THIRD MODERN PHASE: SYSTEM OF NATURAL LIBERTY (cont.)
2. Adam Smith, with his Immediate Predecessors and his Followers
EnglandThe stagnation in economic inquiry which showed itself in England in the early part of the 18th century was not broken by any notable manifestation before 1735, when, Bishop Berkeley put forward in his Querist, with much force and point, views opposed those of the mercantile school on the nature of national wealth and the functions of money, though not without an admixture of grave error. But soon a more decisive advance was made. Whilst in France the physiocrats were working after their own fashion towards the construction of a definite system of political economy, a Scottish thinker of the first order was elucidating, in a series of short but pregnant essays, some of the fundamental conceptions of the science. What had been written on these questions in the English language before his time has remained almost altogether within the limits of the directly practical sphere. With Locke, indeed, the general system of the modern critical philosophy had come into relation with economic inquiry, but only in a partial and indeterminate way. But in Hume the most advanced form of this philosophy was represented, and his appearance in the field of economic decisively marks the tendency of the latter order of speculation to place itself in connexion with the largest and deepest thought on human nature and general human history. Most of the essays here referred to first appears in 1752, in a volume entitled Political Discourses, and the number was completed in the collection of Essays and Treatises on Several Subjects, published in the following year. The most important of them are those on Commerce, on Money, on Interest, and on the Balance of Trade. Yet these should not be separated from the rest, for, notwithstanding the unconnected form of these runs through them a profound unity of thought, so that they indeed compose in a certain sense an economic system. They exhibit in full measure Humes wonderful acuteness and subtlety, which indeed sometimes dispose him to paradox, in combination with the breadth, the absence of prejudice, and the social sympathies which so eminently distinguished him; and they offer, besides, the charm of his easy and natural style and his rare power of lucid exposition.
In the essay on money he refutes the mercantilist error, which tended to confound it with wealth. "Men and commodities," he says "are the real strength of nay community." In the national stock of labour consists all real power and riches." Money is only the oil which makes the movements of the mechanism of commerce more smooth and ways. He shows that, from the domestic as distinguished form the international point of view, the absolute quantity of money, supposed as of fixed amount, in a country is of no consequence, whilst an excessive quantity, larger, that is, than is required for the interchange of commodities, may be injurious as raising prices and driving foreigners from the home markets. He goes so far, in one or two places, as to assert that the value of money is chiefly fictitious or conventional, a position which cannot be defended; but it must not be pressed against him, as he builds nothing on it. He has some very ingenious observations (since, however, questioned by J.S. Mill) on the effects of the increase of money in a country in stimulating industry during the interval which takes place before the additional amount is sufficiently diffused to alter the whole scale of prices. He shows that the fear of the money of an industrious community being lost to it by passing into foreign counties is groundless, and that, under a system of freedom, the distribution of the precious metals which is adapted to the requirements of trade will spontaneously establish itself. "In short, a Government has great reason to preserve with care its people and its manufacturers; its money it may safely trust to the course of human affairs without fear or jealously."
A very important service was rendered by his treatment of the rate of interest. He exposes the erroneous idea often entertained that it depends on the quantity of money in a country, and shows that the reduction of it must in general be the result of "the increase of industry and frugality, of arts and commerce," so that it may serve as a barometer, its lowness being an almost infallible sign of the flourishing condition of a people. It may be observed in passing that in the essay devoted to this subject he brings out a principle of human nature which economists too often overlook, "the constant and insatiable desire of the mind for exercise and employment," and the consequent action of ennui in prompting to exertion.
With respect to commerce, he points to its natural foundation in what has since been called "the territotial division of labour," and proves that that the prosperity of one nation, instead of being a hindrance, is a help to that of its neighbours. "Not only as a man, but as a British subject," he says, "I pray for the flourishing commence of Germany, Spain, Italy, and even France itself." He condemns the "numberless bars, obstructions, and impacts which all nations of Europe, and none more than England, have put upon trade." Yet on the question of protection to national industry he is not quite at the free-trade point of view, for he approves of a tax on German linen as encouraging home manufacturers, and of a tax on brandy as increasing the sale of rum and supporting our southern colonies. Indeed it has been justly observed that there are in him several traces of a refined mercantilism, and that he represents a state of opinion in which the transition from the old to the new views is not yet completely effected.
We cannot do more than refer to the essay on taxes, in which, amongst other things, he repudiates the impôt unique of the physiocrats, and to that on public credit, in which he criticizes the "new paradox, that public incumbrances are of themselves advantageous, independent of the necessity of contracting them," and objects, perhaps too absolutely, to the modern expedient of raising the money required for national enterprises by way of loan, and so shifting our burdens upon the shoulders of posterity.
The characteristics of Hume which are most important in the history of economic investigations are (1) his practice of bringing economic facts into connexion with all the weighty interests of social and political life, and (2) his tendency to introduce the historical spirit into the study of those facts. He admirably illustrates the mutual action of the several branches of industry, and the influences of progress in the arts of production and in commerce on general civilization, exhibits the striking contrasts of the ancient and modern system of life (see especially the essay On the Populousness of Ancient Nations), and considers almost every phenomenon which comes under discussion in its relations to the contemporary stage of social development. It cannot be doubted that Hume exercised a most important influence on Adams Smith, who in the Wealth of Nations calls him "by far the most illustrious philosopher and historian of the present age," and who esteemed his character so highly that, after a friendship of many years had been terminated by Humes decease, he declared him to have "approached as nearly to the idea of a perfectly wise and virtuous man as perhaps the nature of human frailty will permit."
