact he is doubly involved.[174] Two different but equally erroneous solutions have been successively adopted by him, but he has never actually decided between them. The socialists and economists who are to follow will be engaged in the same task, and the cleavage between them will be marked by their adoption of one or other of these two theories.
Smith was led to the study of prices because he wished to know something of the constant oscillation which is such a feature of their history. The actual or market price is unstable because of the unstable connection between demand and supply,[175] or, as he puts it, “It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.”[176] It seemed impossible that their perpetual fluctuation should represent the true value of the commodity. Its real value could not vary from this moment to the next or from one place to another. Underneath the constantly oscillating market price may be discerned another price, referred to by Smith as the real or sometimes as the natural price. The discovery of a more stable and a more constant element beneath the continual fluctuations of price movements still constitutes the great problem of pure economics.[177]
Smith’s first theory makes the true value of any commodity depend upon the amount of labour or effort it has taken to produce. “Labour, therefore, is the real measure of the exchangeable value of all commodities.” “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.”[178] Labour—that is, the effort expended upon the production of a commodity—is both the origin and the measure of its exchange value. The theory that labour or effort is the cause of value (if value can be said to have a cause) was first formulated by the father of political economy himself. It is curious to think that it was this same theory that was used with such good effect by Karl Marx in his attack upon capitalism.
This first attempt to find a firmer foundation for exchange value than that afforded by the shifting sands of demand and supply was scarcely made before Smith became aware of some difficulties in the path. For example, how was this work and the value dependent upon it to be measured? “There may be more labour in an hour’s hard work than in two hours’ easy business; or in an hour’s application to a trade which it cost ten years’ labour to learn, than in a month’s industry at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity.”[179] A second objection arises when the theory is applied to civilized society. Work by itself cannot produce anything; something must be contributed by both land and capital. But neither of these is a free good, and they must cost something to those who employ them. Accordingly primitive societies[180] are the only ones where “the quantity of labour commonly employed in acquiring or producing any commodity is the only circumstance determining its value.” We must nowadays take some account of land and capital. So that labour is not the only source of value, nor is it its sole measure.
Another hypothesis becomes necessary forthwith. This time cost of production is hit upon as the likely regulator of value. Hitherto the “real” price has signified the price that is based upon labour. Now the “natural” price is defined as the price of goods valued at their cost of production. The change of name is not of any great significance. What Smith was in search of on both occasions was that true value which always kept in hiding behind the fluctuations of market prices. It is the same problem, but with a new solution. Just now we were informed that if a commodity sold at a price representing the labour which it cost to produce, that price would also represent its real cost. With no less assurance we are now told that a commodity sold at cost of production “is then sold precisely for what it is worth, or for what it really costs the person who brings it to market.”[181] The true value of goods corresponds to their cost of production. By this we are to understand a sum sufficient to pay at normal rates the wages of labour, the interest of capital, and the rent of land, all of which have collaborated in the production of the particular commodity.
Smith, having discarded labour, finds a new determinant of value in cost of production, and if socialists rallied to his first hypothesis the great majority of economists right up to Jevons have clung to his second. As for Smith himself, he never had the courage to choose between them. They remain juxtaposed in the Wealth of Nations because he never made up his mind which to adopt. As a result his work is full of contradictions which it would be futile to try to reconcile. For example, land and capital in one place are regarded as sources of new values, adding to and increasing the value which labour creates, and producing normally an element of profit and rent, which, together with the wages of labour, makes up the cost of production. In another connection they are treated as deductions made by capitalists and landlords from the value created by labour alone.[182] Some writers accordingly argue that Smith must have been a socialist. On the whole the cost of production theory prevailed, and the natural price of commodities is taken to mean that price which coincides with their cost of production. As to market price, he makes the remark that it is higher or lower than the natural price according as the quantity offered diminishes or increases as compared with the quantity demanded.
Such is Smith’s theory of prices. The element of truth which it contains, namely, that the prices of goods tend to coincide with their cost of production (the remark is not originally Smith’s at all), must not blind us to its many faults. It is open to at least two very serious objections.
An attempt is made to explain the price of goods by referring to the price of the services (wages, interest, and rent) which make up the cost of production. When the cost of those services comes up for consideration it is assumed that their cost is dependent upon the price of the goods. Wages, for example, are determined by the selling price of the commodities which labour has produced. Escape from the vicious circle is only possible by availing ourselves of the modern theory of economic equilibrium. That theory shows us how prices generally, whether of goods or of services, are interdependent; all being determined simultaneously—like the unknown in an algebraical formula—just when the exchange is taking place. But this theory of economic equilibrium was, of course, unknown to Smith.
Cost of production being the regulator of price, it is very important that an analysis of cost of production and a study of the causes which determine the rates of wages, profit, and rent should be made. One might have expected that this study would have cleared away any obscurity that still clung to the theory of prices. But this analysis is one of the least satisfactory portions of Smith’s work. We have already had occasion to note the unsatisfactory character of his theory of rent. That of profits—which Smith fails to distinguish from interest—is equally useless;[183] and his theory of wages is hopelessly inconsistent. He hesitates between the subsistence theory of wages and the other theory which makes them depend upon the relations between demand and supply, without ever making a final choice.
We cannot agree with Say in considering Smith’s theory of distribution one of his best claims to fame. His treatment of this problem, which afterwards became the kernel of Ricardian economics, is altogether inferior to his handling of production. We also know that this is the least original part of his work. It was simply added as a kind of afterthought, the original intention being to deal only with production. This becomes evident if we compare the Wealth of Nations with the Glasgow course of 1763, the whole of which is devoted to production. The addition of a theory of distribution to the original skeleton was probably due to the Physiocrats, with whom in the meantime he had become acquainted; and the hesitations and uncertainties which mar this part of the work merely go to prove that Smith had not thought it out as clearly as the other sections.
The subject cannot be pursued here. We can only point to the inference which Smith draws from his theory of value, and how it is made to support the contention that demand adapts itself spontaneously to the conditions of supply. This is how Smith explains the continual oscillation of prices: “When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity.” The reverse will happen when demand exceeds supply. “When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price. The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less.” Thus “the quantity of every commodity brought to market naturally suits itself to the effectual demand.”[184]
And this very remarkable result is simply the outcome of personal interest. “If at any time it exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to the natural price.”
And so, in the majority of cases at least, this natural and spontaneous mechanism secures a constant balancing of the quantities of goods produced and the quantities effectively demanded. The circumstances under which such a result does not follow are really quite exceptional—although Smith does not deny that sometimes they do exist. Whenever such conditions obtain—that is, when the market price remains for a considerable length of time above the natural price—we find that it is always due to the capitalists’ action in concealing the high rate of profits which they draw, or in retaining possession of some patent or natural monopoly, such as wine of a special quality. It occasionally happens also as the result of an artificial monopoly.[185] But these are mere exceptions, their rare occurrence confirming the fundamental rule concerning the spontaneous adaptation of the quantity offered to the quantity demanded, thanks to this oscillation of the market price about the natural.
This theory of adaptation, we know, is one of the most important in the whole of political economy. Since Smith wrote it has been reproduced by almost every economist, and without any very substantial alteration. It remains even to this day the basis of our theory of production.
It is interesting to note the manner in which Smith makes use of his theory to illustrate his thesis. We shall refer to two cases which are intrinsically important as well as affording admirable illustrations of that spontaneity upon which Smith laid such stress.
