This process of reasoning seems to imply that the revenues of the agricultural and industrial classes are not squeezable because they represent the indispensable minimum necessary for the expenses of production. This seems to be an anticipation of the notorious “iron law.” Turgot’s formula incisively stating this law, but containing no attempt at a justification, is known to most people.[104] Long before his day, however, it had been stated by Quesnay in terms no less pronounced, though perhaps not so well known. “It is useless to urge that wage-earners can pay the tax so levied upon them, by restricting consumption and depriving themselves of luxuries without thereby causing the burden to fall upon the classes who pay the wages. The rate of wages, and consequently the amount of comfort and luxury which wages can purchase, are fixed at the irreducible minimum by the action of the competition which prevails among them.” This is quite a characteristic trait.[105] The author of the “natural order,” without any hesitation, admits that the direct outcome of the establishment of that order would be to reduce the life of the wage-earners to a level of bare subsistence.
It is also remarkable that in their study of the industrial classes wages should have claimed the exclusive attention of the Physiocrats. Profits even then were by no means unsqueezable, but curiously enough they failed to realise this. Voltaire’s rich banker would have proved embarrassing here. They would have had some difficulty in showing how a reduction of his extravagance could possibly have endangered production. But they might have replied that since he had so little difficulty in squeezing the 400,000 livres out of his fellow-citizens he would not experience much more trouble in getting another 400,000 out of them and paying them over to the State.
Another objection consists in the insufficiency of a single tax to meet all the needs of the State. “In some States it is said that a third, a half, or even three-fourths of the clear net revenue from all sources of production is insufficient to meet the demands of the Treasury, and consequently other forms of taxation are necessary.”[106]
In reply to this the Physiocrats would point out that the mere application of their fiscal system would result in such an increase in the net product that the yield from the tax would progressively grow. We must also take account of the economies resulting from the simplicity of the tax, and the almost complete absence of expenses of collection. But the most interesting point of all is that they thought the State should adapt its needs to meet its revenue, and not vice versa. The great advantage of the Physiocratic impôt, however, was that it was regulated by a natural norm, which gave the amount of the net product. Without this, taxation becomes arbitrary.[107] At bottom the system affords a barrier against the autocracy of the sovereign—a barrier that is much more effective than a parliamentary vote.
One of the disciples of Quesnay put the theory to the test of practice. The Margrave of Baden had the advantage of being a prince, and he proceeded to experiment on his own subjects. The system was tried in three communes of his principality, but, like most social experiments, failed. In two of the communes it was abandoned at the end of four years. In a third, despite its evil effects, it was prolonged until 1802. The increase in the land tax caused a veritable slump in the value of property just when the remission of taxes upon consumption was resulting in the rapid multiplication of wineshops and beerhouses.[108] It is unnecessary to add that the failure of the experiment did nothing to weaken the faith of the Margrave or his fellow Physiocrats. An experiment on so small a scale could not possibly be accepted as decisive. This is the usual retort of innovators when social experiments prove failures, but we must recognise the element of truth contained in their reply.
But if we wish to see the real results of the Physiocratic system we must look beyond the private experiments of a prince. Elsewhere the effects were much more far-reaching.
The fiscal aspect of the French Revolution owed its guiding inspiration to their ideas. Out of a budget of 500 million francs the Constituent Assembly decreed that about half of it—that is, 240 millions—should be got out of a tax levied upon land, equal to a tax of 2400 million francs nowadays; and the greatest part of it was to be raised by direct taxation.
Distrust of indirect taxation, and of all taxes on commodities, is also a consequence of the Physiocratic system—a distrust that is bound to grow as society becomes more democratic. Most of the arguments in favour of direct taxation are to be found in the Physiocratic writings. But the chief one employed nowadays—namely, that indirect taxes often bear no proportion to the amount of the revenue, but weigh heaviest upon those who have least, is not among them. This concern about proportionality, which is merely another word for justice, was quite foreign to their thoughts.[109]
At a later stage of this work it will be our duty to call attention to the enthusiasm aroused by this old theory of an impôt unique as advocated in the works of an eminent American economist,[110] who renders homage to the Physiocrats for inspiring him with ideals altogether opposed to those of the landed proprietors. And a similar movement under the very same name—the single-tax system—is still vigorous in the United States.
IV: RÉSUMÉ OF THE PHYSIOCRATIC DOCTRINE. CRITICS AND DISSENTERS
A brief résumé of the contributions made to economic science by the Physiocrats will help us to realise their great importance.
From the theoretical point of view we have:
1. The idea that every social phenomenon is subject to law, and that the object of scientific study is to discover such laws.
2. The idea that personal interest if left to itself will discover what is most advantageous for it, and that what is best for the individual is also best for everybody. But this liberal doctrine had many advocates before the Physiocrats.
3. The conception of free competition, resulting in the establishment of the bon prix, which is the most advantageous price for both parties, and implies the extinction of all usurious profit.
4. An imperfect but yet searching analysis of production, and of the various divisions of capital. An excellent classification of incomes and of the laws of their distribution.