Josiah Tucker, dean of Gloucester (d. 1799), holds a distinguished place among the immediate predecessors of Smith. Most of his numerous productions had direct reference to contemporary questions, and, though marked by much sagacity and penetration are deficient in permanent interest. In come of these he urged the impolicy of restrictions on the trade of Ireland, advocated a union of that country with England and recommended the recognition of the independence of the United States of America. The most important of his general economic views are those relating to international commerce. He is an ardent supporter of free-trade doctrines, which he bases on the principles that there is between nations no necessary antagonism, but rather a harmony, of interests, and that their several natural advantages and different aptitudes naturally prompt them to exchange. He had not, however, got quite clear of mercantilism, and favoured bounties on exported manufacturers and the encouragement of population by a tax on celibacy. Dupont, and after him Blanqui, represent Tucker as a follower of the physocrats, but there seem to be no ground for this opinion except his agreement with them on the subject of the freedom of trade. Turgot translated into French his Important Questions on Commerce (1755).
In 1767 was published James Steuarts Inquiry into the Principles of Political Economy. This was one of the most unfortunate of books. It was the most complete and systematic survey of the science from the point of view of moderate mercantilism which had appeared in England. Stenart was a man of no ordinary abilities, and had prepared himself for his task by long and serious study. But the time for the mercantile doctrines was past, and the system of natural liberty was in possession of an intellectual ascendancy which foreshadowed its political triumph. Nine years later the Wealth of Nations was given to the world, a work as superior to Steuarts in attractiveness of style as in scientific soundness. Thus the latter was predestined to fail, and in fact never exercised any considerable theoretic or practical influence. Smith never quotes or mentions it; being acquainted with Steuart, whose conversation he said was better than his book, he probably wished to keep clear of controversy with him. The German economists have examined Steauarts treatise more carefully than English writers have commonly done; and they recognize its high merits , especially in relation to the theory of value and the subject of population. They have also pointed out that, in the spirit of the best recent research, he has dwelt on the special character which distinguish the economies proper to different nations and different grades in social progress.
Coming now to the great name of Adam Smith (1723-1790), its is of the highest importance that we should rightly understand his position and justly estimate his claims. It is plainly contrary to fact to represent him, as some have done, as the creator of political economy. The subject of social wealth had always in some degree, and increasing in recent times, engaged the attention of philosophic minds. The study had even indisputably assumed a systematic character, and, from being an assemblage of fragmentary disquisitions on particular questions of national interest, had taken the form, notably in Turgots Réflexions, of an organized body of doctrine. The truth is that Smith took up the science when it was already considerably advanced; and it was this very circumstance which enabled him, by the production of a classical treatise, to render most of his predecessors obsolete. But, whilst all the economic labours of the preceding centuries prepared the way for him, they did not anticipate his work. His appearance at an earlier stage, or without those previous labours, would be inconceivable; but he built, on the foundation, which had been laid by other, much of his own that was precious and enduring.
Even those who do not fall into the error of making Smith the creator of the science, often separate him too broadly from Quesnay and his followers, and represent the history of modern economics as consisting of the successive rise and reign of three doctrinesthe mercantile, the physiocratic, and the Smithian. The last two are, it is true, at variance in some even important respects. But it is evident, and Smith himself felt, that their agreements were much more fundamental than their differences; and, if we regard them as historical forces, they must be considered as working towards identical ends. They both urged society towards the abolition of the previously prevailing industrial policy of European Governments; and their arguments against that policy rested essentially on the same grounds. Whilst Smiths criticism was more searching and complete, he also analyzed more correctly than the physiocrats some classes of economic phenomena,in particular dispelling the illusions into which they had fallen with respect to the unproductive nature of manufactures and commerce. Their school disappeared from the scientific field, not merely because it met with a political check in the person of Turgot, but because, as we have already said, the Wealth of Nations absorbed into itself all that was valuable in their teaching, whilst it continued more effectually the impulse they had given to the necessary work of demolition.
The history of economic opinion in modern times, down to the third decade of our own century, is, in fact, strictly bipartite. The first stage in filled with the mercantile system, which, as we have shown, was rather a practical policy than a speculative doctrine, and which came into existence as the spontaneous growth of social conditions acting on minds not trained to scientific habits. The second stage is occupied with the gradual rise and ultimate ascendancy of another system founded on the idea of the right of the individual to an unimpeded sphere for the exercise of his economic activity. With the latter, which is best designated as the "system of natural liberty," we ought to associate the memory of the physiocrats as well as that of Smith, without, however, maintaining their services to have been equal to his.