The first concerns population. Population, like commodities, may be superabundant or it may be insufficient. What regulates its numbers? “The number of people,” Smith replies, “depends upon the demand of society, and this is how it works. Among the proletariat, generally speaking, children are plentiful enough. It is only when wages are very low that poverty and misery cause the death of many of them; but when wages are fairly high several of them manage to reach maturity.” “It deserves to be remarked, too,” he continues, “that it necessarily does this as nearly as possible in the proportion which the demand for labour requires. If this demand is continually increasing, the reward of labour must necessarily encourage in such a manner the marriage and multiplication of labourers as may enable them to supply that continually increasing demand by a continually increasing population. If the reward should at any time be less than what was requisite for this purpose, the deficiency of hands would soon raise it; and if it should at any time be more, their excessive multiplication would soon lower it to this necessary rate. The market would be so much under-stocked with labour in the one case, and so much over-stocked in the other, as would soon force back its price to that proper rate which the circumstances of the society required. It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men; quickens it when it goes on too slowly, and stops it when it advances too fast.”[186]
The second case relates to the demand for money and its supply. We have already seen how the problem of its origin is solved. Alongside of that problem is now placed another, namely, how is the quantity in circulation regulated to meet the requirements of exchange? Smith’s first task was to expose the popular fallacy concerning this topic.[187] According to one school of thinkers, money was wealth par excellence, and it was all the more important that he should get rid of this view seeing that it constituted the very foundation of the Mercantile theory, the overthrow of which was the immediate object in publishing the Wealth of Nations. The Mercantilists contended that a country should export more than it imports, receiving the balance in money. If it can be proved that this balance is useless because money is a mere commodity possessing no greater and no less utility than any other, then the Mercantilist foundation is completely destroyed. Smith thought that money was less indispensable than some other goods, seeing that we are anxious to pass it on as often as we can. The disdain with which Smith regarded money was the result of a reaction against Mercantilism, and it led some of his followers to over-emphasise his point of view and to misconceive the special character of monetary phenomena. A nation’s true wealth “consists,” Smith tells us, “not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds.”[188] “It is the annual produce of the land and labour of the society.”[189] Hence in evaluating a country’s net revenue we must omit money because it is not consumed. It only serves as an instrument for the circulation of wealth and for the measurement of value. It is the “great wheel of circulation.”[190] In virtue of this title, although Smith himself classed money along with circulating capital, he remarks that it might be likened to the fixed capital of an industry, to machinery or workshops. The greater the economy in the use of fixed capital, provided there is no diminution in production, the better, for the larger will be the net product. This is equally true of money—a necessary but a very costly instrument of social production. “Every saving in the expence of collecting and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind”[191] as that which reduces the fixed capital of industry.[192]
This is why bank-notes—the circulation of which diminishes the quantity of money needed—have proved such a precious invention. What they do is to set free a certain quantity of gold and silver which may be sent abroad to pay for machinery and other instruments of production, and which will in turn increase the true revenue of the country. Smith’s parable in which he illustrates these advantages, has long since become classic: “The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour.”[193]
The conclusion is that every policy—the Mercantilist, for example—which aims at increasing the quantity of money within the country, whether by direct or indirect methods, is absurd, for money, far from being indispensable, is really an encumbrance.
It is not only absurd, but also useless. Have we not seen already that money is a mere commodity designed to facilitate circulation and that the demand for it is entirely determined by that object? But the supply of any commodity usually adapts itself spontaneously to the demand for it. No one concerns himself with supplying the nation with wine or with crockery. Why trouble about money?[194] If the quantity of goods diminishes, exchange slackens and a part of the money becomes useless. But “the interest of whoever possesses it requires that it should be employed.”[195] Accordingly “it will, in spite of all laws and prohibitions, be sent abroad, and employed in purchasing consumable goods which may be of some use at home.”
On the other hand, as the prosperity of a nation grows it necessarily attracts the precious metals because a multiplication of exchanges leads to a growing demand for money. These exportations and importations will depend, as Hume[196] had already shown, upon the relative cheapness or dearness of money. What is true of metallic money is also true of a special kind of money known as bank-notes. Smith has given us a vivid description of the functions of banks, and especially of the fortunes of the most famous bank of this period, the Bank of Amsterdam. This afforded him another opportunity of demonstrating how the quantity of notes offered spontaneously adapts itself to the quantity demanded. If banks issue more notes than the circulation warrants prices will rise. Buying from foreign countries will be resorted to and the notes will be returned to the banks to be exchanged for gold and silver—the only international money. The banks clearly have no interest in issuing too many notes, because it involves a greater metallic reserve as the result of the more frequent demands for payment which they will have to face. Of course, “every particular banking company has not always understood or attended to its own particular interest, and the circulation has frequently been over-stocked with paper money.”[197] But this does not affect the main principle, and we have one further proof of the spontaneous activity of the economic mechanism.
We have now reviewed some of Smith’s principal themes, and we have seen how every phenomenon impresses him in the same fashion. Had space permitted we might have cited other examples all pointing to the same conclusion.[198] This conception of spontaneity and wise beneficence is by no means the product of mere a priori thinking. It was no abstract theory that needed the backing of a rigid demonstration. It was a belief gradually borne in upon him in the course of his review of the economic field. This is characteristic of all his thought, and with every new vista we are reminded of it. The conclusion is hinted at again and again, and the impression left upon the reader’s mind is that no other conclusion could ever be possible. Smith thought of the economic order as an organism—the creation of a thousand human wills unconscious of the end whither they are tending, but all of them obedient to the impulse of one instinctive, powerful force. This force, the root of all economic activity, its constancy and uniformity triumphant over every artificial obstacle and giving unity to the whole system, what is it?
We have already encountered it on more than one occasion. It is personal interest, or, as Smith prefers to call it, “the natural effort of every individual to better his own condition.”[199] Hidden deep in the heart of every individual lies this essential spring of human life and social progress.
Doubtless it is not the only one. Smith is never exclusive. He knew that there were other passions[200] besides self-interest, and he is not afraid of naming them, as when he attributes an economic revolution which had such beneficial effects as the emancipation of the rural classes to “the most childish vanity of proprietors.”[201] Neither did he omit to point out that personal interest is not equally strong in the breast of every one, and that there is the greatest diversity in human motives. All this he had forgotten, according to some of his critics, while others charge him with the creation of the homo œconomicus, a poor representation of reality and a mere automaton exclusively guided by material interests. Someone has remarked that if you add to this figure a tinge of patriotism you have a faithful picture of the Englishman and Scotsman of his day. Had he been acquainted with Germans or Frenchmen, with their less sordid attachment to material gain, he might have judged differently. It may be that our reading of him is incorrect. He seems to have taken care to note that his remarks do not apply to all, but only to the generality of men. He continually recalls the fact that he is speaking of men of common understanding,[202] or of those gifted with common prudence.[203] He knew well enough that the principles of common prudence do not always govern the conduct of every individual, but he was of opinion that they always influenced that of the majority of every class and order.[204] His reasoning is applicable to men en masse, and not to individuals in particular. Moreover, he does not deny that man may be unacquainted with or may even entirely ignore his own interest. We have just quoted a passage wherein he remarks that bankers who temporarily issue too many notes are at that moment ignorant of their own interests.
These reservations notwithstanding, and full account being taken of all the exceptions to the principle as laid down by Smith, it is still true to say that as a general thesis he considers “the natural effort of every individual to better his own condition”—that is, personal interest—as the fundamental psychological motive in political economy. Any reference to the case of business men who are really actuated by a desire to take general welfare as their guide in matters of conduct is treated with a measure of scepticism which it is difficult not to share. “I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”[205] Not that sentiment does not play a part, and a very important part, in the philosophy of Smith; but sentiment, or sympathy, as he calls it, has the domain of morality for its own, while interest dominates that of economics. All his thinking led him to a firm belief in a spontaneous economic order founded and guided by self-interest.
