[69] Dialogues, p. 153. The dearth of plenty, as they paradoxically put it, stimulates production, and Boisguillebert, in an equal paradox, remarks that “Low price gives rise to want.” In the Maximes, p. 98, Quesnay contents himself by saying that free trade in corn makes the price more equal. “It is clear,” he adds, “that, leaving aside the question of foreign debt, equal prices will increase the revenue yielded by the land, which will again result in extended cultivation, which will provide a guarantee against those dearths that decimate population.”
Mercier de la Rivière writes in a similar vein. “A good constant average price ensures abundance, but without freedom we have neither a good price nor plenty.” (P. 570.)
Turgot in his Lettres sur le Commerce des Grains develops the argument at great length and tries to give a mathematical demonstration of it. There was no need for this. It is a commonplace of psychology that a steady price of 20 is preferable to alternative prices of 35 and 5 francs respectively, although the average in both cases is the same.
[70] It is worth noting that the nature of American competition was clearly foreseen by Quesnay—one of the most remarkable instances of scientific prevision on record. In his article on corn in the Encyclopédie he says that he views the fertility of the American colonies with apprehension and dreads the growth of agriculture in the New World, but the fear is provisionally dismissed because the corn is inferior in quality to that of France and is damaged in transit. (See our remarks concerning the Physiocratic connection with modern Protectionist theories.)
[71] It must not be forgotten that the Protectionist system aided the development of industry and retarded that of agriculture by its policy of encouraging the exportation of manufactured products and its restrictions on the exportation of agricultural products and raw materials with a view to securing cheap labour and a plentiful supply of raw materials for the manufacturing industries. The Protectionists were not concerned to prevent the exportation of corn. Both Colbertism and Mercantilism sacrificed the cultivator by preventing the exportation of corn and by allowing of its importation, while doing the exact opposite for manufactured products.
[72] “Upon final analysis do you find that you have gained anything by your policy of always selling to foreigners without ever buying from them? Have you gained any money by the process? But you cannot retain it. It has passed through your hands without being of the least use. The more it increases the more does its value diminish, while the value of other things increases proportionally.” (Mercier de la Rivière, pp. 580-583.)
[73] Turgot, Œuvres, vol. i, p. 181. “If you succeed in keeping back foreign merchants by means of your protective tariffs they will not bring you those goods which you need, thus causing those impositions which were designed for others to retaliate upon your own head.” (Quesnay, Dialogues.)
[74] Dialogues, pp. 254, 274.
[75] Ibid., p. 237.
[76] Ibid., p. 22. He proposed a highly complicated system imposing moderate duties both upon the importation and exportation of corn—a 5 per cent. ad valorem duty in the one case and a 10 per cent. in the other.
[77] Turgot was the author of a work on this subject, entitled Mémoire sur les Prêts d’Argent (1769).
[78] Réflexions sur la Formation des Richesses, §§ lix, lxi, lxxiv.
[79] “Remove all useless, unjust, contradictory, and absurd laws, and there will not be much legislative machinery left after that.” (Baudeau, p. 817.) “It is not a question of procuring immense riches, but simply a question of letting people alone, a problem that hardly requires a moment’s thought.” So wrote Boisguillebert sixty years before.
[80] Quesnay, Maximes, vol. i, p. 390. Mercier de la Rivière writes in much the same style; “The positive laws that are already in existence are merely expressions of such natural rights.” (Vol. ii, p. 61.) It sounds like a preamble to the Declaration of the Rights of Man.
[81] “The Physiocrats had the most absolute contempt for political liberty.” (Esmein, La Science politique des Physiocrates, address at the opening session of the Congress of Learned Societies, Paris, 1906.)
“The Greek republics never became acquainted with the laws of the order. Those restless, usurping, tyrannical tribes never ceased to drench the plains with human blood, to cover with ruins and to reduce to waste the most fertile and the best situated soil in the then known world.” (Baudeau, p. 800.)
“It is evident that a democratic sovereign—i.e. the whole people—cannot itself exercise its authority, and must be content to name representatives. These representatives are merely agents, whose functions are naturally transitory, and such temporary agents cannot always be in complete harmony with every interest within the nation. This is not the kind of administration contemplated by the Physiocrats. The sovereignty of the natural order is neither elective nor aristocratic. Only in the case of hereditary monarchy can all interests, both personal and individual, present and future, be clearly linked with those of the nation, by their co-partnership in all the net products of the territory submitted to their care.” (Dupont, vol. i, pp. 359-360.)
