A history of Political Economy

ADAM SMITH, WITH HIS IMMEDIATE
REDECESSORS AND HIS FOLLOWERS.

England.

The stagnation in economic inquiry which showed itself in England in the early part of the eighteenth century was not broken by any notable manifestation before 1735, when Bishop Berkeley put forward in his Querist, with much force and point, views opposed to those of the mercantile school on the nature of national wealth and the functions of money, though not without an admixture of grave error. But soon a more decisive advance was made. Whilst in France the physiocrats were working after their own fashion towards the construction of a definitive system of political economy, a Scottish thinker of the first order was elucidating, in a series of short but pregnant essays, some of the fundamental conceptions of the science. What had been written on these questions in the English language before his time had remained almost altogether within the limits of the directly practical sphere. With Locke, indeed, the general system of the modern critical philosophy had come into relation with economic inquiry, but only in a partial and indeterminate way. But in Hume the most advanced form of this philosophy was represented, and his appearance in the field of economics decisively, marks the tendency of the latter order of speculation to place itself in connection with the largest and deepest thought on human nature and general human history. Most of the essays here referred to first appeared in 1752, in a volume entitled Political Discourses, and the number was completed in the collection of Essays and Treatises on Several Subjects, published in the following year. The most important of them are those on Commerce, on Money, on Interest, and on the Balance of Trade. Yet these should not be separated from the rest, for, notwithstanding the unconnected form of these little treatises, there runs through them a profound unity of thought, so that they indeed compose in a certain sense an economic system. They exhibit in full measure Hume's wonderful acuteness and subtlety, which indeed sometimes dispose him to paradox, in combination with the breadth, the absence of prejudice, and the social sympathies which so eminently distinguish him; and they offer, besides, the charm of his easy and natural style and his rare power of lucid exposition.

In the essay on money he refutes the mercantilist error, which tended to confound it with wealth. "Men and commodities," he says, "are the real strength of any community." "In the national stock of labour consists all real power and riches." Money is only the oil which makes the movements of the mechanism of commerce more smooth and easy. He shows that, from the domestic as distinguished from the international point of view, the absolute quantity of money, supposed as of fixed amount, in a country is of no consequence, whilst an excessive quantity, larger, that is, than is required for the interchange of commodities, may be injurious as raising prices and driving foreigners from the home markets. He goes so far, in one or two places, as to assert that the value of money is chiefly fictitious or conventional, a position which cannot be defended; but it must not be pressed against him, as he builds nothing on it. He has some very ingenious observations (since, however, questioned by J. S. Mill) on the effects of the increase of money in a country in stimulating industry during the interval which takes place before the additional amount is sufficiently diffused to alter the whole scale of prices. He shows that the fear of the money of an industrious community being lost to it by passing into foreign countries is groundless, and that, under a system of freedom, the distribution of the precious metals which is adapted to the requirements of trade will spontaneously establish itself. "In short, a Government has great reason to preserve with care its people and its manufactures; its money it may safely trust to the course of human affairs without fear or jealousy."

A very important service was rendered by his treatment of the rate of interest. He exposes the erroneous idea often entertained that it depends on the quantity of money in a country, and shows that the reduction of it must in general be the result of "the increase of industry and frugality, of arts and commerce," so that it may serve as a barometer, its lowness being an almost infallible sign of the flourishing condition of a people. It may be observed in passing that in the essay devoted to this subject he brings out a principle of human nature which economists too often overlook, "the constant and insatiable desire of the mind for exercise and employment," and the consequent action of ennui in prompting to exertion.

With respect to commerce, he points to its natural foundation in what has since been called "the territorial division of labour," and proves that the prosperity of one nation, instead of being a hindrance, is a help to that of its neighbours. "Not only as a man, but as a British subject," he says, "I pray for the flourishing commerce of Germany, Spain, Italy, and even France itself." He condemns the "numberless bars, obstructions, and imposts which all nations of Europe, and none more than England, have put upon trade." Yet on the question of protection to national industry he is not quite at the free-trade point of view, for he approves of a tax on German linen as encouraging home manufactures, and of a tax on brandy as increasing the sale of rum and supporting our southern colonies. Indeed it has been justly observed that there are in him several traces of a refined mercantilism, and that he represents a state of opinion in which the transition irom the old to the new views is not yet completely effected.