Comparison with the Physiocratic doctrine concerning the natural and essential order of societies is illuminating. To the Physiocrats the “natural order” implied a system—an ideal. It required a genius to discover it, and only an enlightened despotism could realise it. For Smith the “spontaneous order” was a fact. It was not a thing to be brought into being. It already existed. It was doubtless held in check by a hundred imperfections, including, among others, the stupidity of human legislation.[206] But it was triumphant over them all. Beneath the artificial constitution of society lay the natural constitution which completely dominated it. This natural constitution, which for the Physiocrats was nothing more than an ideal, Smith discovered in actual operation, and he was able to describe its modus operandi. Political economy, which with Quesnay was nothing better than a system of rules and regulations, became in Smith’s hands a natural science based upon the observation and analysis of existing facts. In a passage written in his usual lucid style Smith shows the superiority of his system over that of the Physiocrats. “Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation.… Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy in some degree both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance.”[207]
This passage leads us to his second thesis, namely, the excellence of these economic institutions. As we have already remarked, these two ideas of spontaneity and excellence, though confused by Smith, ought to be treated apart. His naturalism and optimism are inseparable, and both of them find expression in the same paragraph. The passage just quoted affords a proof of this. Personal interest not only creates and maintains the economic organism, but at the same time ensures a nation’s progress towards wealth and prosperity. The institutions are not only natural, but are also beneficial. They interest him not merely as objects of scientific curiosity, but also as the instruments of public weal. Herein lies their chief attraction for him, for political economy to him was more of a practical art than a science.[208]
But this is hardly emphatic enough. Natural economic institutions are not merely good: they are providential. Divine Providence has endowed man with a desire to better his condition, whence arises the “natural” social organism: so that man, following where this desire leads, is really accomplishing the beneficent designs of God Himself. By pursuing his own interest, man “is in this as in many other cases” (he is writing now of the employment of capital) “led by an invisible hand to promote an end which was no part of his intention.”[209] The Physiocrats could hardly have improved upon that.
We can scarcely share in his optimism to-day. But it has played too prominent a rôle in the history of ideas not to detain us for a moment. We must examine the arguments upon which it is based and endeavour to grasp their import.
Let us note, in the first place, that every example hitherto deduced with a view to proving the spontaneity of economic institutions at the same time furnishes a demonstration of the beneficial effects of personal interest. Owing to a coincidence by no means fortuitous every institution mentioned by Smith as owing its existence to the prevalence of action of this kind is at the same time favourable to economic progress. Division of labour, the invention of money, and the accumulation of capital are so many natural social facts that also increase wealth. The adaptation of demand and supply, the distribution of money according to the need for a circulating medium, the growth of population according to the demand for it, are so many spontaneous phenomena which ensure the efficient working of economic society. A perusal of Smith’s work leaves us with the impression that these spontaneous institutions must also be the best.
The general proof of this thesis is scattered throughout the whole book. But there was one point especially upon which Smith was very anxious to show complete accord between public and private interest. This was in connection with the investment of capital. In his opinion capital spontaneously seeks, and as spontaneously finds, the most favourable field for investment—most favourable, that is to say, to the interest of society in general. This proof at first sight seems to apply only to one special fact, but it really has a more general import. We know the great stress which Smith laid upon capital. Division of labour depends upon it, and so does the abundance or scarcity of produce. It determines the quantity of work and fixes the limit of population. To show that the investment of capital conforms to the general interest is to show that all production is organised in the manner most favourable to national prosperity.
Smith distinguishes between four methods of investing capital: in agriculture, in industry, in the wholesale and in the retail trades. Wholesale industry is further divided into three classes: domestic trade; foreign trade, furnishing the nation with foreign products; and the carrying trade which transports those goods from one country to another. Smith maintained that the order in which these various forms of activity were mentioned was also the order of their utility, agriculture being the most advantageous, industry the second best, etc.
He also proposes two criteria for testing this hierarchy: (1) the quantity of productive labour put into operation by means of the capital employed by each; (2) the amount of exchange value annually added to the revenue by each of these employments. As we pass from agriculture to the other branches, the quantity of productive labour brought into operation and the amount of exchange value obtained gradually decreases, and with this decrease goes a diminishing utility for the country. Smith thought that a nation ought to employ its capital in the way he had suggested. It ought to give the preference to agriculture, and engage in the other branches only as the accumulation of capital permitted.
But this is precisely what the capitalists would do were they entirely free. Every one of them, in fact, is interested in keeping his capital as near home as possible, with a view to better supervision. Only as a last resource does he venture to engage in foreign commerce. Again, even among the industries carried on in his own country every capitalist will preferably choose that which will result in the production of the greatest exchange value, seeing that his profit varies with the amount of this exchange value. His investments will accordingly be made in the order mentioned, an order which roughly corresponds to the greater or lesser quantity of exchange values produced by each industry. And finally, when contemplating investment in foreign trade he will for the same reason follow the order specified above—the order of greatest general utility. Thus the double desire of keeping one’s capital within one’s reach and of finding for it the most lucrative field of investment leads every capitalist to employ his capital in the fashion which is most advantageous for the nation. Such is the argument, whatever its value.
Even if we adopted his criteria it is obvious that his classification is altogether too arbitrary. How, for example, can we justify the statement that an industrial enterprise or the carrying trade employs less capital than agriculture? The exact contrary would be nearer the truth, and agriculture ought to be given a much more modest position. Moreover, the conception of such a hierarchy does not accord very well with the theory of division of labour, which seeks to put the various forms of human activity more nearly on an equality.
As a matter of fact we cannot even accept a criterion which takes the amount of exchange values furnished by an industry as the test of its social utility. This increase in the quantity of exchange values simply proves that the demand for the goods concerned is stronger than the demand for some others. When capital flows into certain industries it only points to the spontaneous satisfaction of social demand. But social demand and social utility are not necessarily the same. Demand is the outcome of human desires, and its intensity depends upon the revenue drawn by the individual. But we can neither regard these desires in themselves or the system of distribution that makes such desires “effective” as sufficient tests of social utility. And to say that production follows demand is to prove nothing at all. Smith himself seems to have realised this; hence his other criterion—the quantity of productive labour employed by capital. According to this test those industries that employ the least amount of machinery and the greatest amount of hand labour are the most useful—quite an untenable view.
A demonstration of a somewhat similar character has been attempted by the Hedonistic school. They have shown how free competition always tends to direct production into such channels as will result in maximum utility, or, in other words, that it affords the best method of satisfying the actual demands of the market. But they have been very careful to note that social utility and ophelimity are two very different expressions that must never be confused, and that they have failed to find any scientific test of social utility.
Smith’s argument is unsatisfactory, and its foundation untrustworthy. We do not forget that his optimism is based not so much upon this specious demonstration as upon the great number of observations which he had occasion to make in the course of his work. This idea of a harmony between private interest and the general well-being of society was not put forward as a rigidly demonstrable a priori theory, open to no exceptions. It was rather a general view of the whole position—the conclusion drawn from repeated observations, the résumé of a detailed inquiry which had covered every corner of the economic field. A particular process of reasoning may have helped to confirm this conclusion, but the reasoning itself was largely based upon experience, the universal experience of history. It was the study of this experience that led to the discovery of a “vital” principle of health and progress in the “body social.” Smith would have been the first to oppose the incorporation of his belief in any dogma. He was content to say that “most frequently” and in a “majority of cases” general interest was satisfied by the spontaneous action of private interest. He was also the first to point out instances—in the case of merchants and manufacturers, for example—where the particular and the general interest came into conflict. We might cite many characteristic passages in which he takes pains to qualify his optimism.
Absolute his optimism was not, neither was it universal. In fact, it would not be difficult to prove that it was never intended to apply to anything other than production. Nowhere does the great Scotch economist pretend that the present distribution of wealth is the justest possible—a trait that distinguishes him from the optimists of Bastiat’s school. His optimism deserted him when he reached that portion of his subject. On the contrary, he showed that landed proprietors as well as capitalists “love to reap where they have not sown,” that inequalities in social position give masters an advantage in bargaining with their men.[210] In more than one passage he speaks of interest and rent as deductions from the produce of labour.[211] Smith, indeed, might well be regarded as a forerunner of socialism. There is no difficulty in believing, so far as the experience of old countries goes, that “rent and profit eat up wages and the two superior orders of people oppress the inferior one.”[212]
It is especially important that we should make a note of the opinions of those people who think that Smith intended his optimism to extend to distribution as well as to production. As a matter of fact he was too level-headed to entertain any such idea. Even Say himself in the last edition of his Treatise expresses some doubts as to the equity of the present system of distribution.[213] Smith was not really concerned with the question at all. It is only at a much later date, when the socialists had demonstrated the importance of the problem, that we hear of this belief in the beneficence of economic institutions. It really represents a reaction against the socialistic teaching and an attempt at a justification of the present methods of distribution.
