A history of Political Economy

Rent, wages, and profits, as they are the elements of price, are also the constituents of income; and the three great orders of every civilised society, from whose revenues that of every other order is ultimately derived, are the landlords, the labourers, and the capitalists. The relation of the interests of these three classes to those of society at large is different. The interest of the landlord always coincides with the general interest: whatever promotes or obstructs the one has the same effect on the other. So also does that of the labourer: when the wealth of the nation is progressive, his wages are high; they are low when it is stationary or retrogressive. "The interest of the third order has not the same connection with the general interest of the society as that of the other two;... it is always in some respects different from and opposite to that of the public."

The subject of the second book is "the nature, accumulation, and improvement of stock." A man's whole stock consists of two portions -- that which is reserved for his immediate consumption, and that which is employed so as to yield a revenue to its owner. This latter, which is his "capital," is divisible into the two classes of "fixed" and "circulating." The first is such as yields a profit without passing into other hands. The second consists of such goods, raised, manufactured, or purchased, as are sold for a profit and replaced by other goods; this sort of capital is therefore constantly going from and returning to the hands of its owner, The whole capital of a society falls under the same two heads. Its fixed capital consists chiefly of (1) machines, (2) buildings which are the means of procuring a revenue, (3) agricultural improvements, and (4) the acquired and useful abilities of all members of the society (since sometimes known as "personal capital"). Its circulating capital is also composed of four parts -- (1) money, (2) provisions in the hands of the dealers, (3) materials, and (4) completed work in the hands of the manufacturer or merchant. Next comes the distinction of the gross national revenue from the net -- the first being the whole produce of the land and labour of a country, the second what remains after deducting the expense of maintaining the fixed capital of the country and that part of its circulating capital which consists of money. Money, "the great wheel of circulation," is altogether different from the goods which are circulated by means of it; it is a costly instrument by means of which all that each individual receives is distributed to him; and the expenditure required, first to provide it, and afterwards to maintain it, is a deduction from the net revenue of the society. In development of this consideration, Smith goes on to explain the gain to the community arising from the substitution of paper money for that composed of the precious metals; and here occurs the remarkable illustration in which the use of gold and silver money is compared to a highway on the ground, that of paper money to a waggon-way through the air. In proceeding to consider the accumulation of capital, he is led to the distinction between productive and unproductive labour -- the former being that which is fixed or realised in a particular object or vendible article, the latter that which is not so realised. The former is exemplified in the labour of the manufacturing workman, the latter in that of the menial servant. A broad line of demarcation is thus drawn between the labour which results in commodities or increased value of commodities and that which does no more than render services: the former is productive, the latter unproductive. "Productive" is by no means equivalent to "useful": the labours of the magistrate, the soldier, the churchman, lawyer, and physician are, in Smith's sense, unproductive. Productive labourers alone are employed out of capital; unproductive labourers, as well as those who do not labour at all, are all maintained by revenue. In advancing industrial communities, the portion of annual produce set apart as capital bears an increasing proportion to that which is immediately destined to constitute a revenue, either as rent or as profit. Parsimony is the source of the increase of capital; by augmenting the fund devoted to the maintenance of productive hands, it puts in motion an additional quantity of industry, which adds to the value of the annual produce. What is annually saved is as regularly consumed as what is spent, but by a different set of persons, by productive labourers instead of idlers or unproductive labourers; and the former reproduce with a profit the value of their consumption. The prodigal, encroaching on his capital, diminishes, as far as in him lies, the amount of productive labour, and so the wealth of the country; nor is this result affected by his expenditure being on home-made, as distinct from foreign, commodities. Every prodigal, therefore, is a public enemy; every frugal man a public benefactor. The only mode of increasing the annual produce of the land and labour is to increase either the number of productive labourers or the productive powers of those labourers. Either process will in general require additional capital, the former to maintain the new labourers, the latter to provide improved machinery or to enable the employer to introduce a more complete division of labour. In what are commonly called loans of money, it is not really the money, but the money's worth, that the borrower wants; and the lender really assigns to him the right to a certain portion of the annual produce of the land and labour of the country. As the general capital of a country increases, so also does the particular portion of it from which the possessors wish to derive a revenue without being at the trouble of employing it themselves; and, as the quantity of stock thus available for loans is augmented, the interest diminishes, not merely "from the general causes which make the market price of things commonly diminish as their quantity increases," but because, with the increase of capital, "it becomes gradually wore and more difficult to find within the country a profitable method of employing any new capital" -- whence arises a competition between different capitals, and a lowering of profits, which must diminish the price which can be paid for the use of capital, or in other words the rate of interest. It was formerly wrongly supposed, and even Locke and Montesquieu did not escape this error, that the fall in the value of the precious metals consequent on the discovery of the American mines was the real cause of the permanent lowering of the rate of interest in Europe. But this view, already refuted by Hume, is easily seen to be erroneous. "In some countries the interest of money has been prohibited by law. But, as something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it," and will in fact be paid for it; and the prohibition will only heighten the evil of usury by increasing the risk to the lender. The legal rate should be a very little above the lowest market rate; sober people will then be preferred as borrowers to prodigals and projectors, who at a higher legal rate would have an advantage over them, being alone willing to offer that higher rate.⁽²⁷⁾