We cannot do more than refer to the essay on taxes, in which, amongst other things, he repudiates the impt unique of the physiocrats, and to that on public credit, in which he criticises the "new paradox that public encumbrances are of themselves advantageous, independent of the necessity of contracting them," and objects, perhaps too absolutely, to the modern expedient of raising the money required for national enterprises by way of loan, and so shifting our burdens upon the shoulders of posterity.

The characteristics of Hume, which are most important in the history of economic investigation, are (1) his practice of bringing economic facts into connection with all the weighty interests of social and political life, and (2) his tendency to introduce the historical spirit into the study of those facts. He admirably illustrates the mutual action of the several branches of industry, and the influences of progress in the arts of production and in commerce on general civilisation, exhibits the striking contrasts of the ancient and modern system of life (see especially the essay On the Populousness of Ancient Nations), and considers almost every phenomenon which comes under discussion in its relations to the contemporary stage of social development. It cannot be doubted that Hume exercised a most important influence on Adam Smith, who in the Wealth of Nations⁽²⁰⁾ calls him "by far the most illustrious philosopher and historian of the present age," and who esteemed his character so highly that, after a friendship of many years had been terminated by Hume's decease, he declared him to have "approached as nearly to the ideal of a perfectly wise and virtuous man as perhaps the nature of human frailty will permit."

Josiah Tucker, dean of Gloucester (d. 1799), holds a distinguished place among the immediate predecessors of Smith. Most of his numerous productions had direct reference to contemporary questions, and, though marked by much sagacity and penetration, are deficient in permanent interest. In some of these he urged the impolicy of restrictions on the trade of Ireland, advocated a union of that country with England, and recommended the recognition of the independence of the United States of America. The most important of his general economic views are those relating to international commerce. He is an ardent supporter of free-trade doctrines, which he bases on the principles that there is between nations no necessary antagonism, but rather a harmony, of interests, and that their several local advantages and different aptitudes naturally prompt them to exchange. He had not, however, got quite clear of mercantilism, and favoured bounties on exported manufactures and the encouragement of population by a tax on celibacy. Dupont, and after him Blanqui, represent Tucker as a follower of the physiocrats, but there seems to be no ground for this opinion except his agreement with them on the subject of the freedom of trade. Turgot translated into French (1755), under the title of Questions Importantes sur le Commerce, a tract by Tucker on The Expediency of a Law for the Naturalisation of Foreign Protestants.

In 1767 was published Sir James Steuart's Inquiry into the Principals of Political Economy. This was one of the most unfortunate of books. It was the most complete and systematic survey of the science irom the point of view of moderate mercantilism which had appeared in England. Steuart was a man of no ordinary abilities, and had prepared himself for his task by long and serious study. But the time for the mercantile doctrines was past, and the system of natural liberty was in possession of an intellectual ascendency which foreshadowed its political triumph. Nine years later the Wealth of Nations was given to the world, a work as superior to Steuart's in attractiveness of style as in scientific soundness. Thus the latter was predestined to fail, and in fact never exercised any considerable theoretic or practical influence. Smith never quotes or mentions it; being acquainted with Steuart, whose conversation he said was better than his book, he probably wished to keep clear of controversy with him.⁽²¹⁾ The German economists have examined Steuart's treatise more carefully than English writers have commonly done; and they recognise its high merits, especially in relation to the theory of value and the subject of population. They have also pointed out that, in the spirit of the best recent research, he has dwelt on the special characters which distinguish the economies proper to different nations and different grades in social progress.

Coming now to the great name of Adam Smith (1723-1790), it is of the highest importance that we should rightly understand his position and justly estimate his claims. It is plainly contrary to fact to represent him, as some have done, as the creator of political economy. The subject of social wealth had always in some degree, and increasingly in recent times, engaged the attention of philosophic minds. The study had even indisputably assumed a systematic character, and, from being an assemblage of fragmentary disquisitions on particular questions of national interest, had taken the form, notably in Turgot's Réflexions, of an organised body of doctrine. The truth is, that Smith took up the science when it was already considerably advanced; and it was this very circumstance which enabled him, by the production of a classical treatise, to render most of his predecessors obsolete. But, whilst all the economic labours of the preceding centuries prepared the way for him, they did not anticipate his work. His appearance at an earlier stage, or without those previous labours, would be inconceivable; but he built, on the foundation which had been laid by others, much of his own that was precious and enduring.