The teaching of political economy was in the Scottish universities associated with that of moral philosophy. Smith, as we are told, conceived the entire subject he had to treat in his public lectures as divisible into four heads, the first of which was natural theology, the second ethics, the third jurisprudence; whilst in the forth "he examined those political regulations which are founded upon expediency, and which are calculated to increase the riches, the powers, and the prosperity of a state." The last two branches of inquiry are regarded as forming but a single body of doctrine in the well-known passage of the Theory of Moral Sentiments in which the author promises to give in another discourse "an account of the general principles of law and government, and of the different revolutions they have undergone in the different ages and periods of society, not only in what concerns justice, but in what concerns police, revenue, and arms, and whatever else is the subject of law." This shows how little it was Smiths habit to separate (except provisionally), in his conceptions or his researches, the economic phenomena of society from all the rest. The words above quoted have, indeed, been not unjustly described as containing "an anticipation, wonderful for his period, of general sociology, both statical and dynamical, an anticipation which becomes still more remarkable when we learn from his literary executors that he had formed the plan of a connected history of the liberal sciences and elegant arts, which much have added to the branches of social study already enumerated a view of the intellectual progress of society." Though these large designs were never carried out in their integrity, as indeed at that period they could not have been adequately realized, it has resulted from them that, though economic phenomena form the special subject of the Wealth of Nations, Smith yet incorporated into that work much that related to the other social aspects, incurring thereby the censure of some of his followers, who insist with pedantic narrowness on the strict isolation of the economic domain.
There has been much discussion on the questionWhat is the scientific method followed by Smith in his great work? By some it is considered to have been purely deductive, a view which Buckle has perhaps carried to the greatest extreme. He asserts that in Scotland the inductive method was unknown, that the inductive philosophy exercised no influence on Scottish thinkers; and, though Smith spent some of the most important years of his youth in England, where the inductive method was supreme, and though he was widely read in general philosophical literature, he yet thinks he adopted the deductive method because it was habitually followed in Scotland,and this though Buckle maintains that it is the only appropriate, or even possible, method in political economy, which surely would have been a sufficient reason for choosing it. That the inductive spirit exercised no influence on Scottish philosophers is certainly not true, as will be presently shown, Montesquieu, whose method is essentially inductive, was in Smiths time studied with quite peculiar care and regarded with special veneration by Smiths fellow-countrymen. As to Smith himself, what may justly be said of him is that the deductive bent was certainly not predominant character of his mind, nor did his great excellence lie in the "dialectic skill" which Buckle ascribes to him. What strikes us most in his book is his wide and keen observation of social facts, and his perpetual tendency to dwell on these and elicit their significance, instead of drawing conclusions from abstract principles by elaborate chains of reasoning. It is this habit of his mind which gives us, in reading him, so strong and abiding a sense of being in contact with the realities of life.
That Smith does, however, largely employ the deductive method is certain; and that method is quite legitimate when the premises from which the deduction sets out are known universal facts of human nature and properties of external objects. Whether this mode of proceeding will carry us far may indeed well be doubted; but its soundness cannot be disputed. But there is another vicious species of deduction which, as Cliffe Leslie has shown, seriously tainted the philosophy of Smith,in which the premises are not facts ascertained by observation, but the same ·a priori assumptions, half theological half metaphysical, respecting a supposed harmonious and beneficent natural order of things which we found in the physiocrats, and which, as we saw, were embodied in the name of that sect. In his view, Nature has made provision for social wellbeing by the principle of the human constitution which prompts every man to better his condition: the individual aims only at his private gain, but in doing so is "led by an invisible hand" to promote the public good, which was no part of his intention; human institutions, by interfering with the action of this principle in the name of the public interest, defeat their own end; but, when all systems of preference or restraint are taken away, "the obvious and simple system of natural liberty establishes itself of its own accord." This theory is, of course, not explicitly presented by Smith as a foundation of his economic doctrines, but it is really the secret substratum on which they rest. Yet, whilst such latent postulates warped his view of things, they did not entirely determine his method. His native bent towards the study of things as they are preserved him from extravagances into which many of his followers have fallen. But besides this, as Leslie has pointed out, the influence of Montesquieu tended to counterbalance the theoretic prepossessions produced by the doctrine of the jus naturae. That great thinker, though he could not, at his period understand the historical method which is truly appropriate to sociological inquiry, yet founded his conclusions on induction. It is true, as Comte has remarked, that his accumulation of facts, borrowed from the most different states of civilization, and not subjected to philosophic criticism, necessarily remained on the whole sterile, or at least could not essentially advance the study of society much beyond the point at which he found it. His merit, as we have before mentioned, lay in the recognition of the subjection of all social phenomena to natural laws, not in the discovery of those laws. But this limitation was overlooked by the philosophers of the time of Smith, who were much attracted by the system he followed of tracing social facts to the special circumstances, physical or moral, of the communities in which they were observed. Leslie has shown that Lord Kaimes, Dalrymple, and Millarcontemporaries of Smith, and the last his pupilwere influenced by Montesquieu; and he might have added the more eminent name of Ferguson, whose respect and admiration for the great Frenchmann are expressed in striking terms in his History of Civil Society. We are even informed that Smith himself in his later years was occupied in preparing a commentary on the Esprit des Lois. He was thus affected by two different and incongruous systems of thought,one setting out from an imaginary code of nature intended for the benefit of man, and leading to an optimistic view of the economic constitution founded on enlightened self-interest; the other following inductive processes, and seeking to explain the several states in which human societies are found existing, as results of circumstances or institutions which have been in actual operation. And we find accordingly in his great work a combination of these two modes of treatmentinductive inquiry on the one hand, and, on the other, a priori speculation founded on the "Nature" hypothesis. The latter vicious proceeding has in some of his followers been greatly aggravated, while the countervailing spirit of inductive investigation has fallen into the background, and indeed the necessity or utility of any such investigation in the economic field has been sometimes altogether denied.