5. A collection of arguments which have long since become classic in favour of landed property.
From a practical point of view we have:
1. The freedom of labour.
2. Free trade within a country, and an impassionate appeal for the freedom of foreign trade.
3. Limitation of the functions of the State.
4. A first-class demonstration of the superiority of direct taxation over indirect.
It is unjust to reproach the Physiocrats, as is sometimes done, with giving us nothing but social metaphysics. A little over-systemisation may prove useful in the early stages of a science. Its very faults have some usefulness. We must admit, however, that although their conception of the “natural order” supplied the foundation, or at least the scaffolding, for political economy, it became so intertwined with a kind of optimism that it nullified the work of the Liberal school, especially in France.[111]
But the greatest gap in the Physiocratic doctrine is the total absence of any reference to value, and their grossly material, almost terrestrial, conception of production. They seldom mention value, and what little they do say is often confused and commonplace. Herein lies the source of their mistakes concerning the unproductive character of exchange and industry, which are all the more remarkable in view of the able discussions of this very question by a number of their contemporaries. Among these may be mentioned Cantillon,[112] who resembles them in some respects and whose essay on commerce was published in 1755; the Abbé Galiani, who dealt with the question in his Della Moneta (1750); and the Abbé Morellet, who discussed the same topic in his Prospectus d’un Nouveau Dictionnaire du Commerce (1769). More important than any of them, perhaps, is Condillac, whose work Du Commerce et du Gouvernement was unfortunately not published until 1776; but by that time the Physiocratic system had been completed, and their pre-eminence well established.
Turgot, though one of their number, is an exception. He was never a thoroughgoing Physiocrat, and his ideas concerning value are much more scientific.[113] He defines it as “an expression of the varying esteem which man attaches to the different objects of his desire.” This definition gives prominence to the subjective character of value, and the phrases “varying esteem” and “desire” give it greater precision.[114] It is true that he also added that besides this relative attribute value always implied “some real intrinsic quality of the object.” He has frequently been reproached for this, but all that he meant to say was that our desire always implies a certain correctness of judgment, which is indisputable unless every judgment is entirely illusory. But Turgot would never have admitted that.
It is possible that Turgot inspired Condillac, and that he himself owed his inspiration to Galiani, whose book, which appeared twenty years earlier, he frequently quotes. This work contains a very acute psychological analysis of value, showing how it depends upon scarcity on the one hand and utility on the other.
Besides a difference in his general standpoint, there are other considerations which distinguish Turgot from the members of the Physiocratic school, and it would have been juster to him as well as more correct to have devoted a whole chapter to him.[115] Generally speaking, his views are much more modern and more closely akin to Smith’s. In view of the exigencies of space we must be content to draw attention to the principal doctrines upon which he differs from the Physiocrats.
1. The fundamental opposition between the productivity of agriculture and the sterility of industry, if not altogether abandoned, is at least reduced in importance.
2. Landed property is no longer an institution of divine origin. Even the appeal to the “ground expenses” is dropped. As an institution it rests merely upon the fact of occupation and public utility.
3. Movable property, on the other hand, holds a prominent place. The function of capital is more carefully analysed and the legitimacy of interest definitely proved.
But we must turn to Condillac’s book if we want to see how the Physiocratic doctrine should be completed and expurgated of its errors. Condillac was already well known as a philosopher when, in his sixtieth year, he published this new work in 1776. This admirable book, entitled Le Commerce et le Gouvernement considérés relativement l’un à l’autre, contains an outline of most modern problems. The title gives no adequate indication of the character of the work, and possibly accounts for the oblivion into which the book has fallen.
It is a genuine economic treatise, and not a medley of economic and political suggestions concerning social science, with an admixture of ethics and jurisprudence. Value is regarded as the foundation of the science, and the Physiocrats are thus out-classed from the very first.[116] Value itself is considered to be based upon utility, which is stripped of its popular meaning, and given a scientific connotation which it has never lost. It no longer implies an intrinsic, physical property of matter, but connotes a degree of correspondence between a commodity and a given human want. “Value is not an attribute of matter, but represents our sense of its usefulness, and this utility is relative to our need. It grows or diminishes according as our need expands or contracts.” This is the foundation of the psychological theory of value.[117]
But this is not all—though a great deal. He clearly realises that utility is not the only determinant of value; that quantity, i.e. scarcity or abundance, also exercises an important influence. With admirable judgment he seizes upon the connection between them, and shows how the two statements are united in one, for quantity only influences value according as its action upon utility intensifies or weakens demand. “But since the value of things is based upon need it is natural that a more keenly felt need should endow things with greater value, while a less urgent need endows them with less. Value increases with scarcity and diminishes with plenty. In case of plenty it may even disappear; a superabundant good will be valueless if one has no use for it.”[118] This could not be put more clearly to-day. Here we have the germ of the theories of Jevons and the Austrian school, though it took a long time to develop.
We might naturally expect a superior treatment of exchange following upon this new theory of value. If value is simply the satisfaction of want, exchange creates two values when it satisfies two needs at the same time. The characteristic of exchange is that each of the two parties yields what it has in superabundance in return for what it needs. But what is given up is superabundant, is useless, and consequently valueless; what is demanded has greater utility, and consequently greater value. Two men come to market each with a useless thing, and each returns with a useful one.[119] Consequently the Physiocratic saying that exchange means no gain to anyone, or at least that the gain of one only compensates for the loss of the others, is seen to be radically false. The Physiocrats—notably Trosne—attempted a reply, but, for reasons already given, they never succeeded in realising the subjective character of value.