Even those who do not fall into the error of making Smith the creator of the science, often separate him too broadly from Quesnay and his followers, and represent the history of modern Economics as consisting of the successive rise and reign of three doctrines -- the mercantile, the physiocratic, and the Smithian. The last two are, it is true, at variance in some even important respects. But it is evident, and Smith himself felt, that their agreements were much more fundamental than their differences; and, if we regard them as historical forces, they must be considered as working towards identical ends. They both urged society towards the abolition of the previously prevailing industrial policy of European Governments; and their arguments against that policy rested essentially on the same grounds. Whilst Smith's criticism was more searching and complete, he also analysed more correctly than the physiocrats some classes of economic phenomena -- in particular dispelling the illusions into which they had fallen with respect to the unproductive nature of manufactures and commerce. Their school disappeared from the scientific field, not merely because it met with a political check in the person of Turgot, but because, as we have already said, the Wealth of Nations absorbed into itself all that was valuable in their teaching, whilst it continued more effectually the impulse they had given to the necessary work of demolition.

The history of economic opinion in modern times, down to the third decade of the nineteenth century, is, in fact, strictly bipartite. The first stage is filled with the mercantile system which, as we have shown, was rather a practical policy than a speculative doctrine, and which came into existence as the spontaneous growth of social conditions acting on minds not trained to scientific habits. The second stage is occupied with the gradual rise and ultimate ascendency of another system founded on the idea of the right of the individual to an unimpeded sphere for the exercise of his economic activity. With the latter, which is best designated as the "system of natural liberty," we ought to associate the memory of the physiocrats as well as that of Smith, without, however, maintaining their services to have been equal to his.

The teaching of political economy was in the Scottish universities associated with that of moral philosophy. Smith, as we are told, conceived the entire subject he had to treat in his public lectures as divisible into four heads, the first of which was natural theology, the second ethics, the third jurisprudence; whilst in the fourth "he examined those political regulations which are founded upon expediency, and which are calculated to increase the riches, the power, and the prosperity of a state." The last two branches of inquiry are regarded as forming but a single body of doctrine in the well-known passage of the Theory of Moral Sentiments (1759) in which the author promises to give in another discourse "an account of the general principles of law and government, and of the different revolutions they have undergone in the different ages and periods of society, not only in what concerns justice, but in what concerts police, revenue, and arms, and whatever else is the subject of law." This shows how little it was Smith's habit to separate (except provisionally), in his conceptions or his researches, the economic phenomena of society from all the rest. The words above quoted have, indeed, been not unjustly described as containing "an anticipation, wonderful for his period, of general Sociology, both statical and dynamical, an anticipation which becomes still more remarkable when we learn from his literary executors that he had formed the plan of a connected history of the liberal sciences and elegant arts, which must have added to the branches of social study already enumerated a view of the intellectual progress of society." Though these large designs were never carried out in their integrity, as indeed at that period they could not have been adequately realised, it has resulted from them that, though economic phenomena form the special subject of the Wealth of Nations, Smith yet incorporated into that work much that relates to the other social aspects, incurring thereby the censure of some of his followers, who insist with pedantic narrowness on the strict isolation of the economic domain.

There has been much discussion on the question -- What is the scientific method followed by Smith in his great work? By some it is considered to have been purely deductive, a view which Buckle has perhaps carried to the greatest extreme. He asserts that in Scotland the inductive method was unknown, that the inductive philosophy exercised no influence on Scottish thinkers; and, though Smith spent some of the most important years of his youth in England, where the inductive method was supreme, and though he was widely read in general philosophical literature, he yet thinks he adopted the deductive method because it we habitually followed in Scotland, -- and this though Buckle maintains that it is the only appropriate, or even possible, method in political economy, which surely would have been a sufficient reason for choosing it. That the inductive spirit exercised no influence on Scottish philosophers is certainly not true; as will be presently shown, Montesquieu, whose method is essentially inductive, was in Smith's time studied with quite peculiar care and regarded with special veneration by Smith's fellow-countrymen. As to Smith himself, what may justly be said of him is that the deductive bent was certainly not the predominant character of his mind, nor did his great excellence lie in the "dialectic skill" which Buckle ascribes to him. What strikes us most in his book is his wide and keen observation of social facts, and his perpetual tendency to dwell on these and elicit their significance, instead of drawing conclusions from abstract principles by elaborate chains of reasoning. It is this habit of his mind which gives us, in reading him, so strong and abiding a sense of being in contact with the realities of life.