This sounds very much like a eulogy of the House of Hohenzollern, delivered by William II.
Very curious also are Dupont’s criticisms of the parliamentary régime. In his letter to J. B. Say (p. 414) he notes “its tendency to corruption and canker,” which had not then manifested itself in the United States of America. These letters, though very interesting, hardly belong to a history of economic doctrines.
[82] “It is only when the people are ingenuous that we find real despots, because then the sovereign can do whatever he wills.” (Dupont, p. 364.)
[83] Quesnay, Maximes, i. The Physiocrats were in favour of a national assembly, but would give it no legislative power. It was to be just a council of State concerned chiefly with public works and with the apportionment of the burden of taxation. See M. Esmein’s mémoire on the proposed National Assembly of the Physiocrats (Comptes rendus de l’Académie des Sciences Morales et Politiques, 1904).
[84] “The personal despotism will only be the legal despotism of an obvious and essential order. In legal despotism the obviousness of a law demands obedience before the monarch enjoins it. Euclid is a veritable despot, and the geometrical truths that he enunciates are really despotic laws. The legal and personal despotism of the legislator are one and the same. Together they are irresistible.” (Mercier de la Rivière, pp. 460-471.) This despotism is really not unlike that of Comte, who remarks that there is no question of liberty of conscience in geometry.
[85] “On the contrary,” says Quesnay in a letter to Mirabeau, “this despotism is a sufficient guarantee against the abuse of power.”
[86] “That is an abominable absurdity,” says Baudeau, “for on this reckoning a mere majority vote would be sufficient to justify parricide.”
Is it necessary to point out that this is exactly the reverse of the view held by interventionists and socialists of these later times, who think that the mission of the State is to redress the grievances caused by natural laws?
[87] “This single supreme will which exercises supreme power is not, strictly speaking, a human will at all. It is just the voice of nature—the will of God. The Chinese are the only people whose philosophy seems to have got hold of this supreme truth, and they regard their emperor as the eldest son of God.” (Baudeau, p. 798.)
[88] Some writers—for example, Pantaleoni in his introduction to Arthur Labriola’s book, Le Dottrine economiche di Quesnay—seem to think that the Physiocratic criticism proved fatal to feudal society, just as the socialistic criticism of the present time is undermining the bourgeois society. Politically this is true enough, for the Physiocrats advocated the establishment of a single supreme monarch with undivided authority. Economically it is incorrect, for their conception even of sovereignty and taxation is impregnated with feudal ideas.
[89] Dupont, Discours en tête des Œuvres de Quesnay, vol. i, p. 35.
[90] Ibid. p. 22.
[91] Turgot, who is less inclined to favour agriculture, thinks that certain royal privileges must be granted before manufacturers can compete with agriculture (Œuvres, vol. i, p. 360).
[92] “One has come to regard the various nations as drawn up against one another in a perpetual state of war. This unfortunate prejudice is almost sacred, and is regarded as a patriotic virtue.” (Baudeau, p. 808.)
The three errors usually committed by States, and the three that led to the downfall of Greece, Baudeau thought, were arbitrary use of legislative authority, oppressive taxation, and aggressive patriotism (p. 801).
[93] “Before a harvest can be reaped not only must the cultivators incur the usual outlay upon stock, etc., and the proprietors upon clearing the land, but the public authority must also incur some expense, which might be designated avances souveraines.” (Baudeau, p. 758.)
[94] “The Government ought to be less concerned with the task of saving than with the duty of spending upon those operations that are necessary for the prosperity of the realm. This heavy expenditure will cease when the country has become wealthy.” (Quesnay, Maximes, xxvi.)
“It is a narrow and churlish English idea which decrees that an annual sum should be annually voted to the Government, and that Parliament should reserve to itself the right of refusing this tax. Such a procedure is a travesty of democracy.” (Dupont, in a letter to J. B. Say.)
[95] “The amount of the tax as compared with the amount of the net product should be such that the position of the landed proprietor shall be the best possible and the state of being a landowner preferable to any other state in society.” (Dupont, p. 356.)