This same theory should have carried Condillac a stage further, and helped in the rectification of the Physiocratic error concerning production. If value is simply utility and utility itself is just the correspondence between things and our demand for them, what is the agency that produces this harmony between things and desires? It is very seldom that nature succeeds in establishing it. “Nature is frequently fertile in things we have no desire for and lavish of what is useless”—a profound remark that ought to have cooled the Physiocrats’ love of the Alma Parens. “Matter is transformed and made useful by dint of human labour. Production means giving new form to matter.”[120] If this be true, then there is no difference between agricultural and industrial production, for they both transform what already exists.[121]
Moreover, the theory proves very clearly that if artisans and proprietors are dependent upon the agriculturists—as, indeed, they are—the latter in their turn are nothing but artisans. “If someone asks whether agriculture ought to be preferred to manufacture or manufacture to agriculture, we must reply that we have no preferences, and that the best use should be made of both.”[122]
Lastly, his definition of wages, short as it is, is of immense significance. “Wages represent the share of the product which is due to the workers as co-partners.”[123] Wages only “represent” the share that is due to the workers. In other words, the wage-earner, either through want of will or of power, cannot exercise his rightful claim to his own work, and simply surrenders the claim in return for a money price. This constitutes his salary, which is regulated, like every other price, by competition between buyers and sellers. Condillac makes no reference to an iron law of wages, but regards them as determined by the forces of demand and supply. He does, however, hint at the implicit alliance which exists between capital and labour.[124]
From a practical standpoint also, especially in his defence of free labour and his condemnation of corporations, Condillac is more categorical than the Physiocrats. “All these iniquitous privileges,” he writes, “have no claim to a place in the order beyond the fact that they are already established.” He is as persistent as Turgot in his justification of the taking of interest and in his demand for the determination of the rate by competition. This very elegant argument is employed to show its similarity to exchange: Exchange implies compensation for overcoming the drawbacks of distance, whether of place or of time.[125] Exchange generally refers to place, interest to time, and this is really the foundation of the modern theory.
CHAPTER II: ADAM SMITH
Notwithstanding the originality and vigour displayed by the Physiocrats, they can only be regarded as the heralds of the new science. Adam Smith,[126] it is now unanimously agreed, is its true founder. The appearance of his great work on the Wealth of Nations in 1776 instantly eclipsed the tentative efforts of his predecessors. To-day the Physiocratic doctrines scarcely do more than arouse historical curiosity, while Smith’s work has been the guide for successive generations of economists and the starting-point of all their speculation. Even at the present day, despite many changes in the fundamental principles of the science, no economist can afford to neglect the old Scotch author without unduly narrowing his scientific horizon.
Several reasons account for the commanding position held by this book—a position which no subsequent treatise has ever successfully rivalled.
First is its supreme literary charm. It is above all an interesting book, bristling with facts and palpitating with life. The burning questions of the hour, such as the problems presented by the colonial régime, the trading companies, the mercantile system, the monetary question, and taxation, supply the author with congenial themes for his treatment. His discussion of these questions is marked by such mastery of detail and such balance of judgment that he convinces without effort. His facts are intermixed with reasoning, his illustrations with argument. He is instructive as well as persuasive. Withal there is no trace of pedantry, no monotonous reiteration in the work, and the reader is not burdened with the presence of a cumbersome logical apparatus. All is elegantly simple. Neither is there the slightest suggestion of the cynic. Rather a passion of genuinely human sympathy, occasionally bordering upon eloquence, breathes through the pages. Thanks to rare qualities such as these we can still feel something of the original freshness of this old book.
In addition to this, Smith has been successful in borrowing from his predecessors all their more important ideas and welding them into a more general system. He superseded them because he rendered their work useless. A true social and economic philosophy was substituted for their fragmentary studies, and an entirely new value given to their contributions. Taken out of their isolation, they help to illustrate his general theory, becoming themselves illuminated in the process.
Like most great writers, Smith knows how to borrow without impairing his originality. Over a hundred authors are quoted in his book, but he does not always acknowledge them. The names of some of the writers who exercised such influence over him, and opened up the path which he afterwards followed, deserve more than a passing reference.
The first place among these belongs, perhaps, to Hutcheson, Smith’s predecessor in the chair of Moral Philosophy at Glasgow. The divisions of the subject are almost identical with those given by Hutcheson, and many of Smith’s best known theories can be traced in the System of Moral Philosophy published by Hutcheson in 1755, but which we know was written long before. Hutcheson laid great stress upon the supreme importance of division of labour, and his views on such questions as the origin and variations in the value of money and the possibility of corn or labour affording a more stable standard of value closely resemble those of the Wealth of Nations.