Some have represented Smiths work as of so loose a texture and so defective in arrangement that it may be justly described as consisting of a series of monographs. But this is certainly an exaggeration. The book, it is true, is not framed on a rigid mould, nor is there any parade of systematic divisions and subdivisions; and this doubtless recommended it to men of the world and of business, for whose instruction it was, at least primarily, intended. But, as a body of exposition, it has the real and pervading unity which results from a mode of thinking homogeneous throughout and the general absence of such contradictions as would arise form an imperfect digestion of the subject.
Smith sets out from the thought that the annual labour of a nation is the source from which it derives its supply of the necessaries and conveniences of life. He does not of course contemplate labour as the only factor in production: but it has been supposed that by emphasizing it at the outset he at once strikes the note of difference between himself on the one hand and both the mercantilists and the physiocrats on the other. The improvement in the productiveness of labour depends largely on its division; and he proceeds accordingly to give his unrivalled exposition of that principle, of the grounds on which it rests, and of its greater applicability to manufactures than to agriculture, in consequence of which the latter relatively lags behind in the course of economic development. The origin of the division of labour he finds in the propensity of human nature "to truck, barter, or exchange one thing for another." He shows that a certain accumulation of capital is a condition precedent of this division, and that the degree to which it can be carried is dependent on the extent of the market. When the division of labour has been established, each member of the society mush have recourse to the others for the supply of most of his wants: a medium of exchange is thus found to be necessary, and money comes into use. The exchange of goods against each other or against money gives rise to the notion of value. This word has two meaningsthat of utility, and that of purchasing power; the one may be called value in use, the other value in exchange. Merely, mentioning the former, Smith goes on to study the latter. What, he asks, is the measure of value? What regulates the amount of one thing which will be given for another? "Labour," Smith answers, "is the real measure of the exchangeable value of all commodities." "Equal quantities of labour, at all times and places, are of equal value to the labourer." "Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimates and compared. It is their real price; money is their nominal price only." Money, however, is in mens actual transactions the measure of value, as well as the vehicle of exchange; and the precious metals are best suited for this function, as varying little in their own value for periods of moderate length; for distant times, corn is a better standard of comparison. In relation to the earliest social stage, we need consider nothing but the amount of labour employed in the production of an article as determining its exchanged value; but in more advanced periods price is complex, and consists in the most general case of three elementswages, profit, and rent. Wages are the rewards of labour. Profit arises as soon as stock, being accumulated in the hands of one person, is employed by him in setting others to work, and supplying them with materials and subsistence, in order to make a gain by what they produce. Rent arises as soon as the land of a country has all become private property; "the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce." In every improved society, then, these three elements enter more or less into the price of the far greater part of commodities. There is in every society of neighbourhood an ordinary or average rate of wages and profit in every different employment of labour and stock, regulated by principles to be explained hereafter, as also an ordinary or average rate of rent. These may be called the natural rates at the time when and the place where they prevail; and the natural price of a commodity is what is sufficient to pay for the rent of the land, the wages of the labaour, and the profit of the stock necessary for bringing the commodity to market. The market price may rise above or gall below the amount so fixed, being determined by the proportion between the quantity brought to market and the demand of those who are willing to pay the natural price. Towards the natural price as a centre the market-price, regulated by competition, constantly gravitates. Some commodities, however, are subject to a monopoly of production, whether from the peculiarities of a locality or from legal privilege; their price is always the highest that can be got; the natural price of other commodities is the lowest which can be taken for any length of time together. The three component parts or factors of price vary with the circumstances of the society. The rate of wages is determined by a "dispute" or struggle of opposite interests between the employer and the workman. A minimum rate is fixed by the condition that they must be at least sufficient to enable a man and his wife to maintain themselves and, in general, bring up a family. The excess above this will depend on the circumstances of the country, and the consequent demand for labour,wages being high when national wealth is increasing low when it is declining. The same circumstances determine the variation of profits, but in an opposite direction; the increase of stock, which raises wages, tending to lower profit through the mutual competition of capitalists. "The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality; "if one had greatly the advantage over the others, people would crowd into it, and the level would soon be restored. Yet pecuniary wages and profits are very different in different employments,either from certain circumstances affecting the employments, which recommended or disparage them in mens notions, or from national policy, "which nowhere leaves things at perfect liberty." Here follows Smiths admirable exposition of the causes which produce the inequalities in wages and profits just referred to, a passage affording ample evidence of his habits of nice observation of the less obvious traits in human nature, and also of the operation both of these and of social institutions on economic facts. The rent of land comes next to be considered, as the last of the three elements of price. Rent is a monopoly price, equal, not to what the landlord could afford to take, but to what the farmer can afford to give. "Such parts only of the produce of land can commonly be brought to market, of which the ordinary price is sufficient to replace the stock which must be employed in bringing them thither, together with the ordinary profits. If the ordinary price is more than this, the surplus part will naturally go to the rent of the land. If it is not more, though the commodity may be brought to market, it can afford no rent to the landlord. Whether the price is or is not more depends on the demand." "Rent, therefore, enters into the price of commodities in a different way from wages and profits. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it."