We must beware of confusing Smith’s optimism with that of modern Hedonism, or of identifying it with Bastiat’s answer to the socialists. It lacks the scientific precision of the one and has none of the apologetic tone of the other. It is little more than a reflection prompted by the too naïve confidence of the eighteenth century in the bounty of “nature,” and an expression of profound conviction rather than the conclusion of a logical argument.
III: ECONOMIC LIBERTY AND INTERNATIONAL TRADE
The practical conclusion to which naturalism leads and to which Smith’s optimism points is economic liberty. So naturally does it proceed from what we have just said that the reader finds himself quite prepared for Smith’s celebrated phrases: “All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men.” As to the Government, or “sovereign,” as Smith calls him, “he is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interests of the society.”
Smith, following the Physiocrats, but in a more comprehensive and scientific fashion, finds himself driven to the same conclusion, namely, the wisdom of non-intervention by the State in matters economic.[214]
But here, as elsewhere in his work, the sense of the positive and the concrete, so remarkable in Smith, prevents his being content with a general demonstration. He is not satisfied with proving the inefficiency of intervention as compared with the efficiency of those institutions which are spontaneously created by society itself, but he attempts to show that the State, by its very nature, is unfitted for economic functions. His arguments have been the arsenal from which the opponents of State intervention have been supplied with ammunition ever since.
Let us briefly recall them.
“No two characters seem more inconsistent than those of trader and sovereign.”[215] Governments are “always, and without any exception, the greatest spendthrifts in the society.”[216] The reasons for this are numerous. In the first place, they employ money which has been gained by others, and one is always more prodigal of the wealth of others than of one’s own. Moreover, the Government is too far removed from the centres of particular industries to give them that minute attention which they deserve if they are going to prosper. “The attention of the sovereign can be at best but a very general and vague consideration of what is likely to contribute to the better cultivation of the greater part of his dominions. The attention of the landlord is a particular and minute consideration of what is likely to be the most advantageous application of every inch of ground upon his estate.”[217]
This necessity for a thorough cultivation of the soil and for the best employment of capital, for direct and careful superintendence, is an idea to which he continually reverts. He regrets, among other things, that the growth of public debts causes a portion of the land and the national capital to pass into the hands of fund-holders, who are doubtless interested in the good administration of a country, but “are not interested in the good condition of any particular portion of land, or in the good management of any particular portion of capital stock.”[218]
Lastly, the State is an inefficient administrator because its agents are negligent and thriftless, not being directly interested in administration, but paid out of public funds. Should the administration of the land pass into the hands of the State he exclaims that not a fourth of the present produce would ever be raised, because of “the negligent, expensive, and oppressive management of his factors and agents.”[219] On the contrary, he proposes that the remainder of the common land should be distributed among individuals. On this point European Governments have followed his advice somewhat too closely.[220] For the same reason—the necessity for stimulating personal interest wherever possible—he commends, instead of a fixed salary for public officers, payment by those who benefit by their services, such payment in every case to be in strict proportion to the zeal and activity displayed. This was to apply, for example, to judges and professors.[221]
State administration is accordingly a pis aller, and intervention ought to be strictly limited to those cases in which individual action is impossible. Smith recognises three functions only which the State can perform, namely the administration of justice, defence, “and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.”[222]
We must beware, however, lest we exaggerate this point. Although Smith, in the majority of cases, preferred individual action, we must not conclude from this that he had unlimited confidence in individuals. Smith’s individualism was of a particular kind. It was not a mere blind preference for every private enterprise, for he knew that industry frequently falls a prey to the spirit of monopoly. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”[223] In order that a private enterprise may be useful for the community two conditions are necessary. The entrepreneur must be: (1) actuated by personal interest; (2) his actions must by means of competition be kept within the limits of justice. Should either of these two conditions be wanting, the public would run the risk of losing as much by private as they would by State enterprise.
Thus Smith throughout remains very hostile to certain collective enterprises of a private nature, such as joint-stock companies,[224] because of the absence of personal interest. The only exceptions which he would tolerate are banks, insurance companies, and companies formed for the construction or maintenance of canals or for supplying great towns with water, for the management of such undertakings can easily be reduced to a kind of routine, “or to such a uniformity of method as admits of little or no variation.”[225]
His opposition to every kind of monopoly granted either to an individual or to a company is even more pronounced. A whole chapter is devoted to an attack upon the great trading companies of the seventeenth and eighteenth centuries, which were created with a view to the development of colonial trade, and of which the East India Company was the most famous.
One other observation remains to be made. Non-intervention for Smith was a general principle, and not an absolute rule. He was no doctrinaire, and he never forgot that to every rule there are some exceptions. An interesting list could be made, giving all the cases in which, according to Smith, the legitimacy of State intervention was indisputable—legal limitation of interest,[226] State administration of the post-office, compulsory elementary education, State examinations as a condition of entry into the liberal professions or to any post of confidence whatever, bank-notes of a minimum value of £5, etc.[227] In a characteristic phrase he gave expression to his feeling on the question of restricting the liberty of banks. “Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole of society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical.”[228] Despite these reservations it is still very evident that the whole of Smith’s work is a plea for the economic freedom of the individual. It is an eloquent appeal against the Mercantilist policy and a violent attack upon every economic system inspired by it.
On this point there is absolute agreement between the work done by Smith in England and that carried on at the same time by the Physiocrats in France. Both in foreign and domestic trade producers, merchants, and workmen were hemmed in by a network of restrictions either inherited from the traditions of the Middle Ages or imposed by powerful party interests and upheld by false economic theories. The corporations still existed in the towns; although their regulations could not be applied to industries born after the passing of Elizabeth’s famous law concerning apprenticeship. The Colbertian system, with its mob of officials entrusted with the task of superintending the processes of production, of examining the weight, the length, and the quality of the material employed, was still a grievance with the woollen manufacturers.[229] The fixing of the duration of apprenticeship at seven years, the limitation of the number of apprentices in the principal industries, the obstacles put in the way of the mobility of labour by the Poor Law and by the series of statutes passed since the reign of Elizabeth, fettered the movement of labour and the useful employment of capital. Smith opposed these measures with the whole of his energy. England, unlike France, had fortunately escaped internal restrictions upon trade, but the restraints placed upon foreign trade still kept England and Ireland commercially separated. These checks upon foreign trade proved as irksome in England as they did everywhere else. Manufactured goods from foreign countries were heavily taxed or were prohibited entrance altogether. Certain natural products, e.g. French wine, were similarly handicapped; the importation of a number of commodities necessary for national industry was banned; a narrow and oppressive policy regarded the colonies as the natural purveyors of raw materials for the mother-country and the willing buyers of its manufactured goods. Against all this mass of regulations, destined, it was thought, to secure the supremacy of England among other commercial nations, Smith directed his most spirited onslaughts. The fourth book of the Wealth of Nations is an eloquent and vigorous attack upon Mercantilism, admirable alike for the precision and the extent of its learning. It was this section of his work that interested his contemporaries most. For us it would have been the least interesting but for its theory of international trade and its criticism of Protection in general. On this account, however, it is of considerable importance in the study of economic doctrines.
In the struggle for Free Trade, as on other points, Smith was forestalled by the Physiocrats. But again has he shown himself superior in the breadth of his outlook. Physiocratic Liberalism was the result of their interest in agriculture, foreign trade being of quite secondary importance. Smith, on the other hand, considered foreign trade in itself advantageous, provided it began at the right moment and developed spontaneously.[230] Although his point of view is far superior to that of the Physiocrats, even Smith failed to give us a satisfactory theory. It was reserved for Ricardo and his successors, particularly John Stuart Mill, to find a solid scientific basis for the theory of international trade. The doctrine of the Scotch economist is somewhat lame. But the hesitancy of a great writer is often interesting, and some of his arguments deserve to be recalled.