David Hume is a near second. Smith refers to him as “by far the most illustrious philosopher and historian of the present age,”[127] and from 1752 onward they were the closest of friends. Hume was already the author of some essays on economic questions, the most important among them dealing with money, foreign trade, the rate of interest, etc. These, along with several other writings, were published in the Political Discourses in 1752. Hume’s examination of these problems displays his original penetrative thought, and there is evident the profundity and lucidity of treatment characteristic of all his writings. The absurdity of the Mercantile policy and of interfering with the natural tendency of money to adapt itself to the needs of each community, the sophistry of the balance of trade theory, and the impious consequences resulting from commercial jealousy among nations are exposed with admirable force in these essays. No doubt the essays left a great impression upon Smith. He quoted them in his lectures at Glasgow, and Hume consulted him before bringing out a second edition. It is true that Smith eventually became the stauncher Liberal of the two. Hume, in his essay on the Balance of Trade, recognized the legitimacy of certain protective rights which Smith wished removed altogether. Still it was to Hume that Smith owed his conversion to the Liberal faith.
On this matter of commercial liberty there was already, towards the end of the seventeenth and the beginning of the eighteenth centuries, a small but a growing band of Mercantilists who had begun to protest against the irksomeness of the Customs regulations. They were, of course, still largely imbued with mercantile prejudice, but they are rightly classed as “Liberals.” Just as in France Boisguillebert had foreshadowed the Physiocrats, so in England Child, Petty, Tucker, Dudley North, and Gregory King had been preparing the way for a more liberal policy in foreign trade.[128]
In addition to Hutcheson and Hume one other writer must be mentioned in this connection, namely, Bernard de Mandeville. He was not an economist at all, but a doctor with considerable philosophical interests. In 1704 he had published a small poem, which, along with a number of additions, was republished in 1714 under the title of The Fable of the Bees; or, Private Vices Public Benefits. The fundamental idea of the book, which caused quite a sensation at the time, and which was seized by order of the Government, is that civilisation—understanding by that term not only wealth, but also the arts and sciences—is the outcome, not of the virtues of mankind, but of what Mandeville calls its vices; in other words, that the desire for well-being, comfort, luxury, and all the pleasures of life arises from our natural wants. The book was a sort of apology for the natural man and a criticism of the virtuous.
Smith criticised Mandeville in his Theory of Moral Sentiments,[129] and reproached him particularly for referring to tastes and desires as vices though in themselves they were nowise blameworthy. But despite his criticism Mandeville’s idea bore fruit in Smith’s mind. Smith in his turn was to reiterate the belief that it was personal interest (in his opinion no vice, but an inferior virtue) that unwittingly led society in the paths of well-being and prosperity. A nation’s wealth for Smith as well as for Mandeville is the result, if not of a vice, at least of a natural instinct which is not itself virtuous, but which is bestowed upon us by Providence for the realisation of ends that lie beyond our farthest ken.
Such are the principal writers in whose works we may find an outline of some of the more important ideas which Smith was to incorporate in a true system.
Mere systematisation, however, would not have given the Wealth of Nations its unique position. Prior to Smith’s time attempts had been made by Quesnay and the Physiocrats to outline the scope of the science and to link its various portions together by means of a few general principles. Although he was not the first to produce a connected scientific treatise out of this material, he had a much greater measure of success than any of his predecessors.
Smith owed much to the Physiocrats, but he had little personal acquaintance with them beyond that afforded by his brief stay in Paris in 1765. Slight as the intimacy was, however, there is no doubt about the influence they had upon him. It is also very improbable that he had read all their works: Turgot’s Réflexions, for example, written in 1766, but only published in 1769-70, was probably not known to him. But frequent personal converse with both Turgot and Quesnay had helped him in acquiring precise first-hand knowledge of their views. We can easily guess which ideas would attract him most.
On one point at least he had no need to be enlightened, for in the matter of economic liberalism he had long been known as a doughty champion. But the ardent faith of the Physiocrats must have strengthened his own belief very considerably.
On the other hand, it appears that he borrowed from the Physiocrats the important idea concerning the distribution of the annual revenue between the various classes in the nation. In his lectures at Glasgow he scarcely mentions anything except production, but in the Wealth of Nations an important place is given to distribution. The difference can hardly be explained except upon the hypothesis of Smith’s growing acquaintance with the Tableau économique and the theory of the “net product.”
But admitting that he borrowed what was most characteristic and most suggestive in their teaching, his treatment of its many complicated aspects is altogether superior to theirs. The Physiocrats were so impressed by the importance of agriculture that they utterly failed to see the problem in its true perspective. They scanned the field through a crevice, and their vision was consequently narrow and limited. Smith, on the other hand, took the whole field of economic activity as his province, and surveyed the ground from an eminence where the view was clearest and most extensive.
The economic world he regarded as a vast workshop created by division of labour, one universal psychological principle—the desire of everyone to better his lot—supplying unity to its diverse phenomena. Political economy was at last to be based, not on the interests of a particular class, whether manufacturing or agricultural, but upon a consideration of the general interest of the whole community. Such are the directing principles that inspire the whole work, the guiding lines amidst what had hitherto seemed a mere chaos of economic facts. Contemporaries never counted upon the difficulties which the new science was bound to encounter, so great was their enthusiasm at having a fixed standpoint from which for the first time the complex interests of agriculture, industry, and commerce might be impartially surveyed. With Smith the study emerged from the “system” stage and became a science.