Rent, wages, and profits, as they are the elements of price, are also the constituents of income; and the three great orders of every civilized society, from whose revenues that of every other order is ultimately derived, are the landlords, the labourers, and the capitalists. The relation of the interests of these three classes to those of society at large is different. The interest of the landlord always coincides with the general interest; whatever promotes or obstructs the one has the same effect on the other. So also does that of the labourer: when the wealth of the nation is progressive, his wages are high; they are low when it is stationary or retrogressive. "The interest of the third order has not the same connexion with the general interest of the society as that of the other two; . . . it is always in some respects different form and opposite to that of the public."
The subject of the second book is "the nature, accumulation, and improvement of stock." A mans whole stock consists of two portionsthat which is reserved for his immediate consumption, and that which is employed so as to yield a revenue to its owner. This latter, which is his "capital," is divisible into the two classes of "fixed" and "circulating." The first is such as yields a profits without passing into other hands. The second consists of such good, raised, manufactured, or purchased, as are sold for a profit and replaced by other goods: this sort of capital is therefore constantly going from and returning to the hands of its owner. The whole capital of a society falls under the same two heads. Its fixed capital consists chiefly of (1) machines, (2) buildings which are the means of procuring a revenue, (3) agricultural improvements, and (4) the acquired and useful abilities of all members of the society (since sometimes known as "personal capital"). Its circulating capital is also composed of four parts(1) money, (2) provisions in the hands of the dealers, (3) materials, and (4) completed work in the hands of the manufacturer or merchant. Next comes the distinction of the gross national revenue form the net,the first being the whole produce of the land and labour of a country, the second what remains after deducting the expense of maintaining the fixed capital of the country and that part of its circulating capital which consists of money. Money, "the great wheel of circulation," is altogether different from the goods which are circulated by means of it; it is a costly instrument by means of which all that each individual receives is distributed to him; and the expenditure required, first to provide it, and afterwards to maintain it, is a deduction form the net revenue of the society. In development of this consideration, Smith goes on to explain the gain to the community arising from the substitution of paper money for that composed of the precious metals; and here occurs the remarkable illustration in which the use of gold and silver money is compared to a highway on the ground, that of paper money to a waggon way through the air. In proceeding to consider the accumulation of capital, he is led to the distinction between productive and unproductive labour,the former being that which is fixed or realized in a particular object or vendible article, the latter that which is not so realized. The former is exemplified in the labour of the manufacturing workman, the latter in that of the mental servant. A broad line of demarcation is thus drawn between the labour which, results in commodities or increased value of commodities, and that which does no more than render services: the former is productive, the latter unproductive. "Productive" is by no means equivalent to "useful": the labours of the magistrate, the soldiers, the churchman, lawyer, and physician, are, in Smiths sense, unproductive. Productive labourers alone are employed out of capital: unproductive labourers, as well as those who do not labour at all, are all maintained by revenue. In advancing industrial communities, the portion of annual produce set apart as capital, bears an increasing proportion to that which is immediately destined to constitute are venue, either as rent or as profit. Parsimony is the source of the increase of capital; by augmenting the fund devoted to the maintenance of productive hands, it puts in motion an additional quantity of industry, which adds to the value of the annual produce. What is annually saved is as regularly consumed as what is spent, but by a different set of persons, by productive labourers instead of idlers, or unproductive labourers; and the former reproduce with a profit the value of their consumption. The prodigal, encroaching on his capital, diminishes, as far as in him lies, the amount of productive labour, and so the wealth of the country; nor is this result affected by his expenditure being on home-made, as distinct form foreign, commodities, Every prodigal, therefore, is a public enemy; every frugal man a public benefactor. The only mode of increasing the annual produce of the land and labour is to increase either the number of productive labourers or the productive powers of those labourers. Either process will in general require additional capital, the former to maintain the new labourers, the latter to provide improved machinery or to enable the employer to introduce a more complete division of labour. In what are commonly called loans of money it is not really the money, but the moneys worth, that the borrower wants; and the lender really assigns to him the right to a certain portion of the annual produced of the land and labour of the country. As the general capital of a country increases, so also does the particular portion of it from which the possessors wish to derive a revenue without being at the trouble of employing it themselves; the interest diminishes, not merely "from the general causes which make the market price of things commonly diminish as their quantity increases," but because, with the increase of capital, "it becomes gradually more and more difficult to find within the country a profitable method of employing any new capital,"whence arises a competition between different capital, and a lowering of profits, which must diminish the price which can be paid for the use of capital, or in other words the rate of interest. It was formerly wrongly supposed, and even Locke and Montesquie did not escape this error, that the fall in the value of the precious metals consequent on the discovery of the American mines was the real cause of the general lowering of the rate of interest in Europe. But this view, already refuted by Hume, is easily seen to be erroneous. "In some countries the interest of money has been prohibited by law. But, as something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it," the will in fact be paid for it; and the prohibition will only heighten the evil of usury by increasing the risk to the lender. The legal rate should be a very little above the lowest market rate; sober people will then be preferred as borrowers to prodigals and projectors, who at a higher legal rate would have an advantage over them, being alone willing to offer that higher rate.