Already in our review of his theory of money we have become familiar with Smith’s criticism of the balance of trade theory. But the balance of trade theory is not the whole of Protection, and we find in Smith something more than its mere refutation. In the first place, we have a criticism of Protectionism in general considered in its Mercantilistic aspect, followed by an attempt to demonstrate the positive advantages of international commerce.
The first criticism that he offers might be summed up in the well-known phrase: “Industry is limited by capital.” “The general industry of the society can never exceed what the capital of the society can employ.” But Protection, perhaps, increases the quantity of capital? No, “for it can only divert a part of it into a direction into which it might not otherwise have gone.” But the direction spontaneously given to their capital by individuals is the most favourable to a country’s industry. Has not Smith demonstrated this already? Protection, consequently, is not merely useless; it may even prove injurious.[231]
The argument does not appear decisive, especially when we recall the criticism of Smith’s optimism given above. To borrow an expression of M. Pareto, it is the maximum of ophelimity and not the maximum of utility that is realised by the capitalists under the action of personal interest.
A second and a more striking argument shows the absurdity of manufacturing a commodity in this country at a great expense, when a similar commodity might be supplied by a foreign country at less cost. “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.… What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.”[232] It is foolish to grow grapes in hothouses in Scotland when better and cheaper can be got from Portugal or France. Everybody is convinced of that. But a similar stupidity prevails when we are hindered by tariffs from profiting by the natural advantages which foreign nations possess as compared with ourselves. All “the mean rapacity and the monopolizing spirit of merchants and manufacturers”[233] was necessary to blind men to their true interests on this point. According to Smith, there exists a natural distribution of products among various countries, resulting in an advantage to all of them. It is Protection that hinders our sharing in the advantages. This is the principle known as the “territorial division of labour.”
But the argument is inconclusive, for capital and labour do not circulate from one nation to another in the same way as they do within a country. The distribution of industry among the various nations is regulated, not by absolute cost of production, but by relative cost of production. The credit of having shown this belongs to Ricardo.
Smith’s demonstration of the inconveniences of Protection is incomplete, and we feel the incompleteness all the more when he attempts to prove the advantages of international trade.
The real and decisive argument in favour of free exchange turns upon a consideration of the consumer’s interests. Increased utilities placed at his disposal mark the superiority of free exchange, or as John Stuart Mill puts it, “the only direct advantage of foreign commerce consists in the imports.”[234] With Smith this is the point of view developed least of all. True, he wrote that “consumption is the sole end and purpose of all production. But, in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer.”[235] This criticism, however, was placed at the end of his examination of the Mercantilist system in chap. 8 of Book IV. It is not found in the first edition of the work, and was only added in the third.[236]
It is the point of view of the producer that Smith invariably adopts when attempting to illustrate the advantages of international trade.[237]
Just now foreign trade seemed to afford a means of disposing of a country’s surplus products, and this extension of the market, it was argued, would lead to further division of labour and increased productivity.[238] But one is led to ask why, instead of producing the superfluous goods which it must export, it does not produce those things which it is obliged to import.
Smith, being now desirous of showing that international trade necessarily benefits both countries, bases his argument upon the fact that the merchants in both countries must make a profit—i.e. get an additional exchange value, which must be added to the others. To this Ricardo justly replied that the profits of a merchant do not necessarily increase the sum of utilities possessed by any country.
Here again, in striking contrast with the attitude of the Physiocrats, Smith, despite himself, has championed his own adversaries. As yet he is not sufficiently rid of Mercantilist prejudice not to be concerned with the welfare of the producer, and in his great work we find excellent argument and debatable points of view placed side by side. It does not appear that he himself realised this incompatibility. An irresistible tide was sweeping everybody before it in the direction of a more liberal policy. It proved too powerful for his contemporaries, who were not concerned to give a careful consideration to every part of his thesis. Enough that they found in him an ardent champion of an attractive cause.
We have already noticed more than once the hesitation which Smith displays when he comes to apply his principle, and we must again refer to it in this connection.
Theoretically a champion of absolutely free exchange, he mitigates his belief in practice, and mentions an exception to his policy which seemed to him a mere matter of common sense. “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals, irresistibly oppose it.”[239] Facts have belied this prophecy, like many others. England of the nineteenth century succeeded in realising this Utopia of free exchange—almost to perfection.
Without any illusion as to the future, his condemnation of the past was not altogether unqualified. He justified some of the acts that were inspired by Mercantilism. “The act of navigation[240] is not favourable to foreign commerce,” said he; “as defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England.”[241] In another instance he justifies an import duty where a tax is levied upon goods similar to those imported. Here an import duty merely restores that normal state of competition which was upset by the imposition of the Excise. Retaliation as a means of securing the abolition of foreign duties is not altogether under his ban.[242] And he finally admits that liberty is best introduced gradually into those countries in which industry has long enjoyed Protection or where a great number of men are employed.[243]
His practical conclusion is somewhat as follows: Instead of innumerable taxes which hinder importation and hamper production, England ought to content herself with the establishment of a certain number of taxes of a purely fiscal character, placed upon commodities such as wine, alcohol, sugar, tobacco, cocoa. Such a system, though perfectly consonant with a great deal of free exchange, would yield abundant revenue to the Treasury, and would afford ample compensation for the losses resulting from the introduction of Free Trade.[244]
England has followed his advice, and her financial system is to-day founded on these bases. Few economists can boast of such a complete realisation of their projects.
IV: THE INFLUENCE OF SMITH’S THOUGHT AND ITS DIFFUSION. J. B. SAY
The eighteenth century was essentially a century of levelling down. In Smith’s conception of the economic world we have an excellent example of this. Its chief charm lies in the simplicity of its outlines, and this doubtless accounted for his influence among his contemporaries. The system of natural liberty towards which both their political and philosophical aspirations seemed to point were here deduced from, and supported by, evidence taken direct from a study of human nature—evidence, moreover, that seemed to tally so well with known facts that doubt was out of the question. Smith’s work still retains its irresistible charm. Even if his ideas are some day shown to be untenable—a contingency we cannot well imagine—his book will remain as a permanent monument of one of the most important epochs in economic thought. It must still be considered the most successful attempt made at embracing within a single purview the infinite diversity of the economic world.
But its simplicity also constituted its weakness. To attain this simplicity more than one important fact that refused to fit in with the system had to remain in the background. The evidence employed was also frequently incomplete. None of the special themes—price, wages, profits, and rent, the theory of international trade or of capital—which occupy the greater portion of the work, but has been in some way corrected, disputed, or replaced. But the structure loses stability if some of the corner-stones are removed. And new points of view have appeared of which Smith did not take sufficient account. Instead of the pleasant impression of simplicity and security which a perusal of Smith’s work gave to the economists of the early nineteenth century, there has been gradually substituted by his successors a conviction of the growing complexity of economic phenomena.
To pass a criticism on the labours of Adam Smith would be to review the economic doctrines of the nineteenth century. That is the best eulogy one can bestow upon his work. The economic ideas of a whole century were, so to speak, in solution in his writings. Friends and foes have alike taken him as their starting-point. The former have developed, extended, and corrected his work. The latter have subjected his principal theories to harsh criticism at every point. All with tacit accord admit that political economy commenced with him. As Garnier, his French translator, put it, “he wrought a complete revolution in the science.”[245] To-day, even although the Wealth of Nations may no longer appear to us as a truly scientific treatise on political economy, certain of its fundamental ideas remain incontestable. The theory of money, the importance of division of labour, the fundamental character of spontaneous economic institutions, the constant operation of personal interest in economic life, liberty as the basis of rational political economy—all these appear to us as definite acquisitions to the science.
The imperfections of the work will be naturally demonstrated in the chapters which follow. In order to complete our exposition of Smith’s doctrines it only remains to show how they were diffused.