Our examination of Smith’s views will be grouped around three points:
(I) Division of labour.
(II) The “natural” organisation of the economic world under the influence of personal interest.
(III) Liberalism.
I: DIVISION OF LABOUR
It was Quesnay who had propounded the theory that agriculture was the source of all wealth, both the State’s and the individual’s.[130] Adam Smith seized upon the phrase and sought to disprove it in his opening sentence by giving to wealth its true origin in the general activity of society. “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, and which consist always either in the immediate produce of that labour or in what is purchased with that produce from other nations.”
Labour is the true source of wealth. When Smith propounded this celebrated theory, which has given rise to so many misunderstandings since, it was not intended that it should minimise the importance of natural forces or depreciate the part which capital plays in production.[131] No one, except perhaps J. B. Say, has been more persistent in emphasising the importance of capital, and to the land, as we shall presently see, he attributed a special degree of productivity. But from the very outset Smith was anxious to emphasise the distinction between his doctrine and that of the Physiocrats. So he definitely affirms that it is human activity and not natural forces which produces the mass of commodities consumed every year. Without the former’s directing energy the latter would for ever remain useless and fruitless.
He is not slow to draw inferences from this doctrine. Work, employed in the widest sense, and not nature, is the parent of wealth—not the work of a single class like the agriculturists, but the work of all classes. Hence all work has a claim to be regarded as productive. The nation’s annual income owes something to everyone who toils. It is the result of their collaboration, of their “co-operation” as he calls it. There is no longer any need for the distinction between the sterile and the productive classes, for only the idle are sterile.
A nation is just a vast workshop, where the labour of each, however diverse in character, adds to the wealth of all. The passage in which Adam Smith expresses this idea is well known, but no apology is needed for quoting it once again.[132] “What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing those different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated.”
Division of labour is simply the spontaneous realisation of a particular form of this social co-operation. Smith’s peculiar merit lies in placing this fact in its true position as the basis of his whole work. The book opens upon this note, whose economic and social importance has been so frequently emphasised since that it sounds almost commonplace to-day.
This division of labour effects an easy and natural combination of economic efforts for the creation of the national dividend. Whereas animals confine themselves to the direct satisfaction of their individual needs,[133] men produce commodities to exchange them for others more immediately desired. Hence there results for the community an enormous increase of wealth; and division of labour, by establishing the co-operation of all for the satisfaction of the desires of each, becomes the true source of progress and of well-being.
In order to illustrate the growth in total production as the outcome of division of labour, Smith gives an example of its effects in a particular industry. “The effects of the division of labour, in the general business of society, will be more easily understood by considering in what manner it operates in some particular manufactures.” It is in this connection that he introduces his celebrated description of the manufacture of pins. “A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day.”[134]
Such is the picture of man as we find him in society. Division of labour and exchange have resulted in augmenting production a hundredfold, and thus increasing his well-being, whereas left to himself he could scarcely supply his most urgent needs.
In a subsequent analysis Smith ascribes the gain resulting from division of labour to three principal causes: (1) The greater dexterity acquired by each workman when confined to one particular task; (2) the economy of time achieved in avoiding constant change of occupation; (3) the number of inventions and improvements which suggest themselves to men absorbed in one kind of work.
Criticism has been levelled at Smith for his omission to mention the disadvantages of division of labour which might possibly counterbalance its many advantages. The omission is the result of his method of treating the whole question, and it is not of much real importance. The disadvantages, moreover, were not altogether lost sight of, and it would be difficult to find a more eloquent plea for some counteracting influence than that which Smith puts forward in the fifth book of the Wealth of Nations. “In the progress of the division of labour,” he remarks, “the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations; frequently to one or two.” But “the man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become.”[135]
This passage seems in contradiction with the ideas expressed above. At one moment constant application to one particular kind of work is regarded as the mother of invention, at another the unremitting task is branded as a fertile cause of stupefaction. The contradiction is, however, more apparent than real. An occupation at first stimulating to the imagination may, if constantly pursued, result in mental torpor. Smith’s conclusions are at any rate interesting. In order to remove the inconveniences resulting from over-specialisation he emphasises the need for bringing within reach of the people, even of imposing upon them, a system of education consisting of the three R’s[136]—such education to be supplied through institutions partly supported by the State. We can imagine the shock which such heterodoxy must have given to the prophets of laissez-faire. Fortunately it was not the only one they had to bear.
Smith next proceeds to indicate the limits of this division of labour. Of such limits he mentions two: (1) In the first place it must be limited by the extent of the market. “When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.”[137] This is why foreign trade, including trade with the colonies, by extending the market for some products is favourable to further division of labour and a further increase of wealth. (2) The other consideration which, according to Smith, limits division of labour is the quantity of capital available.[138] The significance of this observation is not quite so obvious as that of the former one. Here it seems to us that a conclusion drawn from one particular trade has been applied to industry as a whole. It may be true of a private manufacturer that he will be able to push technical division of labour further than any of his rivals provided he has more capital than they; but taking society as a whole it is clear that the existence of division of labour enables the same product to be produced with less capital than is necessary for the single producer.[139]
Such is an outline of Adam Smith’s theory of division of labour—a theory so familiar to everyone to-day that we are often unable to realise its importance and to appreciate its originality, and this despite the fact that certain sociologists like Durkheim have hailed it as supplying the basis of a new ethic. Juxtaposed with the Physiocratic theory, it is not very difficult to realise its superiority.