[96] If we compare this figure with the total gross revenue of France, valued then at 5 milliard francs, it would represent a tax of 12 per cent., which is rather heavy for a State that was supposed to be governed by the laws of the “natural order.” The proportion which the present French Budget bears to the total revenue of the country is 16 per cent.
The French Budget of 1781, introduced by Necker, corresponded almost exactly with the figure given by the Physiocrats, namely, 610 millions. Of course, we ought to add to this the ecclesiastical dues, the seigniorial rights, and the compulsory labour of every kind, which were to disappear under the Physiocratic régime.
[97] “The tax is a kind of inalienable common property. When proprietors buy or sell land they do not buy and sell the tax. They can only dispose of that portion of the land which really belongs to them, after deducting the amount of the tax. This tax is no more a charge upon property than is the right of fellow proprietors a burden upon one’s property. And so the public revenue is not burdensome to anyone, costs nothing, and is paid by no one. Hence, it in no way curtails the amount of property which a person has.” (Dupont, vol. i, pp. 357, 358.)
[98] In order to give every security to proprietors the Physiocrats were anxious that the value of the property, when once it was fixed, should vary as little as possible. Baudeau, however, recognised the advisability of periodical revaluations “in order that the sovereign power should always share in both the profits and the losses of the producer.” And he addresses this important caution to the proprietors: “Take no credit to yourselves for the increase in the revenue of land. The thanks are really due to the growing efficiency of the sovereign authority.” (P. 708.)
[99] “Let us observe, in passing, that the terms ‘taxation’ and ‘public revenue’ have unfortunately become synonymous in the public mind. The term ‘taxation’ is always unpopular. It implies a charge that is hard to bear, and which everybody is anxious to shirk. The public revenue is the product of the sovereign’s landed property, which is distinct from his subjects’ property.” (Mercier de la Rivière, p. 451.)
[100] “The sovereign takes a fixed amount of the net product for his annual income. This amount of necessity grows with every increase of the net product and diminishes with every shrinking of the product. The people’s interests and the sovereign’s are, consequently, necessarily one.” (Baudeau, p. 769.)
[101] This was the basis of Voltaire’s lively satire, L’Homme avec Quarante Écus. It treats of a wealthy financier who escapes taxation, and who makes sport of the poor agriculturist who pays taxes for both, although his income is only forty écus.
[102] “Such a reduction of the necessary expenditure must result in diminished production, because there can be no harvest without some amount of preliminary expense. You may check your expenditure, but it will mean diminishing your harvest—a decrease in the one means an equal decrease of the other. Such a fatal blow to the growth of population would, in the long run, injure the landed proprietor and the sovereign.” (Dupont de Nemours, p. 353.)
“A fall in the expenditure means a smaller harvest, which means that less will be expended upon making preparation for the next harvest. This cyclical movement seems a terrible thing to those who have given it some thought.” (Mercier de la Rivière, p. 499.)
[103] “There would be something to say for this if the rich repaid them by increased wages or additional almsgiving. But the poor give to the rich, and so add to their misery, already sufficiently great. The State demands from those who have nothing to give, and directs all its penalties and exercises all its severity upon the poor.” (Turgot, Œuvres, vol. i, p. 413).
“It would be better for the landed proprietors to pay it direct to the Treasury, and thus save the cost of collection.” (Dupont de Nemours, p. 352.)
[104] “It might happen—and, indeed, it often does happen—that the worker’s wage is only equal to what is necessary for his subsistence.” (Réflexions, vi.)
It is also possible that Jesus was not formulating a general law when He said that we have the poor always with us. Turgot likewise wished to state the simple fact, and not to draw a general conclusion.
[105] Quesnay, Second Problème économique, p. 134. The argument which follows is rather curious. He does not seem to think that a fall in wages even below the minimum would result in the death of many people, but simply that it would result in emigration to other countries, and that as a consequence of such emigration the diminished supply at home would soon lead to higher wages being paid—a fairly optimistic conclusion for the period.
[106] Baudeau (p. 770) points out the error of confusing the gross revenue with the net revenue. Allowance should be made for the cost of collecting the revenue, etc.
[107] “If unfortunately it be true that three-tenths of the annual product is not sufficient to cover the ordinary expenditure, there is only one natural and reasonable conclusion to be drawn from this, namely, curtail the expenditure.” (Dupont de Nemours, p. 775.)