The rapid spread of his ideas throughout Europe and their incontestable supremacy remains one of the most curious phenomena in the history of ideas. Smith persuaded his own generation and governed the next.[246] History affords us some clue. To attribute it solely to the influence of his book is sheer exaggeration. A great deal must be set to the credit of circumstances more or less fortuitous.
M. Mantoux remarks with much justice that “it was the American War rather than Smith’s writings which demonstrated the decay of the ancient political economy and compassed its ruin. The War of Independence proved two things: (1) The danger lurking in a colonial system which could goad the most prosperous colonies to revolt; (2) the uselessness of a protective tariff, for on the very morrow of the war English trade with the American colonies was more flourishing than ever before. “The loss of the American colonies to England was really a gain to her.” So wrote Say in 1803, and he adds: “This is a fact that I have nowhere seen disputed.”[247] To the American War other causes must be added: (1) The urgent need for markets felt by English merchants at the close of the Napoleonic wars; they were already abundantly supplied with excellent machinery. (2) Coupled with this was a growing belief that a high price of corn as the result of agricultural protection increased the cost of hand labour. These two reasons were enough to create a desire for a general lowering of the customs duties.
Subsequent events have justified Smith’s attitude on the question of foreign trade. In the matter of domestic trade he has been less fortunate.
The French Revolution, which owed its economic measures to the Physiocrats, gave a powerful impulse to the principle of liberty. The influence of the movement was patent enough on the Continent. Even in England, where this influence was least felt; everybody was in favour of laissez-faire. Pitt became anxious to free Ireland from its antiquated system of prohibitions, and he succeeded in doing this by his Act of Union of 1800. The regulations laid down by the Elizabethan Statute of Apprentices, with its limitation of the hours of work and the fixing of wages by justices of the peace, became more and more irksome as industry developed. Every historian of the Industrial Revolution has described the struggle between workers and masters and shown how the former clung in despair to the old legislative measures as their only safeguard against a too rapid change, while the latter refused to be constrained either in the choice of workmen or the methods of their work.[248] They wished to pay only the wages that suited them and to use their machines as long as possible. These repeated attacks rendered the old Statute of Apprentices useless, and Parliament abolished its regulations one after another, so that by 1814 all traces of it were for ever effaced from the Statute Book.
But Smith did not foresee these things. He did not write with a view to pleasing either merchants or manufacturers. On the contrary, he was never weary of denouncing their monopolistic tendencies. But by the force of circumstances manufacturers and merchants became his best allies. His book supplied them with arguments, and it was his authority that they always invoked.
His authority never ceased growing. As soon as the Wealth of Nations appeared, men like Hume, and Gibbon, the historian, expressed to Smith or to his friends their admiration of the new work. In the following year the Prime Minister, Lord North, borrowed from him the idea of levying two new taxes—the tax on malt and the tax on inhabited houses. Smith was yet to make an even more illustrious convert in the person of Pitt. Pitt was a student when the Wealth of Nations appeared, but he always declared himself a disciple of Smith, and as soon as he became a Minister he strove to realise his ideas. It was he who signed the first Free Trade treaty with France—the Treaty of Eden, 1786.[249] When Smith came to London in 1787, Pitt met him more than once and consulted him on financial matters. The story is told that after one of these conversations Smith exclaimed: “What an extraordinary person Pitt is! He understands my ideas better than myself.”
While Smith made converts of the most prominent men of his time, his book gradually reached the public. Four editions in addition to the first appeared during the author’s lifetime.[250] The third, in 1784, presents important differences in the way of additions and corrections as compared with the first. From the date of his death in 1790 to the end of the century three other editions were published.[251]
Similar success attended the appearance of the work on the Continent. In France he was already known through his Theory of Moral Sentiments. The first mention of the Wealth of Nations in France appears in the Journal des Savants in the month of February, 1777. Here, after a brief description of the merits of the work, the critic gives expression to the following curious opinion: “Some of our men of letters who have read it have come to the conclusion that it is not a book that can be translated into our language. They point out, among other reasons, that no one would be willing to bear the expense of publishing because of the uncertain return, and a book-seller least of all. They are bound to admit, however, that the work is full of suggestions and of advice that is useful as well as curious, and might prove of benefit to statesmen.” In reality, despite the opinion of those men of letters, several translations of the work did appear in France, as well as elsewhere in Europe. In little more than twenty years, between 1779 and 1802, four translations had appeared. This in itself affords sufficient proof of the interest which the book had aroused.[252]
Few works have enjoyed such complete and universal success. But despite admiration the ideas did not spread very rapidly. Faults of composition have been burdened with the responsibility for this, and it is a reproach that has clung to the Wealth of Nations from the first. Its organic unity is very pronounced, but Smith does not seem to have taken the trouble to give it even the semblance of outward unity. To discover its unity requires a real effort of thought. Smith whimsically regarded it as a mere discourse, and the reading occasionally gives the impression of conversation. The general formulæ which summarise or recapitulate his ideas are indifferently found either in the middle or at the end of a chapter, just as they arose. They represent the conclusions from what preceded as they flashed across his mind. On the other hand, a consideration of such a question as money is scattered throughout the whole work, being discussed on no less than ten different occasions. As early as April 1, 1776, Hume had expressed to Smith some doubts as to the popularity of the book, seeing that its reading demanded considerable attention. Sartorius in 1794 attributed to this difficulty the slow progress made by Smith’s ideas in Germany. Germain Garnier, the French translator, gave an outline of the book in order to assist his readers. It was generally agreed that the work was a striking one, but badly composed and difficult to penetrate owing to the confused and equivocal character of some of the paragraphs. When Say referred to it as “a chaotic collection of just ideas thrown indiscriminately among a number of positive truths,”[253] he expressed the opinion of all who had read it.
But a complete triumph, so far as the Continent at least was concerned, had to be the work of an interpreter. Such an interpreter must fuse all these ideas into a coherent body of doctrines, leaving useless digressions aside.[254] This was the task that fell into the hands of J. B. Say. Among his merits (and it is not the only one) is that of popularising the ideas of the great Scotch economist on the Continent, and of giving to the ideas a somewhat classical appearance. The task of discrediting the first French school of economists and of facilitating the expansion of English political economy fell, curiously enough, to the hands of a Frenchman.
J. B. Say was twenty-three years of age in 1789.[255] At that time he was Clavières’ secretary. Clavières became Minister of Finance in 1792, but at this period he was manager of an assurance company, and was already a disciple of Smith. Say came across some stray pages of the Wealth of Nations, and sent for a copy of the book.[256] The impression it made upon him was profound. “When we read this work,” he writes, “we feel that previous to Smith there was no such thing as political economy.” Fourteen years afterwards, in 1803, appeared Le Traité d’Économie politique. The book met with immediate success, and a second edition would have appeared had not the First Consul interdicted it. Say had refused to support the Consul’s financial recommendations, and the writer, in addition to having his book proscribed, found himself banished from the Tribunate. Say waited until 1814 before republishing it. New editions rapidly followed, in 1817, 1819, and 1826. The treatise was translated into several languages. Say’s authority gradually extended itself; his reputation became European; and by these means the ideas of Adam Smith, clarified and logically arranged in the form of general principles from which conclusions could be easily deduced, gradually captivated the more enlightened section of public opinion.
It would, however, be unjust to regard Say as a mere populariser of Smith’s ideas. With praiseworthy modesty, he has never attempted to conceal all that he owed to the master. The master’s name is mentioned in almost every line, but he never remains content with a mere repetition of his ideas. These are carefully reconsidered and reviewed with discrimination. He develops some of them and emphasises others. Amid the devious paths pursued by Smith, the French economist chooses that which most directly leads to the desired end. This path is so clearly outlined for his successors that “wayfaring men, though fools, could not err therein.” In a sense he may be said to have filtered the ideas of the master, or to have toned his doctrines with the proper tints. He thus imparted to French political economy its distinctive character as distinguished from English political economy, to which at about the same time Malthus and Ricardo were to give an entirely new orientation. What interests us more than his borrowing is the personal share which he has in the work, an estimate of which we must now attempt.