As to the different employments of capital, the quantity of productive labour put in motion by an equal amount varies extremely according as that amount is employed(1) in the improvement of lands, mines or fisheries, (2) in manufacturers, (3) in wholesale or (4) retail trade. In agriculture "Nature is reproduced with his profits, but also the rent of the landlord. It is therefore the employment of a given capital which is most advantageous to society. Next in order come manufacturers; then wholesale tradefirst the home trade, secondly the foreign trade of consumption, last the carrying trade. All these employments of capital, however, are not only advantageous, but necessary, and will introduce themselves in the due degree, if they are left to the spontaneous action of individual enterprise.
These first two books contain Smiths genera; economic scheme; and we have stated it as fully as was consistent with the brevity here necessary, because from this formation of doctrine the English classical school set out, and round it the discussions of more recent times in different countries have in a great measure resolved. Some of the criticisms of his successors and their modifications of his doctrines will come under our notice as we proceed.
The critical philosophers of the 18th century were often destitute of the historical spirit, which was no part of the endowment needed for their principal social office. But some of the most eminent of the, especially in Scotland, showed a marked capacity and predilection for historical studies. Smith was amongst the latter; Knies and others justly remark on the masterly sketches of this kind which occurs in the Wealth of Nations. The longest and most elaborate of these occupied the third book; it is an account of the course followed by the nations of modern Europe in the successive development of the several forms of industry. It affords a curious example of the effect of doctrinal prepossessions in obscuring the results of historical inquiry. Whilst he correctly described the European movement of industry, and explains it as arising out of adequate social causes, he yet, in accordance with the absolute principles which tainted his philosophy, protests against it as involving an entire inversion of the "natural order of things." First agriculture, then manufactures, lastly foreign commerce; any other order than this he considers "innatural and retrograde." Hume, a more purely positive thinker, simply sees the facts, accepts them, and classes them under a general law. "It is a violent method, " he says, "and in most cases impracticable, to oblige the labourer to toil in order to raise form the land more than what subsists himself and family. Furnish him with manufactures and communities, and he will do it of himself." "If we consult history, we shall find that, in most nations, foreign trade has preceded any refi9nement in home manufactures, and given birth to domestic luxury."
The fourth book is principally devoted to the elaborate and exhaustive polemic against the mercantile system which finally drove it from the field of science, and has exercised a powerful influence on economic legislation. When protection is now advocated, it is commonly on different grounds from those which were in current use before the time of Smith. He believed that to look for the restoration of freedom of foreign trade in Great Britain would have been "as absurd as to expect that an Oceana or Utopia should be established in it;" yet, mainly in consequence of his labours, that object has been completely attained; and it has lately been said with justice that free trade might have been more generally accepted by other nations if the patient reasoning of Smith had not been replaced by dogmatism. His teaching on the subject is not altogether unqualified; but, on the whole, with respect to exchanges of every kind, where economic motives alone enter, his voice is in favour of freedom. He has regard, however, to political as well as economic interests, and on the ground that "defense is of much more important than opulence" pronounces the Navigation Act to have been "perhaps the wisest of all the commercial regulations of England." Whilst objecting to the prevention of the export of wool, he proposes a tax on that export as somewhat less injurious to the interest of growers than the prohibition, whilst it would "afford a sufficient advantage" to the domestic over the foreign manufacturer. This is, perhaps, his most marked deviation form the rigour of principles; it was doubtless a concession to popular opinion with a view to an attainable practical improvement. The wisdom of retaliation in order to procure the repeal of high duties or prohibitions imposed by foreign Governments depends, he says, altogether on the likelihood of its success in effecting the object aimed at, but he does not conceal his contempt for the practice of such expedients. The restoration of freedom in any manufacture, when it has grown to considerable dimensions by means of high duties, should, he thinks, from motives of humanity, be brought about only by degrees and with circumspection,though the amount of evil which would be caused by the immediate abolition of the duties is, in his opinion, commonly exaggerated. The case in which J.S. Mill justified protectionthat, namely, in which an industry well-adapted to a country is kept down by the acquired well-adapted to a country is kept down by the acquiring ascendancy of foreign producersis referred to by Smith; but he is opposed to the admission of this exception for reasons which do not appear to be conclusive. He is perhaps scarcely consistent in approving the concession of temporary monopolies to joint-stock companies undertaking risky enterprises "of which the public is afterwards to reap the benefit."1