“The tax must never be assessed in accordance with individual caprice. The amount is determined by the natural order.” (Dupont, Sur l’Origin d’un Science nouvelle.) Neither should the State, in their opinion, exceed the limit, because it would mean having recourse to borrowing, which would simply mean increased deferred taxation.
[108] See M. Garçon’s instructive brochure, Un Prince allemand physiocrate, for a résumé of the Margrave’s correspondence.
[109] We find the word in one of Dupont’s letters to Say, but that is much later.
[110] Henry George dedicated his volume entitled Protection or Free Trade to them because he considered that they were his masters. But his tribute loses its point somewhat when we remember that he admits that he had never read them.
[111] Listen to Mercier de la Rivière: “We must admire the way in which one man becomes an instrument for the happiness of others, and the manner in which this happiness seems to communicate itself to the whole. Speaking literally, of course I do not know whether there will not be a few unhappy people even in this State, but their numbers will be so few and the happy ones will be so numerous that we need not be much concerned about helping them. All our interests and wills will be linked to the interest and will of the sovereign, forming for our common good a harmony which can only be regarded as the work of a kind Providence that wills that the land shall be full of happy men.” This enchanting picture only applies to future society, when the “natural order” will be established. The optimism of the Physiocrats is very much like the anarchists’.
[112] Very little seems to have been known about Cantillon for more than a century after his death. But, like all the rediscovered founders of the science, he has received considerable attention for some years past. His influence upon the Physiocrats has perhaps been exaggerated. Mirabeau’s earliest book, L’Ami des Hommes, which appeared just twelve months after Cantillon’s work, is undoubtedly inspired by Cantillon. No discussion of his work is included in the text because it was felt that it might interfere with the plan of the work as already mapped out. There are several articles in various reviews which deal with Cantillon’s work, the earliest being that contributed by Stanley Jevons to the Contemporary Review in 1881.
[113] Valeurs et Monnaies, which dates from 1769, and again in his Réflexions. Quesnay’s conception of value may be gleaned from his article entitled Hommes, which remained unpublished for a long time, and has only recently appeared in the Revue d’Histoire des Doctrines économiques et sociales, vol. i, No. 1.
[114] He dilates at considerable length on the distinction between estimative value (what would now be called subjective value) and appreciative (or social) value. The first depends upon the amount of time and trouble we are willing to sacrifice in order to acquire it. In this connection the notion of labour-value appears. As to appreciative value, it differs from the preceding only in being an “average estimative value.”
[115] Turgot, though a disciple of Quesnay, remained outside the Physiocratic school. He always referred to them contemptuously as “the sect.”
[116] “I am so struck with this notion that I think it must serve as the basis of this whole treatise.” (Chap. 1.)
[117] Le Commerce et le Gouvernement, p. 15.
[118] Ibid., Part I, chap. 1.
[119] “It is not correct to say that the exchanged values are equal; on the contrary, each party seeks to give a smaller value in exchange for a larger one. The process proves advantageous to both; hence, doubtless, the origin of the idea that the values must be equal. But one ought to have come to the conclusion that if each gains both must have given less and obtained more.” (Op. cit., pp. 55, 86.) Compare this with the quotation from de Trosne, p. 27, and note its psychological superiority.
[120] Op. cit., Part I, chap. 9.
[121] “Even where the land is covered with products there is no additional material beyond what there was formerly. They have just been given a new form, and wealth consists merely of such transformations.”
[122] Op. cit., Part I, chap. 29.
[123] In a recent study of the wage bargain we find M. Chatelain giving expression to similar ideas, though apparently knowing nothing of Condillac’s work.
[124] Op. cit., chap. xv, par. 8.
[125] See Turgot, Mémoire sur les Prêts d’Argent, p. 122: “In every bargain involving the taking of interest a certain sum of money is given now in exchange for a somewhat larger sum to be paid at some future date; difference of time as well as of place makes a real difference to the value of money.” Further on he adds (p. 127): “The difference is familiar to everyone, and the well-known proverb ‘A bird in the hand is worth two in the bush’ is simply a popular way of expressing it.”