(1) In the first place, Say succeeded in overthrowing the work of the Physiocrats.
The work of demolition was not altogether useless. In France there were many who still clung to the “sect.” Even Germain Garnier, Smith’s translator, considered the arguments of the Physiocrats theoretically irrefutable. The superiority of the Scotch economist was entirely in the realm of practice.[257] “We may,” says he, “reject the Economistes’ theory [meaning the Physiocrats’] because it is less useful, although it is not altogether erroneous.” Smith himself, as we know, was never quite rid of this idea, for he recognised a special productiveness of land as a result of the co-operation of nature, and doctors, judges, advocates, and artists were regarded as unproductive. But Say’s admission was the last straw. Not in agriculture alone, but everywhere, “nature is forced to work along with man,”[258] and by the funds of nature was to be understood in future all the help that a nation draws directly from nature, be it the force of wind or rush of water.[259] As to the doctors, lawyers, etc., how are we to prove that they take no part in production? Garnier had already protested against their exclusion. Such services must no doubt be classed as immaterial products, but products none the less, seeing that they possess exchange value and are the outcome[260] of the co-operation of capital and industry. In other respects also—e.g., in the pleasure and utility which they yield—services are not very unlike commodities. Say’s doctrine meets with some opposition on this point, for the English economists were unwilling to consider a simple service as wealth because of its unendurable character, and the consequent fact that it could not be considered as adding to the aggregate amount of capital. But he soon wins over the majority of writers.[261] Finally Say, like Condillac, discovered a decisive argument against Physiocracy in the fact that the production of material objects does not imply their creation. Man never can create, but must be content with mere transformation of matter. Production is merely a creation of utilities, a furthering of that capacity of responding to our needs and of satisfying our wants which is possessed by commodities; and all work is productive which achieves this result, whether it be industry, commerce, or agriculture.[262] The Physiocratic distinction falls to the ground, and Say refutes what Smith, owing to his intimacy with his adversaries, had failed to disprove.
(2) On another point Say carries forward Smith’s ideas, although at the same time superseding them. He subjects the whole conception of political economy and the rôle of the economist to a most thorough examination.
We have already noticed that the conception of the “natural order” underwent considerable modification during the period which intervened between the writings of the Physiocrats and the appearance of the Wealth of Nations. The Physiocrats regarded the “order” as one that was to be realised, and the science of political economy as essentially normative. For Smith it was a self-realising order. This spontaneity of the economic world is analogous to the vitality of the human body, and is capable of triumphing over the artificial barriers which Governments may erect against its progress. Practical political economy is based upon a knowledge of the economic constitution of society, and its sole aim is to give advice to statesmen. According to Say, this definition concedes too much to practice. Political economy, as he thinks, is just the science of this “spontaneous economic constitution,” or, as he puts it in 1814, it is a study of the laws which govern wealth.[263] It is, as the title of his book suggests, simply an exposition of the production, distribution, and consumption of wealth. It must be distinguished from politics, with which it has been too frequently confused, and also from statistics, which is a simple description of particular facts and not a science of co-ordinate principles at all.
Political economy in Say’s hands became a purely theoretical and descriptive science. The rôle of the economist, like that of the savant, is not to give advice, but simply to observe, to analyse, and to describe. “He must be content to remain an impartial spectator,” he writes to Malthus in 1820. “What we owe to the public is to tell them how and why such and such a fact is the consequence of another. Whether the conclusion be welcomed or rejected, it is enough that the economist should have demonstrated its cause; but he must give no advice.”[264]
In this way Say broke with the long tradition which, stretching from the days of the Canonists and the Cameralists to those of the Mercantilists and the Physiocrats, had treated political economy as a practical art and a guide for statesmen and administrators. Smith had already tried to approach economic phenomena as a scientist, but there was always something of the reformer in his attitude. Say’s only desire was to be a mere student; the healing art had no attraction for him, and so he inaugurates the true scientific method. He, moreover, instituted a comparison between this science and physics rather than between it and natural history, and in this respect also he differed from Smith, for whom the social body was essentially a living thing. Without actually employing the term “social physics,” he continually suggests it by his repeated comparison with Newtonian physics. The principles of the science, like the laws of physics, are not the work of men. They are derived from the very nature of things. They are not established; they are discovered. They govern even legislators and princes, and one never violates them with impunity.[265] Like the laws of gravity, they are not confined within the frontiers of any one country, and the limits of State administration, which are all-important for the student of politics, are mere accidents for the economist.[266] Political economy is accordingly based on the model of an exact science, with laws that are universal. Like physics, it is not so much concerned with the accumulation of particular facts as with the formulation of a few general principles from which a chain of consequences of greater or smaller length may be drawn according to circumstances.
A delight in uniformity,[267] love of universality, and contempt for isolated facts, these are the marks of the savant. But the same qualities in men of less breadth of view may easily become deformed and result in faults of indifference or of dogmatism, or even contempt for all facts. And are these very faults not produced by the stress which he lays upon these principles? Was not political economy placed in a vulnerable position for the attacks of Sismondi, of List, of the Historical school, and of the Christian Socialists by this very work of Say? In his radical separation of politics and economics, in avoiding the “practical” leanings of Adam Smith, he has succeeded in giving the science a greater degree of harmony. But it also acquired a certain frigidity which his less gifted successors have mistaken for banality or crudity. Rightly or wrongly, the responsibility is ascribed to Say.
(3) We have just seen the influence which the progress of the physical sciences had upon Say’s conception of political economy; but he was also much influenced by the progress of industry. Between 1776, the date of the appearance of the Wealth of Nations, and the year 1803, when Say’s treatise appeared, the Industrial Revolution had taken place. This is a fact of considerable importance for the history of economic ideas.
When Say visited England a little before 1789, he found machine production already in full swing there. In France at the same date manufactures were only just beginning. They increased rapidly under the Empire, and the progress after 1815 became enormous. Chaptal in his work De l’Industrie française reckons that in 1819 there were 220 factories in existence, with 922,200 spindles consuming 13 million kilograms of raw cotton. This, however, only represented a fifth of the English production, which twenty years later was quadrupled. Other industries were developing in a similar way. Everybody was convinced that the future must be along those lines—an indefinite future it is true, but it was to be one of wealth, work, and well-being. The rising generation was intoxicated at the prospect. The most eloquent exposition of this debauchery will be found in Saint-Simonism.
Say did not escape the infection. While Smith gives agriculture the premier place, Say accords the laurels to manufactures. For many years industrial problems had been predominant in political economy, and the first official course of lectures given by Say himself at the Conservatoire des Arts et Métiers was entitled “A Course of Lectures on Industrial Economy.”
In that hierarchy of activities which Smith had drawn up according to the varying degree of utility each possessed for the nation, Smith had placed agriculture first. Say preserved the order, but placed alongside of agriculture “all capital employed in utilising any of the productive forces of nature. An ingenious machine may produce more than the equivalent of the interest on the capital it has cost to produce, and society enjoys the benefit in lower prices.”[268] This sentence is not found in the edition of 1803, and appears only in the second edition. Say in the meantime had been managing his factory at Auchy-les-Hesdins, and he had profited by his experience. This question of machinery, which was merely touched on by Smith in a short passage, finds a larger place in every successive edition of Say’s work. The general adoption of machinery by manufacturers both in England and France frequently incited the workers to riot. Say does not fail to demonstrate its advantages. At first he admits that the Government might mitigate the resulting evils by confining the employment of machinery at the outset to certain districts where labour is scarce or is employed in other branches of production.[269] But by the beginning of the fifth edition he changed his advice and declared that such intervention involved interference with the inventor’s property,[270] admitting only that the Government might set up works of public utility in order to employ those men who are thrown out of employment on account of the introduction of machinery.