He is less absolute in his doctrine of Governmental non-interference when he comes to consider in his fifth book the "expenses of the sovereign or the commonwealth." He recognizes as coming within the functions of the state the erection and maintenance of those public institutions and public works which, though advantageous to the society, could not repay, and therefore must not be thrown upon, individuals or small groups of individuals. He remarks in a just historical spirit that the performance of these functions requires very different degrees of expense in the different periods of society. Besides the institutions and works intended for public defence and the administration of justice, and those required for facilitating the commerce of the society, he considers those necessary for promoting the instruction of the people. He thinks the public at large may with propriety not only facilitate and encourage, but even impose upon almost the whole body of the people, the acquisition in youth of the most essential elements of education. He suggest as the mode of enforcing this obligation the requirement of submission to a test examination "before any one could obtain the freedom in any corporation, or be allowed to set up a trade in any village or town corporate." Similarly, he is of opinion that some probation, even in the higher and more difficult sciences, might be enforced as a condition of exercising any liberal profession, or becoming a candidate for any honourable office. The expense of the institutions for religions instruction as well as for general education, he holds, may without injustice be defrayed out of the funds of the whole society, though he would apparently prefer that it should be met by the voluntary contributions of those who think they have occasion for such education or instruction. There is much that is sound, as well as interesting and suggestive, in this fifth book, in which he shows a political instinct and a breadth of view by which he is favourably contrasted with the Manchester school. But, if we may say so without disrespect to so great a man, there are traces in it of what is now called Philistinisma low view of the ends of art and poetrywhich arose perhaps in part form personal defect, though it was common enough in even the higher minds in his century. There are also indications of a certain deadness to the lofty aims and perennial importance of religion, which was no doubt chiefly due to the influences of an age when the critical spirit was doing an indispensable work, in the performance of which the transitory was apt to be confounded with the permanent.
For the sake of considering as a whole Smiths view of the functions of government, we have postponed noticing his treatment of the physiocratic system, which occupies a part of his fourth book. He had formed the acquaintance of Quesnay, Turgot, and other members of their group during his sojourn in France in 1765, and would, as he told Dugald Stewart, had the patriarch of the school lived long enough, have dedicated to him the Wealth of Nations. He described that, with all its imperfections, the system of Quesnay is "perhaps the earnest approximation to the truth that had yet appeared on the subject of political economy." Yet he seems not to be adequately conscious of the degree of coincidence between his own doctrines and those of the physiocrats. Dupont de Nemours complained that he did not do Quesnay the justice of recognizing him as his spiritual father. It is, however, alleged, on the other side, that already in 1753 Smith had been teaching as professor a body of economic doctrine the same in its broad features with that obtained in his great work. This is indeed said by Stewart; an, though he gives no evidence of it, it is possibly quite true; if so, Smiths doctrinal descent must be traced rather from Hume than from the French school. The principal error of this school, that, namely, of representing agricultural labour as alone productive, he refutes in the fourth book, though in a manner which has not always been considered effective. Traces of the influence of their mistaken view appear to remain in his own work, as , for example, his assertion that in agriculture nature labours along with man, whilst in manufactures nature does nothing, man does all; and his distinction between productive and unproductive labour, which was doubtless suggested by their use of those epithets, and which seems to be inconsistent with his recognition of what is now called "personal capital." To the same source MCulloch and others refer the origin of Smiths view, which they represent as an obvious error, that "individual advantage is not always a true test of the public advantageousness of different employments." But that view in really quite correct as Prof. Nicholson has recently made plain. That the form taken by the use of capital profits being given, is not indifferent to the working class as a whole even Ricardo admitted; and Cairnes, as we shall see, built on this consideration some of the most far-reaching conclusions in his Leading Principles.
On Smiths theory of taxation in his fifth book it is not necessary for us to dwell (see TAXATION). The well-known canon which he lays down as prescribing the essentials of a good system have been generally accepted. They have lately been severely criticized by Prof. Walkerof whose objections, however, there is only one which appears to be well-founded. Smith seems to favour the view that the contribution of the individual to public expenses to him by the state, and ought to be proportional to the extent of those services. If he held this opinion, which some of his expressions imply, he was certainly so far wrong in principle.
We shall not be held to anticipate unduly if we remark here on the way in which opinion, revolted by the aberrations of some of Smiths successors, has tended to turn form the disciples to the master. A strong sense of his comparative freedom from the vicious tendencies of Ricardo and his followers has recently prompted the suggestion that we ought now to recur to Smith, and take up once more from him the line of the economical succession. But notwithstanding his indisputable superiority, an whilst fully recognizing the great services rendered by his immortal work, we must not forget that, as has been already said, that work was, on the whole, a product though an exceptionally eminent one, of the negative philosophy of the last century, resting largely in its ultimate foundation on metaphysical bases. The mind of Smith was mainly occupied with the work of criticism so urgent in his time; his principal task was to discredit and overthrow the economic system then prevalent, and to demonstrate the radical unfitness of the existing European Governments to direct the industrial movement. This office of his fell in with, and formed a part of, the general work of demolition carried on by the thinkers who gave to the 18th century its characteristic tone. It is to his honour that, besides this destructive operation, he contributed valuable elements to the preparation of an organic system of thought and of life. In his special domain he has not merely extinguished many errors and prejudices, and cleared the ground for truth, but has left us a permanent possession in the judicious analyses of economic facts, and ideas, the wise practical suggestions, and the luminous indications of all kinds, with which his work abounds. Belonging to the best philosophical school of his period, that with which the names of Hume and Dederot are associated, he tended strongly towards the positive point of view. But it was not possible for him to attain it; and the final and fully normal treatment of the economic life of societies must be constituted on other and more lasting foundations than those which underlie his imposing construction.