As to the different employments of capital, the quantity of productive labour put in motion by an equal amount varies extremely according as that amount is employed -- (1) in the improvement of lands, mines, or fisheries, (2) in manufactures, (3) in wholesale or (4) retail trade. In agriculture "Nature labours along with man," and not only the capital of the farmer is reproduced with his profits, but also the rent of the landlord. It is therefore the employment of a given capital which is most advantageous to society. Next, in order come manufactures; then wholesale trade -- first the home trade, secondly the foreign trade of consumption, last the carrying trade. All these employments of capital, however, are not only advantageous, but necessary, and will introduce themselves in the due degree, if they are left to the spontaneous action of individual enterprise.

These first two books contain Smith's general economic scheme; and we have stated it as fully as was consistent with the necessary brevity, because from this formulation of doctrine the English classical school set out, and round it the discussions of more recent times in different countries have in a great measure revolved. Some of the criticisms of his successors and their modifications of his doctrines will come under our notice as we proceed.

The critical philosophers of the eighteenth century were often destitute of the historical spirit, which was no part of the endowment needed for their principal social office. But some of the most eminent of them, especially in Scotland, showed a marked capacity and predilection for historical studies. Smith was amongst the latter; Knies and others justly remark on the masterly sketches of this kind which occur in the Wealth of Nations. The longest and most elaborate of these occupies the third book; it is an account of the course followed by the nations of modern Europe in the successive development of the several forms of industry. It affords a curious example of the effect of doctrinal prepossessions in obscuring the results of historical inquiry. Whilst he correctly describes the European movement of industry, and explains it as arising out of adequate social causes, he yet, in accordance with the absolute principles which tainted his philosophy, protests against it as involving an entire inversion of the "natural order of things." First agriculture, then manufactures, lastly foreign commerce; any other order than this he considers "unnatural and retrograde." Hume, a more purely positive thinker, simply sees the facts, accepts them, and classes them under a general law. "It is a violent method," he says, "and in most cases impracticable, to oblige the labourer to toil in order to raise from the land more than what subsists himself and family. Furnish him with manufactures and commodities, and he will do it of himself." "If we consult history, we shall find that, in most nations, foreign trade has preceded any refinement in home manufactures, and given birth to domestic luxury."

The fourth book is principally devoted to the elaborate and exhaustive polemic against the mercantile system which finally drove it from the field of science, and has exercised a powerful influence on economic legislation. When protection is now advocated, it is commonly on different grounds from those which were in current use before the time of Smith. He believed that to look for the restoration of freedom of foreign trade in Great Britain would have been "as absurd as to expect that an Oceana or Utopia should be established in it"; yet, mainly in consequence of his labours, that object has been completely attained; and it has lately been said with justice that free trade might have been more generally accepted by other nations if the patient reasoning of Smith had not been replaced by dogmatism. His teaching on the subject is not altogether unqualified; but, on the whole, with respect to exchanges of every kind, where economic motives alone enter, his voice is in favour of freedom. He has regard, however, to political as well as economic interests, and on the ground that "defence is of much more importance than opulence", pronounces the Navigation Act to have been "perhaps the wisest of all the commercial regulations of England." Whilst objecting to the prevention of the export of wool, he proposes a tax on that export as somewhat less injurious to the interest of growers than the prohibition, whilst it would "afford a sufficient advantage" to the domestic over the foreign manufacturer. This is, perhaps, his most marked deviation from the rigour of principle; it was doubtless a concession to popular opinion with a view to an attainable practical improvement The wisdom of retaliation in order to procure the repeal of high duties or prohibitions imposed by foreign Governments depends, he says, altogether on the likelihood of its success in effecting the object aimed at, but he does not conceal his contempt for the practice of such expedients. The restoration of freedom in any manufacture, when it has grown to considerable dimensions by means of high duties, should, he thinks, from motives of humanity, be brought about only by degrees and with circumspection, -- though the amount of evil which would be caused by the immediate abolition of the duties is, in his opinion, commonly exaggerated. The case in which J. S. Mill would tolerate protection -- that, namely, in which an industry well adapted to a country is kept down by the acquired ascendency of foreign producers -- is referred to by Smith; but he is opposed to the admission of this exception for reasons which do not appear to be conclusive.⁽²⁸⁾ He is perhaps scarcely consistent in approving the concession of temporary monopolies to joint-stock companies undertaking risky enterprises "of which the public is afterwards to reap the benefit."⁽²⁹⁾