The influence of these same circumstances must be accounted responsible for the stress which is laid by Say upon the rôle of an individual whom Smith had not even defined, but one who is henceforth to remain an important personage in the economic world, namely, the entrepreneur. At the beginning of the nineteenth century the principal agent of economic progress was the industrious, active, well-informed individual, either an ingenious inventor, a progressive agriculturist, or an experienced business man. This type became quite common in every country where mechanical production and increasing markets became the rule. It is he rather than the capitalist properly so called, the landed proprietor, or the workman, who is “almost always passive,” who directs production and superintends the distribution of wealth. “The power of industrial entrepreneurs exercises a most notable influence upon the distribution of wealth,” says Say. “In the same kind of industry one entrepreneur who is judicious, active, methodical, and willing makes his fortune, while another who is devoid of these qualities or who meets with very different circumstances would be ruined.”[271] Is it not the master spinner of Auchy-les-Hesdins who is speaking here? We are easily convinced of this if we compare the edition of 1803 with that of 1814, and we can trace the gradual growth and development of this conception with every successive edition of the work.
Say’s classic exposition of the mechanism of distribution is based upon this very admirable conception, which is altogether superior to that of Smith or the Physiocrats. The entrepreneur serves as the pivot of the whole system. The following may be regarded as an outline of his treatment.
Men, capital, and labour furnish what Say refers to as productive services. These services, when brought to market, are given in exchange for wages, interest, or rent. It is the entrepreneur, whether merchant, manufacturer, or agriculturist, who requires them, and it is he who combines them with a view to satisfying the demand of consumers. “The entrepreneurs, accordingly, are mere intermediaries who set up a claim for those productive services which are necessary to satisfy the demand for certain products.” Accordingly there arises a demand for productive services, and the demand is “one of the factors determining the value of those services.” “On the other hand, the agents of production, both men and things, whether land, capital, or industrial employees, offer their services in greater or less quantities according to various motives, and thus constitute another factor which determines the value of these same services.”[272] In this fashion the law of demand and supply determines the price of services, the average rate of interest, and rent. Thanks to the entrepreneur, the value produced is again distributed among these “various productive services,” and the various services allotted according to need among the industries. This theory of distribution is in complete accordance with the theory of exchange and production.
Say’s very simple scheme of distribution constitutes a real progress. In the first place, it is much more exact than the Physiocrats’, who conceived of exchange as taking place between classes only, and not between individuals. It also enables us to distinguish the remuneration of the capitalist from the earnings of the entrepreneur, which were confounded by Adam Smith. The Scotch economist assumed that the entrepreneur was very frequently a capitalist, and confused the two functions, designating his total remuneration by the single word “profit,” without ever distinguishing between net interest of capital and profit properly so called. This regrettable confusion was followed by other English authors, and remained in English economic theory for a long time. Finally, Say’s theory has another advantage. It gave to his French successors a clear scheme of distribution which was wanting in Smith’s work, just at the time when Ricardo was attempting to overcome the omission by outlining a new theory of distribution. According to Ricardo, rent, by its very nature and the laws which give rise to it, is opposed to other revenues, and the rate of wages and of profits must be regarded as direct opposites, so that the one can only increase if the other diminishes—an attractive but erroneous theory, and one which led to endless discussion among English economists, with the result that they abandoned it altogether. Say, by showing this dependence, which becomes quite clear if we regard wages and profits from the point of view of demand for commodities, and by his demonstration that rent is determined by the same general causes—viz. demand and supply—as determine the exchange value of other productive services, saved political economy in France from a similar disaster. It was he, also, who furnished Walras with the first outlines of his attractive conception of prices and economic equilibrium. This explains why he never attached to the theory of rent the supreme importance given to it by English economists. In this respect he has been followed by the majority of French economists. On the other hand, and for a similar reason, he never went to the opposite extreme of denying the existence of rent altogether by regarding it merely as the revenue yielded by capital sunk in land. In this way he avoided the error which Carey and Bastiat attempted to defend at a later period.[273]
(4) So far it is Say’s brilliant power of logical reasoning that we have admired. But has he contributed anything which is entirely new to the science?
His theory of markets was for a long time considered first-class work. “Products are given in exchange for products.” It is a happy phrase, but it is not in truth very profound. It simply gives expression to an idea that was quite familiar to the Physiocrats and to Smith, namely, that money is but an intermediary which is acquired only to be passed on and exchanged for another product. “Once the exchange has been effected it is immediately discovered that products pay for products.”[274] Thus goods constitute a demand for other goods, and the interest of a country that produces much is that other countries should produce at least as much. Say thought that the outcome of this would be the advent of the true brotherhood of man. “The theory of markets will change the whole policy of the world,” said he.[275] He thought that the greater part of the doctrine of Free Trade could be based upon this principle. But to expect so much from such a vague, self-evident formula was to hope for the impossible.
Still more interesting is the way in which he applied this “theory of markets” to a study of over-production crises, and the light which that sheds upon the nature of Say’s thought. Garnier had already pointed out that a general congestion of markets was possible. As crises multiplied this fear began to agitate the minds of a number of thinkers. “Nothing can be more illogical,” writes Say. “The total supply of products and the total demand for them must of necessity be equal, for the total demand is nothing but the whole mass of commodities which have been produced: a general congestion would consequently be an absurdity.”[276] It would simply mean a general increase of wealth, and “wealth is none too plentiful among nations, any more than it is among individuals.”[277] We may have an inefficient application of the means of production, resulting in the over-production of some one commodity or other—i.e. we may have partial over-production.[278] Say wishes to emphasise the fact that we need never fear general over-production, but that we may have too much of some one product or other. He frequently gave expression to this idea in the form of paradoxes. We might almost be led to believe that he denies the existence of crises altogether in the second edition of his work.[279] In reality he was very anxious to admit their existence, but he wished to avoid everything that might prove unfavourable to an extension of industry.[280]
He thought that crises were essentially transient, and declared that individual liberty would be quite enough to prevent them. He was extremely anxious to get rid of the vague terrors which had haunted those people who feared that they would not be able to consume all this wealth, of a Malthus who thought the existence of the idle rich afforded a kind of safety-valve which prevented over-production,[281] of a Sismondi who prayed for a slackening of the pace of industrial progress and a checking of inventions. Such thoughts arouse his indignation, especially, as he remarks, when it is remembered that even among the most flourishing nations “seven-eighths of the population are without a great number of products which would be regarded as absolute necessities, not by a wealthy family, but even by one of moderate means.”[282] The inconvenience—and he is never tired of repeating it—is not the result of over-production, but is the effect of producing what is not exactly wanted.[283] Produce, produce all that you can, and in the natural course of events a lowering of prices will benefit even those who at first suffered from the extension of industry.
In this once famous controversy between Say, Malthus, Sismondi, and Ricardo (the latter sided with Say) we must not expect to find a clear exposition of the causes of crises. Indeed, that is nowhere to be found. All we have here is the expression of a sentiment which is at bottom perfectly just, but one which Say wrongly attempted to state in a scientific formula.
J. B. Say plays a by no means negligible part in the history of doctrines. Foreign economists have not always recognised him. Dühring, who is usually perspicacious, is very unjust to him when he speaks of “the labour of dilution” to which Say devoted his energies.[284] His want of insight frequently caused him to glide over problems instead of attempting to fathom them, and his treatment of political economy occasionally appears very superficial. Certain difficulties are veiled with pure verbiage—a characteristic in which he is very frequently imitated by Bastiat. Despite Say’s greater lucidity, it is doubtful whether Smith’s obscurity of style is not, after all, more stimulating for the mind. Notwithstanding all this, he was faithful in his transmission of the ideas of the great Scotch economist into French. Happily his knowledge of Turgot and Condillac enabled him to rectify some of the more contestable opinions of his master, and in this way he avoided many of the errors of his successors. He has left his mark upon French political economy, and had the English economists adopted his conception of the entrepreneur earlier, instead of waiting until the appearance of Jevons, they would have spared the science many useless discussions provoked by the work of a thinker who was certainly more profound but much less judicious than Say, namely, David Ricardo.[285]