[126] The life of Adam Smith presents nothing remarkable. It is easily summed up in the story of his travels, his professional activities, and the records of his friendships, and among these his intimacy with Hume the philosopher has become classical. He was born at Kirkcaldy, in Scotland, on June 5, 1723. From 1737 to 1740 he studied at the University of Glasgow under Francis Hutcheson, the philosopher, to whom he became much attached. From 1740 to 1746 he continued his studies at Oxford, where he seems to have worked steadily, chiefly by himself. The intellectual state of the university was at that time extremely low, and a number of the professors never delivered any lectures at all. Returning to Scotland, he gave two free courses of lectures at Edinburgh, one on English literature and the other on political economy, in the course of which he defended the principles of commercial liberty. In 1751 he became Professor of Logic at Glasgow, at that time one of the best universities in Europe. Towards the end of the year he was appointed to the chair of Moral Philosophy, which included the four divisions of Natural Theology, Ethics, Jurisprudence, and Politics within its curriculum. In 1759 he published his Theory of Moral Sentiments, which speedily brought him a great reputation. In 1764, when forty years of age, he quitted the professorial chair at Glasgow University and accompanied the young Duke of Buccleuch, son-in-law of Charles Townshend, the celebrated statesman, on his travels abroad. With the young nobility of this period foreign travel frequently took the place of a university training, on account of the disrepute into which the latter had fallen. Smith was given a pension of £300 a year for the rest of his life, so that the mere material advantage was considerably in excess of his earnings as a professor. The years 1764-66 were spent in this way. A year and a half was passed at Toulouse, two months at Geneva, where he met Voltaire, and another ten months at Paris. While in Paris he became acquainted with the Physiocrats, particularly with Turgot and the Encyclopædists. It was at Toulouse that he began his Wealth of Nations. Returning to Scotland in 1767, he went to live with his mother, with the sole object of devoting himself to this work. By 1773 the book was nearly complete. But Smith moved to London, and the work did not appear till 1776. By this achievement Smith crowned the great celebrity which he already enjoyed. In January 1778 Smith was appointed Commissioner of Customs at Edinburgh, a distinguished position which he held until his death in 1790.
All that we know of Smith’s character shows him to have been a man of tender feelings and of great refinement of character. His absent-mindedness has become proverbial. In politics his sympathies were with the Whigs. In religion he associated himself with the deists, a school that was greatly in vogue towards the end of the eighteenth century, and of which Voltaire, who was much admired by Smith, was the most celebrated representative.
For a long time the only life of Smith which we possessed was the memoir written by Dugald Stewart, Account of the Life and Writings of Adam Smith, and read by him in 1793 before the Royal Society of Edinburgh. It appeared in the Transactions of the society for 1794, and was published in volume form in 1811 along with other biographies, under the title of Biographical Memoirs of Adam Smith, Robertson, etc., by Dugald Stewart. To-day we are more fortunate. John Rae in his charming Life of Adam Smith (London, 1895) has succeeded in bringing to light all that we can know of Smith and his circle. To him we are indebted for most of the details we have given. In 1894 James Bonar published a catalogue of Smith’s library, containing about 2300 volumes, and comprising about two-thirds of his whole library. A still more important contribution to the study of Smith’s ideas has been made by Dr. Edwin Cannan, who in 1896 published Lectures on Justice, Police, Revenue, and Arms, delivered in Glasgow by Adam Smith, from Notes taken by a Student in 1763 (Oxford). This represents the course of lectures on political economy delivered by Smith while professor at Glasgow. A manuscript copy of the notes taken in this course by a student, probably in 1763, was accidentally discovered by a London solicitor in 1876. These notes were in 1895 forwarded to Dr. Cannan for publication. They are especially precious in helping us to understand Smith’s ideas before his stay in France and his meeting with the Physiocrats. Of the numerous editions of the Wealth of Nations which have hitherto been published, the more important are those of Buchanan, McCulloch, Thorold Rogers, and Nicholson. The latest critical edition is that of Dr. Cannan, published in 1904 by Methuen, containing very valuable notes. This is the edition we have used.
[127] Wealth of Nations, vol. ii, p. 275.
[128] On this point see Schatz’s Individualisme économique et social (Paris, 1908).
[129] Chap. iv of sec. ii of the 7th part of the Theory of Moral Sentiments is entitled Of Systems of License.
[130] Oncken’s edition, p. 331.
[131] The theory that there are three factors of production, which has since become a commonplace of economics, is not to be found in Smith. Indirectly, however, it was he who originated the idea by distinguishing in his treatment of distribution between the various sources of revenue. The distinction once made, it was quite natural to consider each source as a factor of production; and this is just what J. B. Say did in his Treatise (2nd ed., chaps. iv and v). Cf. Cannan’s History of the Theories of Production and Distribution, p. 40 (1894).