That Smith does, however, largely employ the deductive method is certain; and that method is quite legitimate when the premises from which the deduction sets out are known universal facts of human nature and properties of external objects. Whether this mode of proceeding will carry us far may indeed well be doubted; but its soundness cannot be disputed. But there is another vicious species of deduction which, as Cliffe Leslie has shown, seriously tainted the philosophy of Smith -- in which the premises are not facts ascertained by observation, but the same a priori assumptions, half theological half metaphysical, respecting a supposed harmonious and beneficent natural order of things which we found in the physiocrats, and which, as we saw, were embodied in the name of that sect. In his view, Nature has made provision for social well-being by the principle of the human constitution which prompts every man to better his condition: the individual aims only at his private gain, but in doing so is "led by an invisible hand" to promote the public good, which was no part of his intention; human institutions, by interfering with the action of this principle in the name of the public interest, defeat their own end; but, when all systems of preference or restraint are taken away," the obvious and simple system of natural liberty establishes itself of its own accord." This theory is, of course, not explicitly presented by Smith as a foundation of his economic doctrines, but it is really the secret substratum on which they rest. Yet, whilst such latent postulates warped his view of things, they did not entirely determine his method. His native bent towards the study of things as they are preserved him from extravagances into which many of his followers have fallen. But besides this, as Leslie has pointed out, the influence of Montesquieu tended to counterbalance the theoretic prepossessions produced by the doctrine of the jus naturae. That great thinker, though he could not, at his period, understand the historical method which is truly appropriate to sociological inquiry, yet founded his conclusions on induction. It is true, as Comte has remarked, that his accumulation of facts, borrowed from the most different states of civilisation, and not subjected to philosophic criticism, necessarily remained on the whole sterile, or at least could not essentially advance the study of society much beyond the point at which he found it. His merit, as we have before mentioned, lay in the recognition of the subjection of all social phenomena to natural laws, not in the discovery of those laws. But this limitation was overlooked by the philosophers of the time of Smith, who were much attracted by the system he followed of tracing social facts to the special circumstances, physical or moral, of the communities in which they were observed. Leslie has shown that Lord Kaimes, Dalrymple, and Millar -- contemporaries of Smith, and the last his pupil -- were influenced by Montesquieu; and he might have added the more eminent name of Ferguson, whose respect and admiration for the great Frenchman are expressed in striking terms in his History of Civil Society.⁽²²⁾ We are even informed that Smith himself in his later years was occupied in preparing a commentary on the Espirit des Lois.⁽²³⁾ he was thus affected by two different and incongruous systems of thought -- one setting out from an imaginary code of nature intended for the benefit of man, and leading to an optimistic view of the economic constitution founded on enlightened self-interest; the other following inductive processes, and seeking to explain the several states in which human societies are found existing, as results of circumstances or institutions which have been in actual operation. And we find accordingly in his great work a combination of these two methods -- inductive inquiry on the one hand, and, on the other a priori speculation founded on the "Nature" hypothesis. The latter vicious proceeding has in some of his followers been greatly aggravated, while the countervailing spirit of inductive investigation has fallen into the background, and indeed the necessity or utility of any such investigation in the economic field has been sometimes altogether denied.

Some have represented Smith's work as of so loose a texture and so defective an arrangement that it may be justly described as consisting of a series of monographs. But this is certainly an exaggeration. The book, it is true, is not framed on a rigid mould, nor is there any parade of systematic divisions and subdivisions; and this doubtless recommended it to men of the world and of business, for whose instruction it was, at least primarily intended. But it has the real and pervading unity which results from a set of principles and a mode of thinking identical throughout and the general absence of such contradictions as would arise from an imperfect digestion of the subject.

