Profit is either positive, relative, or compound.
Positive, when some body gains and no body loses; relative, when some body gains exactly what is lost by another; and compound, when the gain of one implies a loss to another, but not equal to the full value of the gain. The same distinction may be applied to loss.
Chap. IX. Having laid down the fundamental principles which influence the operations of trade and industry, I take a view of their political consequences, and of the effects resulting to a state, which has begun to subject her political oeconomy to the interests of commerce; and such a state I call a trading nation.
The first consequence is an augmentation of demand for the work of the people; because they begin now to supply strangers. If this augmentation is sudden, it will raise demand; if it be gradual, it will increase it. If prices rise upon one extensive branch of industry, they must rise upon all; because a competition for hands must take place: the farmer looks out for servants, and must dispute them with the loom; and the first must draw back his additional expence upon the sale of his articles of the first necessity. Upon this revolution, wo to those who cannot increase their fund of subsistence in proportion to the augmentation of their expence! Nothing is so agreeable as the gradual rise of profits upon industry, and nothing so melancholy as the stop, which is the necessary consequence of all augmentations. When prices rise high, the market is deserted, and other nations profit of this circumstance to obtain a preference. From hence I conclude, that the rise of demand is the forerunner of decay in trade; and the augmentation of it, the true foundation of lasting opulence. But as an augmentation of supply may imply an augmentation of inhabitants, the statesman must constantly keep subsistence in an easy proportion to the demand for it: on this the whole depends. Plentiful subsistence is the infallible means of keeping prices low; and sudden and violent revolutions in the value of it, must ruin industry, in spite of a combination of every other favourable circumstance. The reason is plain: that article alone, comprehends two thirds of the whole expence of all the lower classes, and their gains must be in proportion to their expence; but as the gains of those who work for exportation are fixed, in a trading nation, by the effects of foreign competition, if their subsistence is not kept at an equal standard, they must live precariously, or in a perpetual vicissitude between plenty and want. From this may be gathered the infinite importance of distinguishing, in every trading nation, where the prices of subsistence are liable to great and sudden variations, these who supply strangers from those who supply their countrymen. As also the inconceivable advantage which would result from such a police upon grain, as might keep the price of it within determined limits.
Chap. X. This doctrine leads me naturally to consider the proportions between demand and supply, and for the better conveying my ideas, I have considered them as two quantities suspended in the scales of a political balance, which I call that of work and demand; preferring the word work to that of supply, because it is the interests of the workmen which chiefly come under our consideration.
When the work is proportioned to the demand, the balance vibrates under the influence of double competition; trade and industry flourish: but as the operation of natural causes must destroy this equilibrium, the hand of a statesman becomes constantly necessary to preserve it.
After representing the different ways in which the balance comes to be subverted (by the positive or relative preponderancy of either scale) I point out the consequences of this neglect in the statesman’s administration. If the scale of work should preponderate, that is, if there be more work than demand, either the workmen enter into a hurtful competition, which reduces their profit below the proper standard and makes them starve; or a part of the goods lie upon their hands, to the discouragement of industry. If the scale of demand should preponderate, then either prices will rise and profits consolidate, which prepares the way for establishing foreign rivalship, or the demand will immediately cease, which marks a check given to the growth of industry.
Every subversion, therefore, of this balance, implies one of four inconveniencies, either the industrious starve one another; or a part of their work provided lies upon hand; or their profits rise and consolidate; or a part of the demand made, is not answered by them. These I call the immediate effects of the subversion of this balance. I next point out the farther consequences which they draw along with them, when the statesman is not on his guard to prevent them.
A statesman must be constantly attentive, and so soon as he perceives a too frequent tendency in any one of the scales to preponderate, he ought gently to load the opposite scale, but never except in cases of the greatest necessity, take any thing out of the heavy one. Thus when the scale of demand is found to preponderate, he ought to give encouragement to the establishment of new undertakings, for augmenting the supply, and for preserving prices at their former standard: when the scale of work is on the preponderating hand, then every expedient for increasing exportation must be employed, in order to prevent profits from falling below the price of subsistence.
Chap. XI. I next examine how this equal balance comes at last to be destroyed.