[132] Wealth of Nations, Book I, chap. 1; Cannan, vol. i, pp. 13-14.
[133] “In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature.” (Wealth of Nations, Book I, chap. 2; Cannan, vol. i, p. 16.)
[134] Wealth of Nations, Book I, chap. 1; Cannan, vol. i, p. 6.
[135] Ibid., Book V, chap, 1, par. iii, art. 2; vol. ii, p. 267.
[136] “For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education.” (Wealth of Nations, Book V, chap. 1, part iii, art. 2; Cannan, vol. ii, p. 270.)
[137] Ibid., Book I, chap. 3; vol. i, p. 19.
[138] “As the accumulation of stock must, in the nature of things, be previous to the division of labour, so labour can be more and more subdivided in proportion only as stock is previously more and more accumulated.” (Ibid., Book II, Introd.; vol. i, p. 259.) It is true that in another passage he speaks of the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it (Book I, chap. 10, part ii; vol. i, p. 137). But this observation remains isolated, while the former represents his true teaching.
[139] Cf. Cannan’s penetrating criticism of this idea of Smith’s in Theories of Production and Distribution, pp. 80-83.
[140] This is the first of the four celebrated maxims enunciated by Smith in his theory of taxation. Here are the other three: “(ii) The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. (iii) Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it. (iv) Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.” (Wealth of Nations, Book V, chap. 2, part ii; Cannan, vol. ii, pp. 310-311.)
[141] This rule of payment according to ability did not prevent his pronouncing in another paragraph in favour of progressive taxation. This is an instance of a want of logic frequently evidenced in his writings. Speaking of taxes upon rent, he remarks that they weigh more heavily upon rich than upon poor, because the former in proportion to their income spend more upon house rent than the latter. But “it is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion.” (Ibid., Book V, chap. 2, part ii, art. 1; vol. ii, p. 327.)
[142] Ibid., Book II, chap. 3; vol. i, p. 314.
[143] “Farmers and country labourers, indeed, over and above the stock which maintains and employs them, reproduce annually a neat produce, a free rent to the landlord. As a marriage which affords three children is certainly more productive than one which affords only two; so the labour of farmers and country labourers is certainly more productive than that of merchants, artificers, and manufacturers. The superior produce of the one class, however, does not render the other barren or unproductive.” (Wealth of Nations, Book IV, chap. 9; Cannan, vol. ii, p. 173.)
[144] Ibid., Book IV, chap. 9; vol. ii, p. 176.
[145] Ibid., Book II, chap. 5; vol. i, p. 344.
[146] Wealth of Nations, Book II, chap. 5; Cannan, vol. i, p. 344. Note that here as elsewhere Smith entertains more than one opinion. In other passages in the book he regards rent as a monopoly price “that enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit, are the causes of high or low price; high or low rent is the effect of it. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low. But it is because its price is high or low; a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit, that it affords a high rent, or a low rent, or no rent at all.” (Ibid., Book I, chap. 11; vol. i, p. 147.)
It is impossible to reconcile these statements. In the one case rent is regarded as a constituent element of price, in the other it is the effect of price.
In the first edition this contradiction was still more evident. In that edition rent, along with profit and wages, was treated as a third determinant of value. (See Cannan’s edition, vol. i, p. 51, note 7.) The paragraph was deleted from the second edition, and rent was treated merely as a component part of the price. This modification was perhaps the outcome of a letter written by Hume to Smith on April 1, 1776, after he had read the Wealth of Nations for the first time. “I cannot think,” says Hume, “that the rent of farms makes any part of the price of the produce, but that the price is determined altogether by the quantity and the demand.” (Quoted by Rae in his Life of Adam Smith, p. 286.) The celebrated controversy as to whether rent enters into prices is not a thing of yesterday. Its origin dates from the birth of political economy itself, and it will probably only die with it.
[147] His error is partly due to the fact that he failed to distinguish between the profits of the entrepreneur and the interest of the capitalist. Both with Smith and with his successors the word “profit” signified a twofold revenue, and this was perfectly correct so long as the entrepreneur was also a capitalist. The word “interest” was reserved for the income of that person who lent capital but who did not himself produce anything. The revenue “derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money.” (Ibid., