The Development of Economic Doctrine: An Introductory Survey

CHAPTER V

ADAM SMITH

Hume

ON the way to Adam Smith, it is only decent to salute one whose great distinction in other fields seems to be the chief justification for the rather meagre treatment which he generally receives when discussed as an economist. Had David Hume1 (1711-1776) not been a pre-eminent philosopher, he would have ranked as an eminent economist. A perusal of his essays underlines, even more emphatically than a plunge into the Physiocratic morass, the extent to which Adam Smith was indebted to his forerunners. That adequate justice has seldom been done to Hume is perhaps also in part due to the fact that he never ventures on a comprehensive treatment of any economic topic; rather is he a gentlemanly essayist who, with a dignity only attainable in the eighteenth century, combines grace, learning and profundity in discoursing of many subjects, among which (on a liberal estimate) some ten may be deemed to be economic in character. Of these, the Essays Of Commerce, Of Money, Of the Balance of Trade, Of the Jealousy of Trade are specially noticeable as embodying on many points the essentials of Smith’s criticism of the mercantilists. To a large extent his argument is directed to proving, as against the mercantilists, the relative unimportance of gold and silver in the national economy. Taking any kingdom by itself, “the greater or less plenty of money is of no consequence.” Primarily, money is a method of rating or estimating labour and commodities; if in greater plenty, a greater quantity will be required to represent the same quantity of goods; the consequent change is analogous to the change springing from the adoption of a new method of notation. The increasing quantity of gold and silver can only be favourable to industry in the interval between the acquisition of money and the subsequent rise of prices. The secret of prosperity lies elsewhere: “the want of money can never injure any state within itself; for men and commodities are the real strength of any community.”2

In the essay Of the Balance of Trade, the same ideas are applied to the central doctrine of the mercantilists. The fear that a country may lose its supply of precious metals is a groundless apprehension. “I should as soon dread,” says Hume, “that all our springs and rivers should be exhausted, as that money should abandon a kingdom where there are people and industry.” Assuming a people adequately supplied with industry, they will get the money they require, and he tests this doctrine by two extreme hypotheses. Imagine four-fifths of the country’s money annihilated in one night, what would be the consequence? The price of all labour and of all commodities would at once sink to a mediaeval level. What nation would then dispute with us in any foreign market? Consequently in how short a time would we not get back the money which we had lost? Prices would rise once more to the level prevailing in neighbouring countries, and we should lose the advantage of cheapness of labour and of commodities. Take the converse hypothesis and suppose that our supply of gold and silver had increased five-fold over night. Prices would rise to so exorbitant a height that no neighbouring country could afford to buy from us, and in spite of all laws to the contrary, their commodities “would be run in upon us, and our money flow out.” And the conclusion of the argument is that

“a government has great reason to preserve with care its people and its manufactures. Its money, it may safely trust to the course of human affairs, without fear or jealousy.”

A further consequence is that no nation has any reason to be envious of the prosperity of another; on the contrary, it is only if our neighbours are prosperous that we can expect them to be good customers and so contribute to our own prosperity. If we succeeded in reducing our neighbours to a condition of sloth and ignorance, we should ourselves suffer and should soon fall into the same abject condition. Hume’s protest on this point is characteristic, and has frequently been quoted:

“I shall therefore venture to acknowledge, that, not only as a man, but as a British subject, I pray for the flourishing commerce of Germany, Spain, Italy and even France itself.”3

Of Smith’s immediate predecessors, Hume is the most considerable. He is introduced here, however, not that he may be adequately discussed, but because no account of Smith can claim to be fair or proportioned if it fails to disclose Hume in the background.

Adam Smith

Adam Smith4 (1723-1790), especially for us in this country, occupies so central a place in the history of Political Economy, and has become popularly so much of a legend, that the prudent mariner hesitates to embark on so vast an ocean. Here, if anywhere, discussion in a few pages is bound to be inadequate, for the influence of Smith and the reactions against Smith, extend throughout the whole subsequent history of economic doctrine. There is at least this excuse for the lingering tendency to regard “Adam Smith” and “Political Economy” as terms which mutually exhaust each other. Yet both aspects of the legend are wholly fallacious. Adam Smith was not the founder, the inventor, or the discoverer of Political Economy. That he did so much was entirely due to the fact that so much had been done before him. In no sense was he a pioneer. The mercantilists, doubtless with practical obsessions, had discussed all manner of economic problems. The Physiocrats had jointly come very near to giving a systematic account of the economic process, though they had embellished it with strange frills. Quite apart from Adam Smith it was an age of much economic speculation, and doubtless out of the Physiocrats, David Hume and some others, the enterprising student could reconstruct a large part of The Wealth of Nations. Smith throughout, in short, was discussing problems which had already been the subject of discussion. The other aspect of the legend which assumes that Adam Smith found Political Economy brick (if so far advanced) and left it marble, is equally wide of the mark. The Wealth of Nations, to speak candidly of the achievement of the greatest of Scotsmen, is a work which singularly abounds in obvious defects. Those who, like Say, speak of it as a “vast chaos” may be harsh in their judgment; but it is certainly a disorderly book, in which the sequence of thought is successfully concealed behind lengthy digressions. Moreover, on essential points, Adam Smith, for all his acuteness, is sometimes singularly confused, and on rare occasions—as in the discussion of value—the reader may even suspect that Smith is not clear in his own mind as to which of two subjects he is discussing. In the same way, though this defect is sometimes a merit, he develops in one and the same chapter contradictory lines of thought, so that he hints at alternative doctrines without ever resolving, or apparently even being conscious of, the inherent contradictions. Political Economy, as it left the hands of Adam Smith, was by no means a complete and rounded system of doctrine. Like all the other works of frail man, it has its errors, its gaps, its ambiguities and its bias.

Yet, having said so much to placate the devil, it remains true that Adam Smith’s name is incomparably the greatest in the history of economic thought. Himself a groper, he at least marked out the ground. He looked at things comprehensively, as none of his predecessors had done; and defective as his own arrangement may be, it is nevertheless true that his analysis, refined and made systematic by his followers, has to a large extent furnished the plan according to which all later economic thought has proceeded. Before Adam Smith there had been much economic discussion; with him we reach the stage of discussing economics.

Unfortunately Adam Smith is difficult to apprehend in his totality, for the perverse reason that he is in parts so regrettably well known. Bits of Adam Smith, in isolation, are known even to those who make no profession of economic knowledge. His chapters on division of labour (above all as represented in the manufacture of pins), his discussion of the causes of different rates of remuneration in different employments, his canons of taxation and the more purple passages in his polemic against the mercantilists—these are tit-bits which are not to be escaped even by those who foreswear economic study. But precisely this familiarity with Adam Smith’s teaching on certain specific points makes it more difficult to grasp the sum and substance of his doctrines viewed as a whole, and the nature and extent of his influence on the development of economic doctrine. Instead of discussing airily certain aspects of Adam Smith, this chapter will therefore in the main endeavour to obtain a compendious view of The Wealth of Nations as a whole, so that the more familiar portions may be seen in their proper relationship to the whole structure.

But before attempting to assess his doctrine, a few sentences may be devoted to his more general standpoint. The influences producing Adam Smith were many, and need not detain us here. Something may be allowed to his teacher, Hutcheson, in his emphasis on what is “natural”; something—since all the critics agree and it is therefore the correct thing to say—to Mandeville and his paradoxical contention that private “vices” (private “interests” would be a saner word) may tend to the public good; something may be allowed to his familiar intercourse with the Physiocrats, although it is now certain that the main scheme of his thought was developed before he met the leaders of that school. It is enough that Adam Smith shared with the Physiocrats, and with other aspects of eighteenth century thought, the belief in a natural order. This belief, in Adam Smith’s case, was founded in ideas which were partly philosophical and partly religious. The natural order implied the removal of restrictions of all kinds, and Smith is therefore a passionate (though not a dogmatic or doctrinaire) advocate of liberty. But the removal of restrictions will not, in his view, lead to an economic chaos; on the contrary, only then will the natural order be able to function. In such a natural state the divinely appointed impulse which keeps the machine going is a psychological instinct, in short the interest which each man has in himself and in his own. Herein lies the a priori element in Adam Smith; there is a natural order, appointed by a wise Providence in which self-interest will supply the necessary drive to make the machine go, and will also so act as to produce equilibrium between contending forces. This leads to what is in the main a wholly optimistic view of a world in which a beneficent deity has arranged that progress and harmony shall result from the free-play of instincts which are, frankly, self-centred and self-concerned. But alongside this a priori element, there is another aspect of Adam Smith, in virtue of which he is a hard realist, at times indeed a realist with a dash of cynicism. With whatever philosophic bias Adam Smith approached his problems, his feet were always firmly planted on the ground. He was no amateur in mundane affairs, and consequently his philosophical preconceptions never blind him to the possible expediency of waiving the application of those inferences which would seem to be implicit in his starting point. So also, though Adam Smith is undoubtedly optimistic in his general outlook, he is far from thinking that all’s right with the world when it comes to particular cases.

For the eighteenth century one method of stating the economic problem was to discover and lay bare the source of wealth. The mercantilists, speaking broadly, had attributed the increase of the nation’s wealth to a favourable balance of trade; the Physiocrats had found that all wealth comes from agriculture, and that all other occupations are “unproductive.” Adam Smith’s opening sentence is significant of his whole position: “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.”5 The source of all wealth is thus found in labour, and to this is due the rather misleading practice, current on the Continent, of referring to Smith’s system (or Smithianismus) as the industrial system. It is misleading because Adam Smith in fact wrote before the Industrial Revolution and is therefore in no wise its exponent or apologist, as is sometimes assumed; he is, moreover, much more favourable to agriculture and much more critical of the industrial and commercial interests than is frequently realized. Increase of wealth, on Smith’s initial assumption, will therefore depend on the skill, dexterity and judgment with which labour is applied. It is thus that Smith is led directly in the first chapter of the first book to expound the principle of division of labour. The principle of division of labour is clearly in no sense new. It lay at the root of Plato’s ideal state; Xenophon, as we have seen, knew all about it, and the proverbial wisdom of all nations has rendered homage to the essential part of the doctrine. Yet popular opinion is right in attaching peculiar importance to Smith’s exposition. For here, division of labour is placed in the forefront as the cardinal fact of economic life. The reaction of this on Smith’s doctrine is enormous. The influence of this fundamental conception in two directions may be indicated. In the first place, division of labour postulates exchange later; and in fact Smith, from his starting point, is led at the next stage to consider money and value. It has been said that the weakness of the Physiocrats is that they had no theory of value; Smith’s point of departure inevitably impelled him to a consideration of this problem. In the second place, the emphasis laid on division of labour and its inevitable concomitant, the subsequent exchange of products, led Smith to look on society as a vast concourse of people held together by the exchanges effected between them, and also to regard wealth as increased by anything tending to increase these exchangeable values. Here lies the root of much German criticism of Smith’s thought.

The significance of the opening chapters therefore lies not so much in what Adam Smith says with regard to division of labour as in the central and dominating place which it occupies in his theory. That division of labour leads to increased output; that its advantages spring from increased dexterity, from economy of time, from the encouragement it gives to inventions are not, in themselves, epoch-making discoveries.6 Even the further celebrated dictum, that division of labour is limited by the extent of the market,7 is, properly viewed, little more than a truism; for the extent to which labour can be divided will clearly depend on the amount of work to be done or, otherwise expressed, the extent of the market. His explanation of the effects of division of labour is more satisfactory than his account of the principle which gives occasion to it. It is not, he says, the result of human wisdom, aiming at increased opulence. It springs from a natural tendency to truck or barter, as though the mere act of exchange was in itself one of the joys of life.8 But having made this lapse into the comparatively absurd, Smith at once and more reasonably makes division of labour the expression of man’s continual need for the co-operation and assistance of his fellows. “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.” And the true Smith further adds: “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.” On this view each one, labouring to satisfy the needs of others, secures at the same time that others will supply his wants. Society is held together by exchanges which are prompted by self-interest, and which are founded on division of labour.

Having thus disposed of division of labour in the first three chapters, Smith proceeds, in the fourth, to discuss the origins of money, the need for which he makes one of the consequences of the rise of different occupations among men. “Every man . . . becomes in some measure a merchant,” and therefore, in effect, a currency is required to serve as “the universal instrument of commerce.” Thus emerges the idea of “elative or exchangeable value of goods,” and we arrive at that celebrated, almost notorious, paragraph in which Smith says that value has two different meanings, sometimes expressing the utility of a particular object, and sometimes its power of purchasing other commodities—the former being “value-in-use,” the latter “value-in-exchange.” He correctly notes the paradox of value, citing the instances of water and diamonds to show that a high value in use may be combined with little or no value in exchange, and conversely. Here is the fruitful source of much discussion, above all when the Austrians take the boards. But as for Adam Smith, in the immortal words of Mr. Hubert Phillips,

The wily bird.

Had never heard.

Of marginal utility.

Enough at this stage to note that Smith, having stared “value-in-use” in the face, proceeds to consider value-in-exchange.

The next three chapters, so far as subject matter is concerned, logically develop the conception of exchangeable value thus arrived at. In the first place, Adam Smith is concerned (in chap. 5) to consider what is the “real measure” of this exchangeable value. This is one of the most obscure chapters in Smith, and it is difficult to resist the impression that in Smith’s mind two entirely different questions were confused. At times he seems to be discussing what is the determinant of value; again he seems to be considering what, in this wayward, changeable world, is the best, because the most stable, measure of value. Conceivably the value of my fountain pen may be determined by the amount of labour that went to its making, and if it costs 10s., that may,be because 10s. worth of labour, however calculated, is incorporated in it. That is one question; but witnessing the oscillation in the value of 10s., calculated in 1800, 1890, 1920, to go no further, I may feel that I am not very much further on when I say that my pen is worth 10s. But if to-day a charwoman will work for 5s. a day, I may say that my pen is worth two days’ work of a charwoman. In that case I should be regarding labour as a better measure of the value of my pen than its gold price. To consider what is the determinant of value, and what is the ideal measure of value are indeed two questions, and in the main it is the latter which Smith is after. Without descending into minute points of textual criticism, the main conclusions in this important chapter may be indicated. Perhaps the most fundamental passage is in the opening statement:

“The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.”

In short, the value of anything to a possessor who wants to exchange it, is best measured by the quantity, of labour which its selling price will secure.

But though labour in this sense is the real measure of the exchangeable value of commodities, their value is in general otherwise estimated; from motives of convenience and custom they are in fact estimated in money. But whereas gold and silver vary in value, “equal quantities of labour, at all times and places, may be said to be of equal value to the labourer.” Presumably he means that an aching back to Adam, after his expulsion from the garden of Eden, is equivalent to the aching back of a navvy taking up Regent Street. With one other possible standard Smith toys for a moment. Equal quantities of corn, representing the subsistence of the labourer, will answer the purpose, probably better than any other commodity; and indeed, if we assume a generally operative subsistence law of wages and a uniformity in the requirements of life, this comes to pretty much the same standard as labour. The final conclusion is that “labour, therefore, it appears evidently, is the only universal, as well as the only accurate, measure of value, or the only standard by which we can compare the values of different commodities, at all times, and at all places.” From century to century, corn is a better standard than silver; from year to year, silver is a better measure than corn. The whole discussion is befogging, involving not merely wholly unwarranted assumptions about the stability of the value of labour, but also a semblance of circular reasoning. The important point, however, is that Smith’s conclusion primarily relates to labour regarded as the best measure of value and that, apart from certain ambiguities of expression, the argument is not directed, here at least, to proving that labour is the determinant of value.

In the following chapter (Book I, chap. 6) Smith proceeds to consider the component parts of the price of commodities. In an “early and rude state of society,” before the accumulation of stock (capital) and the appropriation of land, he clearly now makes labour both the determinant and the measure of value. At this stage the whole produce of labour belongs to the labourer; and (a different order of idea) “the quantity of labour commonly employed in acquiring or producing any commodity is the only circumstance which can regulate the quantity of labour which it ought commonly to . . . exchange for.” This, however, is only in the early and rude state of society. When capital accumulates, over and above the price of materials and the wages of the workmen, there must be something for the profits of the undertaker. Although Adam Smith regards the profit of stock as merely wages for a particular form of labour, they are, he contends, regulated on wholly different principles from ordinary wages. At this stage neither does the whole produce belong to labour, nor is labour any longer specifically the determinant of value. Lastly, a third element arises with the appropriation of land. “The landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.” Smith, whose views on rent were never clear, here regards it, it will be observed, as mere extortion. Thus we have the very familiar tripartite division whereby in all prices there is an element of rent, of wages and of profits, corresponding to the great trinity, Land, Labour and Capital.

But how does this work out in practice? The following chapter (No. 7) “Of the Natural and Market Prices of Commodities,” contains Smith’s answers. He postulates (it is largely an assumption) in each society an ordinary or average rate of wages, of profit and of rent. These ordinary or average rates he calls the “natural rates” (a horrible question-begging phrase) at the time and place in which they prevail. Corresponding to this is the “natural price” of a commodity, which is arrived at when it yields the natural rates of wages, profit and rent. In that case the commodity is sold “precisely for what it is worth,” an expression which seems to imply that value is an objective reality, capable of being determined. In short the natural (or shall we say “normal”?) price represents in its essence a “cost-of-production” theory of value. The natural price is in its nature an ideal; opposed to it, is the actual or market price which is arrived at by conditions of demand and supply and the competition among buyers and sellers. As a result of this competition, the natural price will be the central price to which prices will continually gravitate; but in certain exceptional cases the market price may for a long period of time be above the natural price. Of such cases he notes what we should now call quasi-rents, as represented by increased demand where “secrets in manufactures” are for a time successfully kept; cases where conditions of production are limited, but the demand is great, as in the case of wines requiring a peculiar soil and situation, and also the cases of monopoly, where the price is “the highest that can be got.” Such, then, is Smith’s theory of value. In short, the ideal measure of value is labour: at any given moment value is determined by conditions of demand and supply, but under the influence of competition it constantly tends towards the cost of production, apart from exceptional cases where the seller is favourably situated.

Having thus deduced the contributory factors of Labour, Capital and Land, Smith in the remaining chapters of the first book proceeds to consider how the corresponding revenues, that is to say wages, profits and rent, are determined. The eighth chapter, dealing with wages, is an excellent example both of the strength and (if one so chooses) the weakness of Smith. It may be suggested that his arguments lead to no definite conclusion with regard to a tenable theory of wages; on the other hand he suggests many trains of thought, and there are indeed few subsequent theories of wages which cannot appeal for support to some passage in this chapter.

The chapter opens with the doctrine that “the produce of labour constitutes the natural recompense or wages of labour”—a phrase again embodying the unfortunate word “natural.” In the original state of society, Smith says, “the whole produce of labour belongs to the labourer.” Here at the outset, if one cares, is high sanction for the doctrine of the “right to the whole produce of labour,” which distinguishes a large part of nineteenth century Socialist theory. Such a position, however, cannot survive the appropriation of land and the accumulation of capital. Somewhat shifting his ground, Smith next outlines a theory of wages resting on the bargaining strength of employers and workers—in effect demand and supply as applied to labour. Wages depend upon a contract between workmen who desire to get as much, and masters who desire to give as little as possible. Hence there will be a tendency to combine on both sides, but Smith has no doubts on which side the advantage will lie. Masters are few and can combine easily, whereas combinations of workmen are prohibited. Masters can hold out longer. Despite appearances, “masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate.” In every sense the master is in a strong position, while the workmen seldom derive any advantage from their “tumultuous combinations.” Wages, then, depend on a bargain, but all the bargaining strength is on one side. There is, however, a lower limit below which it is impossible to reduce wages for any considerable time. The labourer’s wage must be sufficient to support himself and to enable him to bring up a family, if the race of workmen is to be maintained. Here is foreshadowed the Iron Law of Wages, arrived at as the natural outcome of a bargain in which the pull is all on one side.

Proceeding to consider cases where the labourer has an advantage (as in the “scarcity of hands”), we find ourselves quivering on the brink of the wages fund theory: “The demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined to the payment of wages.” While the fund for the payment of wages is thus dependent on national wealth, it is not the actual greatness of national wealth that is decisive, so far as wages are concerned, but its “continual increase.” It is therefore not necessarily in the richest countries, but in the most thriving, that wages of labour will be highest. Here we seem for a moment to be approaching the later produce theories of wages: “The liberal reward of labour, therefore, as it is the necessary effect, so it is the natural symptom of increasing national wealth.” Contrariwise, in a stationary state wages may be low.

The chapter concludes with an extraordinary anticipation of the essence of Malthusianism in its relation to wages:

“Every species of animal naturally multiplies in proportion to the means of their subsistence, and no species can ever multiply beyond it. But in civilized society, it is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species; and it can do so in no other way than by destroying a great part of the children which their fruitful marriages produce.”

High wages, on Malthusian lines, will increase the number of workers. If there is an increased demand for labour, wages must rise to stimulate the production of workers. Wages, in fact, reflect the demand for labour:

“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.”

This sentence summarizes Malthus with a terseness and incisiveness which Malthus himself might have envied.

In the main, then, Adam Smith’s discussion of wages is interesting because he gropingly anticipates so much of later thought. The doctrine on which he lays most stress is that which makes wages the resultant of the bargaining strength of the two parties to the contract, and the bearing on this of what he calls the progressive, the declining and the stationary state.

In turning, in the ninth chapter, to profits, Smith emphasizes that these also, like wages, depend upon the increasing or declining state of wealth of a country, but the relationship is in the opposite direction. Increase of stock, by leading to competition, will mean a diminution of the rate of profit. An indication of the rate of profit is to be found in the current rate of interest, inasmuch as a high rate of interest betokens that a profitable use can be made of capital. The general theory thus presupposes that wages and profits will move in opposite directions, not because of the exploitation of labour by capital, but because the increasing abundance of capital, on which high wages depend, leads likewise to capital commanding a lower reward. To this general tendency there are two exceptions: in new colonies, wages and profits may be high simultaneously, and in a stationary state, in a country with its full complement of riches, both may be low.

So much for wages and profits in general. What, however, will determine their variations as between different employments? This, so far as wages are concerned, leads to one of the most hackneyed passages in Smith (chap. 10). Broadly, wages will vary in employments, according to their agreeableness, the ease in learning them, the constancy of employment they offer, the trust imposed, and the probability of success. His treatment of this question is apparently one of those things which.age cannot wither, however much custom may stale its finite variety. His observations throughout are just and pertinent; but as a general criticism, it may be suggested that Smith’s explanations only account for wage-differences in employments between which labour is easily transferable. He overlooks the fact that the reservoir of labour is not one, but rather that labour consists of many groups which are isolated from each other. Smith’s five causes rather inadequately explain the difference in remuneration between a fashionable doctor and an unskilled navvy, between a Hollywood star and a professor of Political Economy. Of these five causes of variation, it should be added that Smith regards two only as applicable to profits, viz., the agreeableness or disagreeableness of the business and the risk involved. Moreover, agreeableness affects the employers far less than the worker. Therefore, on general grounds Smith infers that rates of profit will vary less than rates of wages. On the general treatment of profits, it is noteworthy that for Smith, profit is equivalent to the total return to capital, and that therefore interest is merely a constituent element in profits. Otherwise expressed, there is no systematic analysis of gross profits or net profits.

Lastly, there is Rent (chap. 11), with regard to which Smith remains amphibious. His main statement tends to look upon rent as mere extortion. It is “naturally the highest which the tenant can afford to pay in the actual circumstances of the land.” What is left over “is evidently the smallest share with which the tenant can content himself, without being a loser, and the landlord seldom means to leave him more.” So far from rent representing a reasonable profit on money sunk in improvements, the landlord, he goes on, demands a rent even for unimproved land. Ricardo, later, boggling at the “even,” would say that this alone was rent. The rent of land is therefore “naturally a monopoly price.” Conjointly, with this, there is, curiously, the purely Physiocratic doctrine that rent springs from the bounty and generosity of Nature:

“Land, in almost any situation, produces a greater quantity of food than what is sufficient to maintain all the labour necessary for bringing it to market, in the most liberal way in which that labour is ever maintained. . . . Something, therefore, always remains for a rent to the landlord.”

With all its confused thought, this is precisely the Physiocratic view. Here there is no Ricardian finesse, no subtle juggling with land at the margin.

For a conspectus of the economic views of Adam Smith, the second book dealing with “the nature, accumulation, and employment of Stock” (i.e., capital) is of less importance than the first, but here also there are points which reveal the essential Smith. His analysis of the meaning of capital and his account of fixed and circulating capital need not detain us, but his discussion of the accumulation of capital and the distinction between productive and unproductive labour have been the occasion of so much criticism on the part of those writers who are unsympathetic to Smithianismus that these points ought not to be passed over in silence.

The distinction between productive and unproductive labour, as has been seen, was an evil legacy of the Physiocrats; but with Smith the words have a new meaning. Productive labour is now that labour which adds value to the material worked upon; unproductive labour is labour which, however useful, results in no increase of value. In Smith’s vigorous language, “the labour of the manufacturer fixes and realizes itself in some particular subject or vendible commodity, which lasts for some time at least after that labour is past.”9 It has therefore been productive. On the other hand, the services of a menial servant, taking him as an example of unproductive labour, “generally perish in the very instant of their performance”—and forthwith into this galley, along with the menial servant, goes the sovereign, accompanied by all the army, the navy and the civil service, followed by churchmen, lawyers, buffoons and opera dancers. All these—and it is a hard saying—render services which perish in the very instant of their performance.

But do they? the ordinary man asks. Adam Smith’s test of productive labour is that the labour should realize itself in a “vendible commodity”—or result in a higher vendibility. On this, as much as anything, is based the charge of materialism which the German idealist school brings against Smith. His view of wealth, it is said in criticism, is that it consists of things that can be and are brought to the market and sold; and consequently that an increase of wealth occurs whenever there is an increase of exchange values. The whole controversy with regard to productive and unproductive labour strikes us nowadays as rather futile—a fertile field for suggesting insoluble conundrums which are sometimes not unamusing. Two things only need be said: firstly, there may be all manner of occupations which are unproductive in the Smithian sense, but yet indirectly are of the highest productivity. The doctor who saves the life of a worker should be allowed some share in the worker’s later productivity,10and a nation whose existence has been saved by an army of mercenaries, ought not, in writing their epitaph, to record that their services perished in the instant of their performance. Secondly, precisely the same services may or may not result in an increase of exchangeable values. The pastry-cook who produces a pie and sets it in the shop window, may pride himself on the productive labour which he has fixed in a vendible commodity; but what of the cook-general, a menial servant, whose pie perishes in the instant of its production ?

The other point in the same chapter which is preeminently characteristic of Smith is his emphasis on parsimony as the basis of accumulation, not merely of private wealth, but also of the wealth of the State. To parsimony, indeed, rather than to industry, the increase of capital must be attributed. Though unacceptable later to Lauderdale, this paean, admirably adapted to further the Savings Movement, is on reasonably orthodox lines. Every prodigal is a public enemy, and every frugal man is a benefactor; and reasons for this faith are vigorously annexed. What is important in Smith’s exposition is, however, the manner in which he links this up with his fundamental principle of self-interest, which is, by its impulse to economy, a power capable of saving the State, the errors of government notwithstanding:

“This frugality and good conduct, however, is, upon most occasions, it appears from experience, sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extravagance ol government. 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 towards 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.”

Here self-interest becomes the very life force of society, saving the State in spite of itself.11

The last chapter in the second book (chap. 5) deals with the various ways in which capital may be employed, and their relative advantages from the point of view of giving encouragement and support to productive labour. Smith’s argument is remarkable, firstly, for the notable infusion of Physiocratic doctrine, of which Smith was never able wholly to rid himself, and secondly, for its enunciation of laissez-faire doctrine, more fully elaborated at a later stage. The problem is to determine in what order the various possible employments of capital should be ranked, having regard to their comparative advantage-ousness to society. At the head Smith places agriculture: “No equal capital puts into motion a greater quantity of productive labour than that of the farmer.” But the reasons he assigns are almost exclusively Physiocratic in character, based on the assumption that in agriculture, Nature is herself an active co-operating agency:

“Not only his labouring servants, but his labouring cattle, are productive labourers. In agriculture, too, Nature labours along with man; and though her labour costs no expense, its produce has its value, as well as that of the most expensive workmen.”

Nature herself, in short, produces something which has a value; it is Turgot’s “pure gift” over again. After agriculture, Smith places manufacturers, and in the third place the “trade of exportation.” Smith here is at one with the Physiocratic reversal of the mercantilist scale of values. So far as concerns trade, the home trade, from the point of view of employment, is preferable to the foreign trade of consumption, and that again is preferable to the carrying trade. But natural forces “without any constraint or violence” should determine the distribution of capital between the different employments:

“The great object of the political economy of every country is to increase the riches and power of that country. It ought, therefore, to give no preference nor superior encouragement to the foreign trade of consumption above the home trade, nor to the carrying trade above either of the other two. It ought neither to force nor to allure into either of those two channels a greater share of the capital of the country than what would naturally flow into them of its own accord.”

Thus does Adam Smith, the great apostle of laissez-faire, deploy his forces for the grand argument in the fourth book.

The fourth book, designated “Of Systems of Political Economy,” is devoted largely to a criticism of the mercantilists, and to a smaller extent of the Physiocrats; and it is here, as against the mercantilists, that the full argument for Free Trade and against Protection is developed. Adam Smith’s statement of the mercantilist position, crudely that “wealth consists in money, or in gold and silver,” is not wholly above reproach, but we are here concerned with the development of his own views rather than with his representation of the views of others. With becoming brevity, his view may be taken to be that gold and silver are commodities on the same footing as any others, and that the natural course of trade will bring to any country the gold and silver it requires:

“A country that has wherewithal to buy wine will always get the wine it has occasion for; and a country that has wherewithal to buy gold and silver will never be in want of these metals. They are to be bought for a certain price, like all other commodities; and as they are the price of all other commodities, so all other commodities are the price of these metals.”12

The freedom of trade that brings us the wines we require can be relied on to bring us the gold and silver we require. Moreover, on account of their small bulk and great value, no commodities regulate themselves more easily or perfectly to the effective demand for them than do the precious metals.

Not only so, but on lines familiar to modern monetary theory, Smith argues that it is a futile proceeding to endeavour to restrain gold and silver from leaving the country, if the natural course of trade would lead to their withdrawal. “All the sanguinary laws of Spain and Portugal” cannot prevent the exportation of gold and silver from these countries if, owing to excess of the metals there, they should fall in value below what they command elsewhere. This is merely the familiar point already encountered in Hume, that excess of gold will result in high prices which, by making the country a good country to sell to and a bad country to buy in, will re|sult in a drain of gold until equilibrium and stability ate again established. Gold and silver are, indeed, less essential than other commodities. “If provisions are waited, the people must starve”; but there are expedients, as in a paper currency, for getting along without gold and silver. It is only a small part of a nation’s produce that is required for purchasing gold and silver from neighbouring countries; the greater part is circulated and consumed at home; even of that which is sent abroad, the greater part is destined for the purchase of foreign goods. All this could go on without the mercantilist itch for gold. The whole of Smith’s argument thus tends to look upon gold not merely as a commodity stripped of mystic qualities, but as a commodity which is really subservient to other commodities, and therefore less important:

“Goods can serve many other purposes besides purchasing money, but money can serve no other purpose besides purchasing goods. Money therefore necessarily runs after goods, but goods do not always or necessarily run after money.”13

“Look after trade, and the gold will look after itself,” is, in effect, the sum of Smith’s teaching on this point. Claims that gold is a more durable form of wealth rest on a misconception. Hardware is more durable than wine, but we do not therefore heap up hardware “to the incredible multiplication of the pots and pans of the country.” The number of pots and pans which it is expedient a country should possess is limited by the use there is for these utensils, and in the same manner the use there is for the precious metals sets a limit to the quantity of these which any country may wisely or profitably possess. Increase the use of gold and silver, “and you will infallibly increase the quantity”; if you artificially increase the quantity beyond the use there is for them, nothing will prevent the metals from going elsewhere.

If foreign trade does not exist for the purpose of acquiring gold and silver, wherein lie its advantages? Adam Smith replies that it brings two distinct benefits. It carries out surplus produce, and it brings back something for which there is a demand. More significantly for Smith’s general standpoint, as a result of foreign trade “the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection.” Foreign trade is, in fact, for Adam Smith, merely an extension of domestic trade. It extends division of labour; it increases specialization; it multiplies exchanges.

So much for Smith’s general criticism of mercantile assumptions. It is difficult to resist the impression that he somewhat overstates his case in arguing that gold is a commodity exactly like any other. Originally it doubtless was; but when one commodity, for whatever cause and whatever it may be, becomes the universally accepted medium of exchange, it attaches to itself qualities which it did not possess before its elevation to the rank of money; and henceforth it is bound to be a commodity somewhat different from all others. The fact that gold is universally acceptable, that it is consequently wealth which can be potentially applied in any direction, sufficiently distinguishes this utensil from Adam Smith’s pots and pans.

Smith next proceeds to consider the various expedients whereby the mercantilists had sought to secure a favourable balance of trade. His most instructive and illuminating chapters are those which relate to restraints upon imports. Of such restraints he distinguishes two kinds, the first being restraints upon the importation of such commodities as might be made at home, irrespective of the country they come from; while the second class is represented by the more mercantilist idea of restraints on all goods which happen to come from countries with which the balance of trade is unfavourable. The first is the typically straightforward protective duty, aiming at giving a monopoly to the home producer. Such a protective duty, Adam Smith admits, may give encouragement to any particular industry to which it is applied, and may direct labour and capital in that direction; but as industry is limited by capital, such a regulation cannot increase the quantity of industry in any country beyond what the capital will maintain. A protective tariff will therefore merely divert industry from one trade to another.14

Moreover, Adam Smith argues, it will divert it from a more advantageous to a less advantageous channel. And this for two reasons. Firstly, from motives largely of security, the merchant will prefer to put his money in the home trade rather than in the foreign trade of consumption, and in the foreign trade of consumption rather than in the carrying trade. But that is the order in which the possible uses of capital are to be arranged, viewing them from the point of view of their advantageousness to the country. The second reason is more fundamental, and leads to the core of Smith’s doctrine. Every individual is aiming at a profit, and therefore uses his capital where the produce is likely to be of the greatest value. But the annual revenue of society is the sum total of all that is produced. Therefore each individual, pursuing his own ends, is unconsciously helping to increase the wealth of the whole:

“He generally, indeed, neither intends to promote the public interest nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Such is the invisible hand whose intervention miraculously harmonizes the pursuit of gain with the promotion of the public good—the quasi-religious sanction of laissez-faire. Moreover, in the pursuit of his own interests, each one is a reasonably competent judge; certainly, knowing the local circumstances, he is a better judge than any Government. It is a “most unnecessary attention” on the part of a statesman to direct private people how they shall apply their capital, and this is what is done when, by restraints placed on imports, trade and industry are diverted into channels which they would not have taken of their own accord. Protective tariffs are, in short, either useless or hurtful—useless, if without them the home product is as cheap as the foreign; hurtful, if it prevents people buying in the cheapest market:

“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”15

Such, in somewhat condensed form, is the substance of Adam Smith’s argument for Free Trade. Fortunately it is not necessary here to try the great issue; but, without in any way impugning or even considering the case for Free Trade, it is worth noting how essentially Adam Smith’s argument is based on the ideas and the circumstances of his time. The basic arguments are two: firstly, that there is a natural order in which men direct their capital and their enterprise, and that this natural order follows a descending grade of advan-tageousness from the country’s point of view. This corresponds to the conditions of the time when capital was relatively immobile, and when men were timorous of letting it out of their sight. “Home is, in this manner, the centre,” says Adam Smith, “round which the capitals of the inhabitants of every country are continually circulating.” With the development of foreign investment and the internationalization of finance and enterprise, no one would say this to-day. The second main argument is that of the invisible hand, the divinity which shapes our selfish ends to public purposes. Frankly, we do not believe it; rather have we learned that the interests and the prosperity of the individual may be in conflict with the well-being of the community, that no such simple process of mathematical integration as Smith suggests is permissible. If so, there must be a restraining power, and the restraining power can be vested nowhere but in the State itself. We have thus lost faith in the fundamental assumptions of laissez-faire, and Adam Smith’s observations on the “folly and presumption” of Government intervention, the outcome of many irritating restrictions on trade, do not awake the ready response that once they did. Yet Adam Smith was far from being the doctrinaire free-trader of the type which a later generation produced. He notes two cases where some burden should be placed upon foreign, for the encouragement of domestic, industry; and two others where the matter is, as he says, one for deliberation. Two of these at least are such that Adam Smith’s authority may be, and has been, invoked in support of fairly wide departures from Free Trade policy. The first definite exception is “when some particular sort of industry is necessary for the defence of the country.” Defence is of more importance than opulence, in Smith’s famous dictum; and Smith, an ardent patriot in spite of cosmopolitan tendencies, approves of the Navigation Act on this ground. In these days, when in the event of war the whole nation and all its resources are pitted against the enemy, it is obvious that this exception, if admitted, will claim a wider application than in Smith’s time.

The second definite exception is of little importance in these days: it relates to the imposition of an import duty where a tax of the nature of an excise duty is already imposed on the domestic production of a commodity. This merely equalizes the conditions as between the home and the foreign goods, and it is therefore merely a step towards equality of treatment. The first of the two matters of deliberation relates to the vexed question of retaliation, where high duties are imposed by a foreign country, and where the object of introducing duties is to persuade the foreigner to remove his. Of such duties, Smith gives a vague approval, if they are likely to succeed; but whether or not they are in any case likely to succeed he refers to that “insidious and crafty animal vulgarly called a statesman or politician.” The fourth of the exceptions (the second of the cases for deliberation) relates to how far and in what manner it is proper to restore Free Trade when it has been lost. The argument is not without interest in modern, times. Smith realizes that the sudden introduction of Free Trade may result in wide unemployment in industries suddenly exposed to foreign competition, and he adds that “humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection.” Smith’s willingness, in the interests of humanity, to postpone the restoration of Free Trade in order to prevent the emergence of unemployment, is of some interest in an age deafened with pleas for protection to cure existing unemployment.

From Adam Smith’s criticism of the second class of restraints on imports (restraints on all goods from countries with which the balance of trade is unfavourable16) two points of general interest emerge. Firstly, as against the mercantilist tendency to consider that the interest of each nation consisted in beggaring its neighbours, he emphatically asserts the common interests of all nations in these matters. It is a point familiar alike to the Physiocrats and to David Hume. A trade carried on “without force or restraint” is advantageous to both parties; and, whatever may be the case during war, it is in peace to the advantage of every nation to be surrounded by wealthy and prosperous nations. “As a rich man is likely to be a better customer to the industrious people in his neighbourhood than a poor, so is likewise a rich nation.” The second point is his adumbration, as against the balance of trade, of another and more important balance, the balance of the annual produce and consumption. This is the real test of prosperity, and it may exist in a country without foreign trade, cut off from all other nations, just as it may exist in the world viewed as a whole. A country may enjoy a balance of produce over consumption when its balance of trade, estimated on mercantilist lines, is unfavourable. But Adam Smith does little more than hint at this idea without developing it.

The criticism of the Physiocratic system (entitled “Of the Agricultural Systems”) which follows the campaign against the mercantilists is a shorter encounter. Its chief interest perhaps lies in the revelation of the extent to which Smith remained, unconsciously and despite his protestations, in the Physiocratic line of thought. In criticizing the Physiocratic use of the words “productive” and “unproductive” he says, and with evident truth:

“We should not call a marriage barren or unproductive, though it produced only a son and a daughter, to replace the father and the mother, and though it did not increase the number of the human species, but only continued it as it was before.”17

True, but the Physiocrats, and not merely the Physiocrats, would say that such a marriage was not ultimately productive of an increased population, which is the essential Physiocratic point. And even more emphatically of the Physiocratic train of thought is a subsequent sentence:

“As a marriage which affords three children is certainly more productive than one which affords only two, so the labour of farmers and country labourers is certainly more productive than that of merchants, artificers, and manufacturers. The superior produce of the one class, however, does not render the other barren or unproductive.”

In admitting the greater productivity of agriculture, Adam Smith accepts the essence of Physiocracy. As Mr. Gonnard has well put it, Smith, in protesting against the word, accepts the idea.18

Other points, and these by no means the least interesting for a comprehension of the complete Adam Smith, must here be passed over. In particular there is his scheme of Imperial Federation, a by-product of his criticism of the mercantilist colonial policy; there is his discussion of the principles of taxation which has lived on in so many text-books; there is his chapter on the expenses of the Sovereign, from which inferentially may be deduced his views on the functions of Government, and the exceptions (again considerable) which he would allow to the general principle of non-intervention. But enough, it is hoped, has been said to indicate the main features of Adam Smith’s system of thought viewed as a whole, and his commanding place in the development of economic doctrine. For undoubtedly he is not merely the central and greatest figure in the development of Political Economy as a separate branch of study, his influence, both in thought and practice, has been greater than that of any other economist. His great merit lay in presenting an interpretation of life which, up to a point, corresponded, and still corresponds, with the facts of the case. He saw society on its economic side working automatically through competition and self-interest, the whole being knit together by division of labour and the multiplex process of exchange resulting therefrom. The efficiency of this self-adjusting machinery was such that all he demanded was liberty for its fuller and better functioning. Much of this, it is true, is a priori in its character, but the Adam Smith who took refuge in the shadow of an invisible hand is constantly corrected by another Adam Smith, a hard-headed, shrewd, far-seeing, somewhat cynically wise and slightly sceptical Scot, such as every village on the eastern sea-board of Scotland produces in large numbers, though few may attain to the eminence of the most eminent son of Kirkcaldy.

The Adam Smith of the large unproved assumption is indeed admirably balanced by that other Adam Smith who knew so much about his fellow-men that he is never surprised into anything more than a biting phrase which is almost kindly even when it cuts. Smith, perhaps for the same reason, is full of contradictions; putting it more generously, he is many-sided. A cosmopolitan, if ever there was one, no one was ever more patriotic; the supreme exponent of laissez-faire and of the ultimate beneficence of the individualistic and self-centred instincts, he is under no illusions regarding the consequences of unrestrained selfishness. The oracle of Free Trade from his own to the present day, he has furnished the Protectionist Party with the motto which, if it were wise, it would inscribe on its banner. That Smith contains something for all men and for all causes, is the supreme proof that he was a giant compared to all who stand around him.

Yet Smith has not escaped criticism, and to one school of thought he has apparently continually acted as an irritant. Smith’s feet were so firmly planted on the ground that those whose heads are lost in the clouds have never realized how secure his footing was. The idealist school and those whose patriotism is barbed with enmity for others, have been uniformly unkind to Adam Smith. Hildebrand, List, Muller, and in our own day Spann, represent a well-defined line of criticism. It may be as well to note wherein hostile criticism suggests that the weakness of Adam Smith lies.

Firstly, it is suggested that his view of wealth is too narrow. His starting point, it has been seen, leads to the idea of exchangeable value, and he therefore identifies wealth with exchangeable value. His theory, therefore, merely relates to the “formal laws of value and of price”19 and consequently the wider aspects of national welfare elude him. Here, as in most of these points, Smith is his own best corrective, and a perusal of The Wealth of Nations in its totality will rectify any erroneous impressions based on particular passages.

Secondly, there is the charge of excessive individualism, that he is, in the German phrase “atomistisch,” viewing society as a vast crowd of individuals, unrelated except by the interaction on each other of their self-interested motives; consequently, that he misses the significance of the State in which, on one view of politics, the individual alone attains true significance. That Smith is not one of those who regard the State as a Holy Leviathan may be frankly admitted; that he did not recognize the need for the protective functions of the State can hardly be a charge against one who, in fact, wrote before the Industrial Revolution, since the modern idea of the State as a protective agency is largely the result of conditions which became apparent after Adam Smith’s day.

Thirdly, the critics have found in Smith a certain materialism, an absence of idealism. Partly this is an extension of the first point mentioned above, the limitation of wealth to things that can be bought and sold. But partly also the criticism goes beyond this, and suggests that Smith does not approach questions relating to the right consumption of wealth or the higher ends and uses of wealth. Superficially again, there may be some substance in the criticism, especially if based on isolated passages; in fact Smith’s treatment has a comprehensiveness whioh will be sought for in vain in most of his successors. So far as there is any foundation in the criticism, two answers may be suggested. Firstly, deliberately and of intention, The Wealth of Nations is only a half of Smith; designedly it embodies his thought on the economic and material side of life alone. And secondly, like all (or most) Scots, Adam Smith did not easily wear his soul on his sleeve, and was rather tongue-tied in the presence of the lofty theme. The true Scot shrinks from speaking of the ideal, fearing lest he may thereby look silly.

And so we take leave of Adam Smith.

 

________________

20 Born in Edinburgh in 1711. In the main a student, with visits to the Continent as a tutor after the manner of the times. Later (1752) Librarian to the Faculty of Advocates, Edinburgh.

21 Of Money.

22 Of the Jealousy of Trade.

23 Born at Kirkcaldy, 1723. Educated at Glasgow and Oxford. Professor of Logic and later of Moral Philosophy in Glasgow, 1751-1763. Thereafter travelling tutor to the Duke of Buccleuch. Returned to Kirkcaldy 1767. Wealth of Nations published 1776. Commissioner of Customs in Edinburgh from 1778 until his death in 1790 On the philosophic side of his activities, wrote The Theory of Moral Sentiments.

24 The Wealth of Nations, Introduction and plan.

25 Ibid., Book I, chap. 1.

26 Ibid., Book I, chap. 3.

27 Ibid., Book I, chap. 2.

28 The Wealth of Nations, Book II, chap. 3.

29 As Mill, later, realized; but it only led him deeper into the bog.

30 Another passage in the same chapter lays even greater stress on the permanent pervasive influence of self-interest, though without linking it up with the public benefits flowing therefrom: “But 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. In the whole interval which separates these two moments, there is scarce perhaps a single instance, in which any man is so perfectly and completely satisfied with his situation, as to be without any wish of alteration or improvement of any kind. An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition,” etc. etc.

31 Ibid., Book IV, chap. 1.

32 Ibid., Book IV, chap. 1.

33 Ibid., Book IV, chap. 2.

34 Ibid., Book IV, chap. 2.

35 Ibid., Book IV, chap. 3.

36 Ibid., Book IV, chap. 9.

37 Gonnard, Histoire des Doctrines Économiques, Vol. II, p. 211.

38 See Spann in the translation now available under the title Types of Economic Theory.

• 1The Republic, Jowett’s translation, p. 49.
• 2Ibid., Book III, p. 106.
• 3The Republic, Jowett’s translation, p. 154.
• 4The Laws, Jowett’s translation, p. 121.
• 5Ibid., p. 230.
• 6Politics, Book II, chap. 3, Welldon’s translation, p. 43.
• 7Beer, Social Struggles in Antiquity, p. 97.
• 8Ibid., p. 124.
• 9Ibid., Book II, chap. 5, p. 49.
• 10Ibid., Book I, chap. 6, Welldon, p. 13.
• 11Ibid., Book I, chap. 9.
• 12Ethics, Book V, chap. 5, Welldon’s translation, p. 149.
• 13Politics, Book III, chap. 5, Welldon, p. 113.
• 14Loeb translation, pp. 367, 409.
• 15Printed in Laistner, Greek Economics.
• 16“For just as all other arts are developed to superior excellence in large cities, in that same way the food at the king’s palace is also elaborately prepared with superior excellence. For in small towns the same workman makes chairs and doors and ploughs and tables, and often this same artisan builds houses, and even so he is thankful if he can only find employment to support him. And it is, of course, impossible for a man of many trades to be proficient in all of them. In large cities, on the other hand, inasmuch as many people have demands to make upon each branch of industry, one trade alone, and very often even less than a whole trade, is enough to support a man: one man, for instance, makes shoes for men, and another for women; and there are places even where one man earns a living by only stitching shoes, another by cutting them out, another by sewing the uppers together, while there is another who performs none of these operations but only assembles the parts. It follows, therefore, as a matter of course, that he who devotes himself to a very specialized line of work is bound to do it in the best possible manner. Exactly the same thing holds true in reference to the kitchen; in any establishment where one and the same man arranges the dining couches, lays the table, bakes the bread, prepares now one sort of dish and now another, he must necessarily have things go as they may; but where it is all one man can do to stew meats and another to roast them, for one man to boil fish and another to bake them, for another to bake bread and not every sort at that, but where it suffices if he makes one kind that has a high reputation—everything that is prepared in such a kitchen will, I think, necessarily be worked out with superior excellence.” (Cyropœdia, Book VIII, ii, 5-6; Loeb translation, PP- 333-335.)
• 17Laistner, op. cit., p. 41.
• 18“Now in regard to trades and other means of livelihood, which ones are to be considered becoming to a gentleman and which ones are vulgar, we have been taught, in general, as follows: First, those means of livelihood are rejected as undesirable which incur people’s ill-will, as those of tax-gatherers and usurers. Unbecoming to a gentleman, too, and vulgar, are the means of livelihood of all hired workmen whom we pay for mere manual labour, not for artistic skill; for in their case the very wages they receive is a pledge of their slavery. Vulgar we must consider those also who buy from wholesale merchants to retail immediately; for they would get no profits without a great deal of downright lying; and verily there is no action that is meaner than misrepresentation. And all mechanics are engaged in vulgar trades; for no workshop can have anything liberal about it. Least respectable of all are those trades which cater to sensual pleasures:
• 19“Et cum ille, qui quæsierat, dixisset: ‘ Quid fænerari? ’, turn Cato: ‘ Quid hominem,’ inquit, ‘ occidere’” (De Officiis, Book II, xxv; Loeb, p. 266.)
• 20So far as economic theory is concerned, it is in Plato that Greek thought advances beyond the level of such wise saws as may be extracted from Hesiod and others, and arrives at some consecutiveness. Yet Plato is the supreme example of the classical tendency to regard economics as a minor subsection of ethics and politics. It is above all in The Republic, and to a lesser extent in The Laws, where he indulges in “an old man’s game,” that Plato turns to economic questions. The former is primarily a discussion on Justice, and it is because the essential nature of Justice may perhaps be most easily discerned in the State—since for the short-sighted the larger letters may be more easily read—that the disputants turn aside in the second book to discuss the State and its origin, and are thus led to construct from the foundation an ideal polity. It is noticeable that the origin of the State is attributed wholly to economic considerations: “A state arises out of the needs of mankind; no one is self-sufficing, but all of us have many wants,” and moreover, Plato indicates that no other origin of a state can be imagined. This line of argument, after a consideration of the essential needs of mankind, leads to Plato’s discussion of division of labour, which has so often been compared with the famous chapter in Adam Smith. The essential needs of mankind are food, dwelling and clothing, so that the barest notion of a state must include four or five men—a husbandman, a builder, a weaver, and perhaps a shoemaker or a representative of some other similar occupation. Each of these is, moreover, to confine himself to his own calling. The governing considerations in the application of the principle of division of labour, as conceived by Plato, are then, firstly, that there are “diversities of natures among us which are adapted to different occupations,” and secondly, and as a consequence of this, that “all things are produced more plentifully and easily, and of a better quality, when one man does one thing which is natural to him and does it at the right time, and leaves other things.” It is in order that this principle may be satisfied that Plato then extends his State to include a considerable diversity of other crafts—sailors, traders, retailers and others.
• 21Thus we arrive at the guardians, who practise an art which is not to be combined with any other occupation, since one man cannot practise many arts with success. The guardians require careful selection; likewise very careful education. They must combine apparently contradictory qualities, inasmuch as they must be dangerous to their enemies and gentle to their friends. We are not here concerned with the lengthy discussion of the education of the guardians, nor with the subsequent distinction between “guardians in the fullest sense” (the real rulers) and the auxiliaries, but the words in which communism is enacted are of importance in specifying both the scope and the purpose of the communism prescribed. The guardians are to look round for a spot where they can best suppress insurrections within and defend the State from enemies without, and they are to encamp there. Further, in order to ward off the danger that they may become enemies instead of friends of the citizens, their whole mode of life is to be such that they will not be tempted to prey upon the other citizens. Consequently they are devoted to an ascetic method of life; they are to have no property beyond what is necessary; they are to receive a fixed rate of pay, sufficient to meet expenses and no more: “Should they ever acquire homes or lands or moneys of their own, they will become housekeepers and husbandmen instead of guardians, enemies and tyrants instead of allies of the other citizens.”
• 22Then secondly, as to the purpose of the guardians’ communism, it is noticeable that Plato in his motives is poles asunder from other communistic dreamers. Elsewhere the cry for communism arises from an aggrieved sense of the injustice and monstrous inequality of the world. It is not so in Plato. For his guardians, communism is an act of ascetic renunciation; it is the condition on which alone they can efficiently discharge their duties. The work they have to do is so important that they may only do it properly on condition that they remain free of the snares and the entanglements of this world. In its motive therefore it is akin to the celibacy of the Roman Catholic priesthood. The object of Plato’s communism is in no way to establish a right to equal enjoyment; rather it is a part of the price that must be paid by a class on whom special responsibilities have been imposed. An interesting, if trivial sidelight, illustrative of the fact that the whole arrangements with regard to the guardians are designed to free them from the ordinary troubles of life, is furnished by the provision that when a woman guardian has a child, the process of suckling shall not be protracted too long: “the mothers will have no getting up at night or other trouble, but will hand over all this sort of thing to the nurses and attendants.”
• 23A slight glance at The Laws, as supplementing the teaching of The Republic, is almost essential. The Laws is the work of an old man whose fire is spent, and some have found in it the marks of the disillusionment of age. Yet here Plato still clings to the old ideal: “The first and highest form of the State and of the Government and of the Law is that in which there prevails most widely the ancient saying that ‘Friends have all things in common.’” But that is rather a State for gods and the sons of gods, and therefore he now outlines the State which “when created, will be nearest to immortality and the only one which takes the second place.”Such a state comprises 5,040 lots, since the city must not be too large and the citizens should be known to each other, and this figure is administratively convenient, as it is divisible by all numbers up to ten. There is no longer any question of communism, since “community of goods goes beyond their proposed origin, and nurture, and education.” The regulations throughout are to aim at a middle and contented condition of life, based on the doctrine that poverty is to be regarded as the increase of a man’s desires and not the diminution of his property. No one is to possess gold or silver except as coin for daily use, and the currency of the country is to be peculiar to it and not acceptable abroad. Inequality of condition cannot be avoided; but undue disparity, arising from extreme poverty or excessive wealth, is to be guarded against. For this purpose the population is to be divided into four classes, the limit of poverty being one lot which is to be guarded unimpaired, while the maximum possession is to be the equivalent of four lots, the surplus to be surrendered to the State. No money is to be lent at interest, and, more startling, there is to be no obligation to repay even the capital, a provision explicable on the ground that this is to be a society of half-brothers, if not of brothers, and that there is a definite restriction imposed on the amount of permissible wealth.
• 24Among other points it is perhaps worthy of mention that the second best State is to enjoy free trade and complete immunity from import and export duties, subject only to the importation of unnecessary luxuries and the exportation of what is wanted in the country being prohibited. Retail trade is forbidden, and there is also a curious desire to preserve the virtues and the purity of the city by removing it to a safe distance from the sea, for “the sea is pleasant enough as a daily companion, but has indeed also a bitter and brackish quality; filling the streets with merchants and shopkeepers, and begetting in the souls of men uncertain and unfaithful ways.” But into the rather wearisome details of the State contemplated in The Laws, it is unnecessary here to enter.
• 25When we turn to Aristotle, we are confronted with a writer who, by his analytical frame of mind, went further than any other thinker in antiquity in the direction of detaching a separate science of economics. This is not the place to consider his political theories, but his starting point that man is by nature a political animal enthroned for him the science of politics, so that ethics and economics alike were viewed by him from a political angle. Two points are of peculiar interest to the economist. The first is his destructive criticism of Plato’s communism in the second book of the Politics, and the other is his analysis of the household, leading to a discussion of the economic bases of society. On the former point, with the arguments of all the ages ringing in our ears, Aristotle’s contentions may appear hackneyed. What he says about the snares inherent in community of wives need not detain us; it never has been, and is not now (it may be hoped) an urgent question. But his arguments on the general question of community of property might date from the present year of grace. It is still true that “people pay most attention to their own private property and less to that in which they have but a part interest”—as witness the carved hieroglyphics on the seats in any public park contrasted with the reverence paid to the domestic Chesterfield.
• 26Firstly, as to the scope of Plato’s communism, it is clear from the whole argument that it is prescribed only for the limited class of the guardians, who are indeed throughout to live a semi-military life. It is, in fact, the communism of the camp. The contrary view has been argued along lines which need not here be indicated, and one authority has contended that “a superficial reading of The Republic gives the impression . . . that Plato recommends communism solely for these upper sections.” It is almost sufficient to note that Aristotle himself is one of these superficial readers; it is entirely sufficient that Plato expressly describes the regulations as “appointed by us for the guardians,” and even more conclusive is his statement that if the guardians depart from their communistic life, they will become housekeepers and husbandmen.
• 27A slight glance at The Laws, as supplementing the teaching of The Republic, is almost essential. The Laws is the work of an old man whose fire is spent, and some have found in it the marks of the disillusionment of age. Yet here Plato still clings to the old ideal: “The first and highest form of the State and of the Government and of the Law is that in which there prevails most widely the ancient saying that ‘Friends have all things in common.’” But that is rather a State for gods and the sons of gods, and therefore he now outlines the State which “when created, will be nearest to immortality and the only one which takes the second place.”Such a state comprises 5,040 lots, since the city must not be too large and the citizens should be known to each other, and this figure is administratively convenient, as it is divisible by all numbers up to ten. There is no longer any question of communism, since “community of goods goes beyond their proposed origin, and nurture, and education.” The regulations throughout are to aim at a middle and contented condition of life, based on the doctrine that poverty is to be regarded as the increase of a man’s desires and not the diminution of his property. No one is to possess gold or silver except as coin for daily use, and the currency of the country is to be peculiar to it and not acceptable abroad. Inequality of condition cannot be avoided; but undue disparity, arising from extreme poverty or excessive wealth, is to be guarded against. For this purpose the population is to be divided into four classes, the limit of poverty being one lot which is to be guarded unimpaired, while the maximum possession is to be the equivalent of four lots, the surplus to be surrendered to the State. No money is to be lent at interest, and, more startling, there is to be no obligation to repay even the capital, a provision explicable on the ground that this is to be a society of half-brothers, if not of brothers, and that there is a definite restriction imposed on the amount of permissible wealth.
• 28Aristotle’s arguments, in the main, are of a highly practical character; in short, that a system of communism would not work, and that it violates natural human instincts. There would be disputes between those who get less and work more, and those who get much and work little—the old difficulty of distribution among frail, grudging and suspicious men. Unity built on communism is in fact a delusion; the common purse leads to quarrels arising out of trivial causes. Moreover there is an immense advantage in the sense of private property. It corresponds to natural instincts; “the love each individual bears to himself is not purposeless,” as he remarks in a phrase in which we seem to catch the tones of Adam Smith’s invisible hand. Again, in an argument which is still common, though of doubtful cogency, he urges that community of property would destroy the virtue of liberality. His own position is not, however, merely negative. As against reformers in a hurry in all ages, he contends that the evils are due, not to the institution which it is proposed to destroy (in this case private property), but to defects in human nature. Unless that is first amended, he would seem to say, there will be no advantage in abolishing something which in itself may be used for good or evil. “The existing system, if embellished by the moral tone of those who live under it and by a code of wise laws, would be far superior.” The ideal which Aristotle outlines is thus that of private possession with use in common, so far as that may be practicable—in modern language, private property mellowed by a sense of the responsibility of wealth, a position not so different from that of the Christian Socialists.
• 29Under the section which deals with the relationship of master and slave occurs Aristotle’s celebrated defence of slavery, which sounds so oddly in modern ears. The principle of rule and subjection is, he says, inevitable and beneficent, and there are “natural slaves,” persons who are as far inferior to others as the body is to the soul, or a beast to a man. In these cases a life of slavish subjection is advantageous. Aristotle is not blind to the obvious objection that, as he puts it, it may happen “contrary to the intention of Nature that those who possess the bodies do not possess the souls of free men and vice versa” for even if there be those who are “slaves by nature,” it calls for supreme faith to believe that the accidents of life should at any time sort out the slaves and the non-slaves, in accordance with the definition of a “natural slave.” Hence he distinguishes between natural and legal slaves, and speaks of the law being a convention according to which all conquests in war are the property of the conqueror. The whole discussion is curious and unconvincing, and is perhaps best viewed as a reflection of the fact, not merely that many slaves were well-treated, but also that their position would have been worse but for the institution of slavery.
• 30As against this, there is another kind of finance, which does not have a natural existence and which is ultimately based on the distinction, familiar long afterwards as that between value in use and value in exchange. Every object has two uses; the shoe has a use as a covering for the feet; it has also a use as an article of exchange. So long as we are in the region of primitive barter, we are still concerned with what is natural, but this has ceased when we come to retail trading, where exchange is “carried beyond the point of satisfying mere requirements.” Out of mere simple barter to satisfy a real need, the evil art of finance—retail trading—develops as a natural consequence after the introduction of a system of currency, the successive stages of which are noted with a fair approximation to the discussion in Jevons’s textbook. Finance, in the natural sense, is a part of Domestic Economy. Unnatural finance is not; it produces money merely by means of exchange, and here wealth is unlimited. The one, the healthy, might be described as the acquisition of the means of living, the securing of the “pre-requisites which Nature ought to provide”; the other is merely money-making. The one is laudable; the other enriches one party at the expense of the other. But of all evil forms of finance, the worst is usury, since here money produces the gain itself, and is diverted from the purpose for which it was devised.
• 31Apart from the Politics, there is also a passage in the Nicomachcean Ethics (Book V, chaps. 7 and 8) which is of some economic interest. Aristotle is there concerned with justice in private dealings. Discarding the mathematical theory of proportion in which his doctrine is embedded, the central point of his teaching is that “when people get as the result of exchange exactly what they had at the beginning, neither more nor less, they are said to have what belongs to them and to be neither losers nor gainers.” How is this principle to be carried out? That things may be exchanged, they must in some sense be comparable, and hence money is invented. It measures all things, and consequently, in the case taken, that of a cobbler and a builder, it measures the number of shoes which are equivalent to a house. “As a builder then is to a cobbler, so must so many shoes be to a house or a meal.” It is the demand for mutual services which binds society together, and money is the recognized representative of this demand. Money, Aristotle says in this passage, has not a natural but a conventional (vóμω) existence, and for this reason it is called money (vóμlσμα): it is within our power to change it and make it useless, a doctrine which would seem to possess kinship with Knapp’s theory that money is a creature of the law. Money, he adds, is serviceable for future exchanges; it is a guarantee that if we do not desire a thing now, we shall be able to get it when we do want it. Though the value of money is not always the same, it tends to have a more constant value than anything else. Aristotle was obviously not unfamiliar with certain orthodox views regarding the nature and the functions of money.
• 32One last point worthy of passing mention is that Aristotle’s attitude towards “mechanics” and their share in the State is in line with that of most writers in antiquity. It is summed up in the general statement that all who are indispensable to the existence of the State cannot be regarded as citizens, and that in the best State (whatever may happen elsewhere) citizenship will not be conferred upon any mechanic. There is here a striking similarity to the passage in the Book of Ecclesiasticus in praise of artificers: “Without these cannot a city be inhabited”; yet “they shall not be sought for in publick counsel.”
• 33The third Greek writer to contribute certain embryonic elements to an economic science is Xenophon, who approaches matters throughout in an entirely practical spirit. His achievement is perhaps greater than has generally been admitted, and even where his speculation is confused, it may at least be pleaded on his behalf that the man who gives a wrong answer to a question has at least made some progress, insofar as he realizes that a question exists. The pleasantly innocuous dialogue Œconomicus, devoted to a discussion of the principles of estate management, opens with an analysis of wealth in the manner of Ruskin. Wealth is only wealth to him who can use it, or, more epigrammatically, useful things are those things which one knows how to use; so also, even money is not wealth to him who does not know how to use it. Further, wealth is to be interpreted in relation to needs: the man of simple tastes and little substance is wealthy in comparison with the man of great possessions on whom excessive claims rest. All this is the stuff of which proverbial philosophy and the home-spun poetry of contentment are woven. Primarily, Xenophon is an agricultural writer, and it is of interest to note that he furnishes the motto to Quesnay and the Physiocratic school many centuries later: “When husbandry flourishes, all the other arts are in good fettle; but whenever the land is compelled to lie waste, the other arts of landsmen and mariners alike wellnigh perish.” His praise of agriculture is indeed of Physiocratic excess. It is the easiest of all things to learn; none gives quicker returns (to a careful man); it is the giver of all things; no art is “dearer to servants, or pleasanter to a wife, or more delightful to children, or more agreeable to friends.” Moreover, on Xenophon has been fathered an approach to the familiar agents of production, two—land and labour—being recognized; for though agriculture or the land supplies good things in abundance, “she suffers them not to be won without toil.” So also in a fumbling way he approaches, or seems to approach, the Law of Diminishing Returns: “the landowners could all tell you how many teams and how many labourers are required for their estates. If anyone employs hands in excess of requirements, it is reckoned as a loss.”
• 34It is, however, in the short essay on The Ways and Means to Increase the Revenues of Athens that Xenophon is most interesting, most enlightened and perhaps also most confused. Here he is concerned with finding a “remedy for the poverty of our citizens,” and the tract therefore resolves itself into an elementary discussion of public finance. Throughout, a more liberal view than customary is manifested. The foreign residents are seen as a source of revenue, and Xenophon argues for the abolition of all regulations that inflict disabilities on this class. He is indeed anxious to attract “more and better class foreigners to settle at Athens,” and in pursuance of this policy he would show favour to merchants—by free seats at festivals and invitations to banquets. No less significant is his suggestion to raise a capital sum to provide accommodation for merchants and shops and houses for retail dealers. Equally enlightened is his contention that it is the cities which have been longest at peace that have been most prosperous; despite the booty of war, it is in peace that wealth is accumulated; it is in war-time that it is spent.
• 35Even a brief survey of Xenophon would be incomplete without reference to a passage in the Cyropœdia which, being quoted by Marx and others, has become one of the curiosities of economic literature. It represents division of labour as applied to the kitchen, run mad, with one man to boil fish and another to bake them. Here, surely, the centuries have shown retrogression.
• 36Apart from these three main representatives of Greek thought, a passing reference is perhaps due to the dialogue called Eryxias, which is of interest as being devoted wholly to an analysis of wealth, and which clearly distinguishes between material and immaterial wealth, so that “in exchange for their art” men may obtain the necessaries of life; and to Aristophanes’ wholly diverting play Ecclesiazusœ, a skit on communism (not neglecting votes for women) which is full of the most modern thrusts.
• 37Of the philosophers (of whom Cicero, Seneca and Pliny may be taken as typical) it may be suggested that in so far as they merely censure luxury, or emphasize the beauty of simplicity and the right uses of wealth, they are primarily moral rather than economic teachers. To a considerable extent this exhausts their content. On other questions there is little that is new. One of the most illuminating passages in Cicero’s De Officiis is that in praise of agriculture, which is also and even more emphatically in dispraise of all other occupations. In itself this passage indicates why the spirit of antiquity could scarcely be expected to evolve a body of economic doctrine. As has been properly observed, Cicero is here concerned with the respectability of various occupations, not with their productiveness. Notable is his comparative tolerance towards wholesale trade, especially if it leads to a country estate. Usury naturally is condemned, in this passage on the feeble ground that it incurs people’s ill-will; but it is also to Cicero that we owe Cato’s terse comment: “How about murder?” to one who inquired: “How about money-lending?”
• 38Of the philosophers (of whom Cicero, Seneca and Pliny may be taken as typical) it may be suggested that in so far as they merely censure luxury, or emphasize the beauty of simplicity and the right uses of wealth, they are primarily moral rather than economic teachers. To a considerable extent this exhausts their content. On other questions there is little that is new. One of the most illuminating passages in Cicero’s De Officiis is that in praise of agriculture, which is also and even more emphatically in dispraise of all other occupations. In itself this passage indicates why the spirit of antiquity could scarcely be expected to evolve a body of economic doctrine. As has been properly observed, Cicero is here concerned with the respectability of various occupations, not with their productiveness. Notable is his comparative tolerance towards wholesale trade, especially if it leads to a country estate. Usury naturally is condemned, in this passage on the feeble ground that it incurs people’s ill-will; but it is also to Cicero that we owe Cato’s terse comment: “How about murder?” to one who inquired: “How about money-lending?”