To the Physiocrats the economic world was a hierarchy of classes. The agriculturist in some mysterious way bore the “whole weary weight of this unintelligible world” upon his own shoulders, giving to the other classes a modicum of that sustenance which he had wrested from the soil. Hence the fundamental importance of the agricultural classes and the necessity for making the whole economic system subordinate to them. Adam Smith, on the other hand, attempted to get a view of production as a whole. He regarded it as the result of a series of joint undertakings engineered by the various sections of society and linked together by the tie of exchange. The progress of each section is bound up with that of every other. To none of these classes is entrusted the task of keeping all the others alive; all are equally indispensable. The artisan who spares the labourer the task of building his house or of making his shoes contributes to the accumulation of agricultural products just as much as the ploughman who frees the artisan from turning the furrow or sowing the seed. The progress of national wealth cannot be measured in terms of a single net product; it must be estimated by the increase in the whole mass of commodities placed at the disposal of consumers.
One very evident practical conclusion follows; namely, that taxation should fall, not upon one class, as the Physiocrats wished, but upon all classes alike. As against the impôt unique, Smith advocates multiple taxation which shall strike every source of revenue equally, labour and capital as well as land; and the fundamental rule which he lays down is as follows: “The subjects of every State ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”[140] This is his famous maxim of equality so frequently quoted in every financial discussion.[141]
It is very curious that Smith should have failed to make the best possible use of this theory. Its full significance was lost upon him. The theory of division of labour alone was sufficient to dispose of the whole Physiocratic system. Nevertheless, in the last chapter of Book IV we find him still valiantly struggling to disprove the conclusions of the Physiocrats, by the aid of arguments not always very convincing. Forgetting his principle of division of labour, he even adopts a part of their thesis and finds himself entangled by the invalid distinctions which they had drawn between productive and unproductive workers. He simply gives another definition and describes as unproductive all works which “perish in the very instant of their performance, and seldom leave any trace or value behind them for which an equal quantity of service could afterwards be procured.”[142] All these services, which comprise the labours of domestic servants, of administrators and magistrates, of soldiers and priests, of counsellors, doctors, artists, authors, musicians, etc., Say classed together as “immaterial products.” By restricting the term “productive” to material objects only, Smith gave rise to a very useless controversy on the nature of productive and unproductive works—a controversy that was first taken up by Say and revived by Mill, but which to-day seems to be decided against Smith, thanks to a more exact interpretation of his own doctrines. It is, indeed, quite clear that all these services constitute a part of the annual revenue of the nation, and that “production” in a general sense would be diminished if some persons did not exclusively devote themselves to the performance of such tasks.
After criticising the Physiocratic distinction drawn between the wage-earning classes and the productive, Smith immediately admits that the labour of artisans and traders is not as productive as that of farmers and agricultural labourers, for the latter not only return the capital employed by them together with profits, but they also furnish the proprietor with rent.[143]
Whence this hesitation on the part of Smith? Where did he come by the idea of the special and superior productivity of agriculture? An attempt to account for it may prove interesting, and it will help us to give Smith his true place in a history of economic doctrines.
Notwithstanding his recantation, Smith was never quite rid of Physiocratic influence. Writing of the Physiocratic system, he described it as perhaps “the nearest approximation to the truth that has yet been published.”[144] So indelible was the impression which the Physiocrats left upon him that both they and their doctrines, even when the latter are directly opposed to his own, are always spoken of with the greatest respect. The most important evidence of their power over him is the thesis just mentioned which he attempted to defend, namely, that between agriculture and other industries lies an essential distinction, because in industry and commerce the forces of nature are never brought into play, whereas in agriculture they always collaborate with man. “No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing; man does all; and the reproduction must always be in proportion to the strength of the agents that occasion it.”[145] We almost think we are dreaming when we read such things in the work of a great economist. Water, wind, electricity, and steam, are they not natural forces, and do they not co-operate with man in his task of production?
Considerations such as these were allowed to pass quite unheeded, and Smith persisted in his error because he believed that this new doctrine furnished him with an explanation of rent, that strange enigma which had puzzled English economists for so long. How was it that while other branches of production gave a return only sufficient to remunerate the capital and labour employed, agriculture, in addition to these two revenues, yielded a supplementary income known as rent? It was because “in agriculture nature labours along with man: and though her labour costs no expence, its produce has its value as well as that of the most expensive workman.” Thus “rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.”[146] Had Smith arrived at a true theory of rent this recourse to the natural powers of the soil to furnish an explanation of the proprietor’s revenue would have been quite unnecessary, and in all probability he would not have so easily accepted the idea of the special productivity of the soil. But this false conception of nature has persisted in economic theory, and in it Smith thought he saw an additional reason for adhering to those errors which the Physiocrats had first induced him to commit.[147]
Apart from his personal attachment to the Physiocrats we must also remember that Smith more than shared their predilection for agriculture.
Nothing can be more incorrect, though it is frequently done, than to regard Smith as the prophet of industrialism and to contrast him with the Physiocrats, the champions of agriculture. When the Wealth of Nations appeared in 1776 the economic transformation known to history as the Industrial Revolution, which consisted in the rapid substitution of machine production for the old domestic régime, had as yet scarcely begun. Hargreaves and Arkwright had doubtless some inventions to their credit. The one had produced the spinning jenny in 1765, and the other had perfected the water frame in 1767, improvements that had given considerable impetus to the cotton trade. James Watt,[148] who was known to Smith, took out a patent for a steam-engine in 1769. But these inventions were as yet quite novel, and required time before they could modify the industrial system. The more important among them, Crompton’s “mule”[149] and Cartwright’s weaving machine, were as yet of the future. These dates are significant; they prove conclusively that the Industrial Revolution had scarcely begun when Smith’s great work appeared. Moreover, several of the more important themes treated of in the Wealth of Nations may be discovered in the course of lectures which Smith delivered at Glasgow about 1759, so that it is quite impossible to establish anything like an exact connection between the Industrial Revolution which was just beginning and the ideas embodied in the Wealth of Nations. One cannot even say that Smith was particularly enamoured of the manufacturing régime—apart from the mechanical advance which it implied. For, as Marx says,[150] the characteristic trait of English economic life, despite the undisputed advance that industry was making at that time, was commercial rather than industrial.[151] Especially was this true of Glasgow, where Smith made most of his observations. Glasgow then was an essentially commercial town, principally engaged in the importation of American tobacco.[152]
Far from constituting a prophetic manifesto of the new age, Smith’s work reveals even to the most superficial reader a thorough abhorrence of traders and manufacturers. All his sarcasm is reserved for them, all his criticism levelled at them. While the interest of landed proprietors and workers appears to him always to accord with a country’s general interest, that of traders and manufacturers “is never exactly the same with that of the public,” the manufacturers having “generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”[153]
Again, when it comes to choosing between capitalists and workmen the issue is not long in doubt. It is quite clear from more than one passage that Smith’s sympathy was wholly with the workers. Several paragraphs could be cited in proof of this. Suffice it to recall the very sympathetic way in which he speaks of the high wages of workmen and contrast it with his discussion of profits. “Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged.”[154] The tune changes when he comes to speak of profits. He is of opinion that high profits raise the price of commodities much more than high wages, and he dismisses the consideration of the problem with this ironical remark: “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”[155] The contrast is significant. It is still more deeply marked in that phrase which one is surprised not to see more frequently quoted by the champions of labour legislation. “Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.”[156]
This is not the tone of most of his contemporaries. Nor do we meet with this note in the writings of the appointed champions of the industrial system—the MacCullochs, the Ures, and the Babbages of the next fifty years. His words ring with that generous pity which proved a source of inspiration to Lord Shaftesbury and Michael Sadler in their efforts to secure the passing of the Factory Act of 1833.
Smith cannot, accordingly, be regarded as the herald of dawning industrialism. He clung to agriculture with all the tenacity of his nature, and no opportunity of showing his preference was ever missed. The difficulties of agriculture are quite beyond those of any other craft. “After what are called the fine arts, and the liberal professions, however, there is perhaps no trade which requires so great a variety of knowledge and experience.”[157] Not only is it more difficult, but it is also more useful. Between agriculture, manufacture, and commerce he draws a long comparison (to which we shall have to make reference again) purporting to show that of all employments agriculture is the most profitable field of investment, and the one most in accord with the general interest. For the more progressive nations “the natural course of things” would seem to suggest the investment of capital firstly in agriculture, in the second place in industry, and finally in foreign trade. The whole of Book III is an endeavour to show how the policy of European nations had for many centuries been hostile to agriculture and how the natural order had been inverted in the interests of merchants and artisans. Agriculture had always been the victim. In his theory of taxation he shows how a portion of the taxes on profits and wages ultimately falls upon property. In his discussion of duties on imported corn—those duties which aroused the indignation of Ricardo against the landlords—he reveals the same partiality. And he even goes the length of saying that it is not because of their personal interest, but owing solely to a badly conceived imitation of the doings of merchants and manufacturers, that “the country gentlemen and farmers of Great Britain so far forgot the generosity which is natural to their station, as to demand the exclusive privilege of supplying their countrymen with corn and butchers’-meat.”[158]
Smith’s preference for agriculture and agriculturists need not be further insisted upon. Despite his own theory of division of labour, he still cherished a secret regard for the Physiocratic prejudice. He never subjected agriculture to the indignity of equal treatment along with other forms of economic activity. In his work at least it still retains its ancient pre-eminence.
II: THE “NATURALISM” AND “OPTIMISM” OF SMITH
In addition to the conception of the economic world as a great natural community created by division of labour, we can distinguish in Smith’s work two other fundamental ideas, around which his more characteristic theories group themselves. First is the idea of the spontaneous origin of economic institutions, and secondly their beneficent character—or, more briefly, Smith’s naturalism and optimism.
The two ideas, though frequently intermingled and sometimes even confused in Smith’s work, must be carefully distinguished by the historian of economic thought.
Spontaneity and beneficence were intimately connected for Smith. In the eighteenth century anything natural or spontaneous was immediately voted good, and the terms “natural,” “just,” and “advantageous” were often used as synonymous. Smith did not escape the confusion of ideas. Having shown the natural origin of economic institutions, he imagined that at the same time he had demonstrated their useful and beneficent character.[159] The confusion is no longer permissible. To give a scientific demonstration of the origin of social institutions and to gauge their value from the point of view of the general interest are two equally legitimate but very different intellectual pursuits. We may agree with Smith that our economic organisations, both in their origin and functions, participate of the spontaneity of natural organisms, but we may at the same time reserve judgment as to their real worth. Pessimism no less than optimism may be engendered by contemplation of the spontaneous character of economic institutions. While this conception of the spontaneity of economic institutions seems to us just and fruitful, the demonstration given of their beneficent character appears insufficient and doubtful. The former conception is a commonplace with all the greatest economists; the latter is rejected by the majority of them.
These two ideas which have played such an important part in the history of economic doctrines must be separately examined.
The conception of spontaneity is the one to which Smith refers most frequently. Il mondo va da se. Here at any rate he and the Physiocrats were entirely at one. There is no need for organisation, no call for the intervention of any general will, however far-seeing or reasonable, and no necessity for any preliminary understanding between men. Such are the reflections that the study of the economic world suggests ever anew to our author. The present aspect of the economic world is the result of the spontaneous action of millions of individuals, each of whom follows his own sweet will, taking no heed of others, but never doubting the ultimate result. The noble outlines of the economic world as we know it have been traced, not by following a plan issuing complete from the brain of an organiser and deliberately carried out by an intelligent society, but by the accumulation of numberless deeds designed by a crowd of individuals in obedience to an instinctive force wholly unconscious of the work which it was encompassing.
This idea of the spontaneous constitution of the economic world is in some aspects analogous to the conception of an “economic law” of a later period. Both ideas suggest the presence of something superior to individual wills, and imposed upon them even despite their resistance. The differences are equally marked, however, the scope of the former being far greater than that of the latter. The words “natural law,” in the first place, suggest regularity and repetition—the constant recurrence of the same phenomena under similar conditions. This is not the aspect that particularly struck Smith. He insists less upon the constancy of economic phenomena and more on their spontaneity, their instinctive and natural character. Say’s delight was to compare the economic and the physical worlds. Smith loves to regard the economic world as a living organism which creates for itself its own indispensable organs. Nowhere is the term “economic law” employed, but his delineation of the chief economic institutions and the account of their functions always results in the same conclusion.
First of all take division of labour, which we have just studied, and which more than any other institution contributes to the increase of wealth.
This marvellous institution is “not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion.” “It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”[160] This tendency itself is the outcome of personal interest. “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. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages.”[161] This gives rise to exchange, and with exchange comes division of labour. “And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.” Division of labour is the outcome of a tendency common to all men, the tendency to barter; and this tendency itself is spontaneously developed under the influence of personal interest, which acts simultaneously for the benefit of each and all.
Next comes money, and nothing has so facilitated exchange or so greatly increased wealth. Every economic treatise since Smith’s has demonstrated its advantages in terms almost identical with his. But how did money first come to be employed? It was not by the act of a public body, nor was it the outcome of a nation’s reflective judgment. It is simply the result of the operation of a collective instinct. Some men who were keener than others saw the inconveniences of the truck system. And “in order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.”[162] Money is thus the product of the simultaneous though not concerted action of a great number of people, each obeying his personal inclination. The intervention of the public authority is much later, and its object is merely to guarantee by means of a design the weight and purity of such coins as are already in circulation.
Take another well-known phenomenon—capital.[163] With the exception of division of labour and the invention of money, Smith thought there was no phenomenon of greater importance and no more essential fount of national wealth than capital. The larger the store of capital, the greater the number of productive workers, makers of tools and machinery—the essentials of increased productivity—the further will division of labour extend. To increase a nation’s capital is to expand its industry and to further its well-being.[164] In some passages the growth of wealth appears not merely as the chief but as the only method of augmenting a nation’s wealth. “The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue.”[165] In short, capital limits industry,[166] a phrase that was destined to become classic, and one that was repeated by every economist down to Mill. Capital is the true source of economic life. Let capital increase and industry will expand in every direction; diminish it and a bar is set to all improvement. Capital fertilises the earth, whereas the labour of man simply leaves it a weary waste.
Criticism has been freely levelled at this extravagant importance which capital is made to assume. It is certainly somewhat curious that labour should now be treated as altogether subordinate to capital, whereas earlier in the volume labour alone was regarded as the great wealth-producing agent. But we are not here concerned with the revival of these threadbare controversies.[167] We merely wish to note that Smith finds in this accumulation of capital a new illustration of spontaneity. The saving of capital is not the result of any foresight on the part of society, but is solely due to the simultaneous and concurrent actions of thousands of individuals. These individuals, urged on by a desire to better their situation, are spontaneously urged to save their earnings and to employ those savings productively.
“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.… An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire.” This desire is so powerful that even the greatest follies perpetrated by Governments have never succeeded in annulling its beneficial effects. “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 toward 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.”[168]