He is less absolute in his doctrine of Governmental noninterference when he comes to consider in his fifth book the "expenses of the sovereign or the commonwealth." He recognises as coming within the functions of the state the erection and maintenance of those public institutions and public works which, though advantageous to the society, could not repay, and therefore must not be thrown upon, individuals or small groups of individuals. He remarks in a just historical spirit that the performance of these functions requires very different degrees of expense in the different periods of society. Besides the institutions and works intended for public defence and the administration of justice, and those required for facilitating the commerce of the society, he considers those necessary for promoting the instruction of the people. He thinks the public at large may with propriety not only facilitate and encourage, but even impose upon almost the whole body of the people, the acquisition in youth of the most essential elements of education. He suggests as the mode of enforcing this obligation the requirement of submission to a test examination "before any one could obtain the freedom in any corporation, or be allowed to set up a trade in any village or town corporate." Similarly, he is of opinion that some probation, even in the higher and more difficult sciences, might be enforced as a condition of exercising any liberal profession, or becoming a candidate for any honourable office. The expense of the institutions for religious instruction as well as for general education, he holds, may without injustice be defrayed out of the funds of the whole society, though he would apparently prefer that it should be met by ihe voluntary contributions of those who think they have occasion for such education or instruction. There is much that is sound, as well as interesting and suggestive, in this fifth book, in which he shows a political instinct and a breadth of view by which he is favourably contrasted with the Manchester school. But, if we may say so without disrespect to so great a man, there are traces in it of what is now called Philistinism -- a low view of the ends of art and poetry -- which arose perhaps in part from personal defect; and a certain deadness to the high aims and perennial importance of religion, which was no doubt chiefly due to the influences of an age when the critical spirit was doing an indispensable work, in the performance of which thr transitory was apt to be confounded with the permanent.

For the sake of considering as a whole Smith's view of the functions of government, we have postponed noticing his treatment of the physiocratic system, which occupies a part of his fourth book. He had formed the acquaintance of Quesnay, Turgot, and other members of their group during his sojourn in France in 1765, and would, as he told Dugald Stewart, had the patriarch of the school lived long enough, have dedicated to him the Wealth of Nations. He declares that, with all its imperfections, the system of Quesnay is "perhaps the nearest approximation to the truth that had yet appeared on the subject of political economy." Yet he seems not to be adequately conscious of the degree of coincidence between his own doctrines and those of the physiocrats. Dupont de Nemours complained that he did not do Quesnay the justice of recognising him as his spiritual father. it is, however, alleged, on the other side, that already in 1753 Smith had been teaching as professor a body of economic doctrine the same in its broad features with that contained in his great work. This is indeed said by Stewart; and, though he gives no evidence of it, it is possibly quite true; if so, Smith's doctrinal descent must be traced rather from Hume than from the French school. The principal error of this school, that, namely, of representing agricultural labour as alone productive, he refutes in the fourth book, though in a manner which has not always been considered effective. Traces of the influence of their mistaken view appear to remain in his own work, as, for example, his assertion that in agriculture nature labours along with man, whilst in manufactures nature does nothing, man does all; and his distinction between productive and unproductive labour, which was doubtless suggested by their use of those epithets, and which is scarcely consistent with his recognition of what is now called "personal capital." To the same source M'Culloch and others refer the origin of Smith's view, which they represent as an obvious error, that "individual advantage is not always a true test of the public advantageousness of different employments." But that view is really quite correct, as Professor Nicholson has clearly shown.⁽³⁰⁾ That the form taken by the use of capital, profits being given, is not indifferent to the working class as a whole even Ricardo admitted; and Cairnes, as we shall see, built or this consideration some of the most far-reaching conclusions in his Leading Principles.

On Smiths theory of taxation in his fifth book it is not necessary for us to dwell. The well-known canons which he lays down as prescribing the essentials of a good system have been generally accepted. They have lately been severely criticised by Professor Walker--of whose objections, however, there is only one which appears to be well founded. Smith seems to favour the view that the contribution of the individual to public expenses may be regarded as payment for the services rendered to him by the state, and ought to be proportional to the extent of those services. If he held this opinion, which some of his expressions imply, he was certainly so far wrong in principle.