Smith sets out from the thought that the annual labour of a nation is the source from which it derives its supply of the necessaries and conveniences of life. He does not of course contemplate labour as the only factor in production; but it has been supposed that by emphasising it at the outset he at once strikes the note of difference between himself on the one hand and both the mercantilists and the physiocrats on the other. The improvement in the productiveness of labour depends largely on its division; and he proceeds accordingly to give his unrivalled exposition of that principle, of the grounds on which it rests, and of its greater applicability to manufactures than to agriculture, in consequence of which the latter relatively lags behind in the course of economic development.⁽²⁴⁾ The origin of the division of labour he finds in the propensity of human nature "to truck, barter, or exchange one thing for another." He shows that a certain accumulation of capital is a condition precedent of this division, and that the degree to which it can be carried is dependent on the extent of the market. When the division of labour has been established, each member of the society must have recourse to the others for the supply of most of his wants; a medium of exchange is thus found to be necessary, and money comes into use. The exchange of goods against each other or against money gives rise to the notion of value. This word has two meanings -- that of utility, and that of purchasing power; the one may be called value in use, the other value in exchange. Merely mentioning the former, Smith goes on to study the latter. What, he asks, is the measure of value? what regulates the amount of one thing which will be given for another? "Labour," Smith answers, "is the real measure of the exchangeable value of all commodities." "Equal quantities of labour, at all times and places, are of equal value to the labourer."⁽²⁵⁾ "Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only." Money, however, is in men's actual transactions the measure of value, as well as the vehicle of exchange; and the precious metals are best suited for this function, as varying little in their own value for periods of moderate length; for distant times, corn is a better standard of comparison. In relation to the earliest social stage, we need consider nothing but the amount of labour employed in the production of an article as determining its exchange value; but in more advanced periods price is complex, and consists in the most general case of three elements -- wages, profit, and rent. Wages are the reward of labour. Profit arises as soon as stock, being accumulated in the hands of one person, is employed by him in setting others to work, and supplying them with materials and subsistence, in order to make a gain by what they produce. Rent arises as soon as the land of a country has all become private property; "the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce." In every improved society, then, these three elements enter more or less into the price of the far greater part of commodities. There is in every society or neighbourhood an ordinary or average rate of wages and profit in every different employment of labour and stock, regulated by principles to be explained hereafter, as also an ordinary or average rate of rent. These may be called the natural rates at the time when and the place where they prevail; and the natural price of a commodity is what is sufficient to pay for the rent of the land,⁽²⁶⁾ the wages of the labour, and the profit of the stock necessary for bringing the commodity to market. The market price may rise above or fall below the amount so fixed, being determined by the proportion between the quantity brought to market and the demand of those who are willing to pay the natural price. Towards the natural price as a centre the market price, regulated by competition, constantly gravitates. Some commodities, however, are subject to a monopoly of production, whether from the peculiarities of a locality or from legal privilege their price is always the highest that can be got; the natural price of other commodities is the lowest which can be taken for any length of time together. The three component parts or factors of price vary with the circumstances of the society. The rate of wages is determined by a "dispute" or struggle of opposite interests between the employer and the workman. A minimum rate is fixed by the condition that they must be at least sufficient to enable a man and his wife to maintain themselves and, in general, bring up a family. The excess above this will depend on the circumstances of the country and the consequent demand for labour -- wages being high when national wealth is increasing, low when it is declining. The same circumstances determine the variation of profits, but in an opposite direction; the increase of stock, which raises wages, tending to lower profit through the mutual competition of capitalists. "The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality"; if one had greatly the advantage over the others, people would crowd into it, and the level would soon be restored. Yet pecuniary wages and profits are very different in different employment -- either from certain circumstances affecting the employments, which recommend or disparage them in men's notions, or from national policy, "which nowhere leaves things at perfect liberty." Here follows Smith's admirable exposition of the causes which produce the inequalities in wages and profits just referred to, a passage affording ample evidence of his habits of nice observation of the less obvious traits in human nature, and also of the operation both of these and of social institutions on economic facts. The rent of land comes next to be considered, as the last of the three elements of price. Rent is a monopoly price, equal, not to what the landlord could afford to take, but to what the farmer can afford to give, "Such parts only of the produce of land can commonly be brought to market, of which the ordinary price is sufficient to replace the stock which must be employed in bringing them thither, together with the ordinary profits. If the ordinary price is more than this; the surplus part will naturally go to the rent of the land. If it is not more, though the commodity may be brought to market, it can afford no rent to the landlord, Whether the price is or is not more depends on the demand." "Rent, therefore, enters into the price of commodities in a different way from wages and profits. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it."