It has been well said that of philosophic doctrine the saying "by their fruit ye shall know them" is eminently true. And it cannot be doubted that the germs of the vicious methods and false or exaggerated theories of Smiths successors are to be found in his own work, though his good sense and practical bent prevented his following out his principles to their extreme consequences. The objections of Hildebrand and others to the entire historical development of doctrine which the Germans designate as "Smithianismus" are regarded by those critics as applicable, not merely top his school as a whole, but, though in a less degree, to himself. The following are the most important of these objections. It is said(1) Smiths conception of the social economy is essential individualistic. In this he falls in with the general character of the negative philosophy of his age. That philosophy, in its most typical forms, even denied the natural existence of the disinterested affections, and explained the altruistic feelings as secondary results of self-love. Smith, however, like Hume, rejected these extreme views; and hence it has been held that in the Wealth of Nations he consciously, though tacitly, abstracted from the benevolent principles in human nature, and as a logical artifice supposed an "economic man" actuated by purely selfish motives. However this may be, he certainly placed himself Habitually at the point of view if the individual, whom he treats as a purely egoistic force, working uniformily in the direction of private gain, without regard to the good of others or of the community at large. (2) He justifies this personal attitude by its consequences, presenting the optimistic view that the good of the community is best attained through the free play of individual cupidities, provided only the law prevents the interference of one member of the society with the self-seeking action of another. He assumes with the negative school generallythough he has passages which are not in harmony with these propositionsthat every one knows his true interest and will pursue it, and that the economic advantage of the individual coincides with that of the society. To this last conclusion he is secretly led, as we have seen, by a priori theological ideas, and also by metaphysical conceptions of a supposed system of nature, natural right, and natural liberty.(3) By this reduction of every question to one of individual gain, he is led to a too exclusive consideration of exchange value as distinct from wealth in the proper sense. This, whilst lending a mechanical facility in arriving at conclusions, gives a superficial character to economic investigation, divorcing it from the physical and biological sciences, excluding the question of real social utility, leaving no room for a criticism of production, and leading to a denial, like J.S. Mills, of any economic doctrine dealing with consumptionin other words, with the use of wealth, (4) In condemning the existing industrial policy, he tends too much towards a glorification of non-government, and a repudiation of all social intervention for the regulation of economic life. (5) He does not keep in view the moral destination of our race, nor regard wealth as a means to the higher ends of life, and thus incurs, not altogether unjustly, the charge of materialism, in the wider sense of that word. Lastly, (6) his whole system is too absolute in its character; it does not sufficiently recognize the fact that, in the language of Hildebrand, man, as a member of society, is a chilled of civilization and a product of history, and that account ought to be taken of the different stages of social development as implying altered economic conditions and calling for altered economic action, or even involving a modification of the actor. Perhaps in all the respects here enumerated, certainly in some of them and notably in the last, Smith is less open to criticism than most of the later English economists; but it must, we think, be admitted that to the general principles which lie at the basis of his scheme the ultimate growth of these several vicious tendencies is traceable.
Great expectations had been entertained respecting Smiths work by competent judges before its publication, as is shown by the language of Ferguson on the subject in his History of Civil Society. That its merits received prompt recognition is proved by the fact of six editions having been called for within the fifteen years after its appearance.1 From the year 1783 it was more and more quoted in parliament. Pitt was greatly impressed by its reasonings; Smith is reported to have said that that minister understood the book as well as well as himself. Pulteney said in 1797 that Smith would convince the then living generation and would rule the next.
FOOTNOTES (page. 370)
(1) Five editions of the Wealth of Nations appeared during the life of the author:the second in 1779, the third in 1784, the fourth in 1786, and the fifth in 1789. After the third edition Smith made no change in the text of his work. The principal editions containing matter added by other economists are those by David Buchanan, with notes and an additional volume, 1814?; by J.R.MCulloch, with life of the author, introductory discourse, notes, and supplemental dissertations, 1828 (also, with numerous additions, 1839; since reprinted several times with further additions); by the author of England and America Edward Gibbon Wakefield), with a commentary, which, however, is not continued beyond the second book, 1835-9; by James E. Thoroid Rogers, now professor of political economy at Oxford, with biographical preface and a careful verification of all Smiths quotations and references, 1869 (2d ed., 1880); and by J.S. Nicholson, professor at Edinburgh, with notes referring to sources of further information on the various topics handled in the text, 1884. There is a careful Abridgment by W.P, Emerton (2d. ed., 1881), founded on the earlier Analysis of Jeremiah Joyce (3d ed., 1821).
FOOTNOTES (page 368)
(1) Professor Bastable calls our attention to the interesting fact that the proposal of an export duty on wool and the justification of a temporary monopoly to joint-stock companies both appear for the first in the edition of 1784.
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