We shall not be held to anticipate unduly if we remark here on the way in which opinion, revolted by the aberrations of some of Smiths successors, has tended to turn from the disciples to the master. A strong sense of his comparative freedom from the vicious tendencies of Ricardo and his followers has recently prompted the suggestion that we ought now to recur to Smith, and take up once more from him the line of the economical succession. But notwithstanding his indisputable superiority, and whilst fully recognising the great services rendered by his immortal work, we must not forget that, as has been already said, that work was, on the whole, a product, though an exceptionally eminent one, of the negative philosophy of the 18th century, resting largely in its ultimate foundation on metaphysical bases. The mind of Smith was mainly occupied with the work of criticism so urgent in his time ; his principal task was to discredit and overthrow the economic system then prevalent, and to demonstrate the radical unfitness of the existing European Governments to direct the industrial movement. This office of his fell in with, and formed a part of, the general work of demolition carried on by the thinkers who gave to his period its characteristic tone. It is to his honour that, besides this destructive operation, he contributed valuable elements to the preparation of an organic system of thought and of life. In his special domain he has not merely extinguished many errors and prejudices, and cleared the ground for truth, but has left us a permanent possession in the judicious analyses of economic facts and ideas, the wise practical suggestions, and the luminous indications of all kinds with which his work abounds. Belonging to the best philosophical school of his period, that with which the names of Hume and Diderot are associated, he tended strongly towards the positive point of view. But it was not possible for him to attain it; and the final and fully normal treatment of the economic life of societies must be constituted on other and more lasting foundations than those which underlie his imposing construction.

It has been well said that of philosophic doctrines the saying "By their fruits ye shall know them" is eminently true. And it cannot be doubted that the germs of the vicious methods and false or exaggerated theories of Smiths successors are to be found in his own work, though his good sense and practical bent prevented his following out his principles to their extreme consequences. The objections of Hildebrand and others to the entire historical development of doctrine which the Germans designate as "Smithianismus" are regarded by those critics as applicable, not merely to his school as a whole, but, though in a less degree, to himself. The following are the most important of these objections. It is said--(1) Smiths conception of the social economy is essentially individualistic. In this he falls in with the general character of the negative philosophy of his age. That philosophy, in its most typical forms, even denied the natural existence of the disinterested affections, and explained the altruistic feelings as secondary results of self-love. Smith, however, like Hume, rejected these extreme views; and hence it has been held that in the Wealth of Nations he consciously, though tacitly, abstracted from the benevolent principles in human nature, and as a logical artifice supposed an "economic man" actuated by purely selfish motives. However this may be, he certainly places himself habitually at the point of view of the individual, whom he treats as a purely egoistic force, working uniformly in the direction of private gain, without regard to the good of others or of the community at large. (2) He justifies this personal attitude by its consequences, presenting the optimistic view that the good of the community is best attained through the free play of individual cupidities, provided only that the law prevents the interference of one member of the society with the self-seeking action of another. He assumes with the negative school at large-though he has passages which are not in harmony with these propositions -- that every one knows his true interest and will pursue it, and that the economic advantage of the individual coincides with that of the society. To this last conclusion he is secretly led, as we have seen, by a priori theological ideas, and also by metaphysical conceptions of a supposed system of nature, natural right, and natural liberty. (3) By this reduction of almost every question to one of individual gain, he is led to a too exclusive consideration of exchange value as distinct from wealth in the proper sense. This, whilst lending a mechanical facility in arriving at conclusions, gives a superficial character to economic investigations, divorcing it from the physical and biological sciences, excluding the question of real social utility, leaving no room for a criticism of production, and leading to a denial, like J. S. Mill's, of any economic doctrine dealing with consumption -- in other words, with the use of wealth. (4) In condemning the existing industrial policy, he tends too much towards a glorification of non-government and a repudiation of all social intervention for the regulation of economic life. (5) He does not keep in view the moral destination of our race, nor regard wealth as a means to the higher ends of life, and thus incurs, not altogether unjustly, the charge of materialism, in the wider sense of that word. Lastly, (6) his whole system is too absolute in its character; it does not sufficiently recognie the fact that, in the language of Hildebrand, man, as a member of society, is a child of civilization and a product of history, and that account ought to be taken of the different stages of social development as implying altered economic conditions and calling for altered economic action, or even involving a modification of the actor. Perhaps in all the respects here enumerated, certainly in some of them, and notably in the last, Smith is less open to criticism than most of the later English economists; but it must, we think, be admitted that to the general principles which lie at the basis of his scheme the ultimate growth of these several vicious tendencies is traceable.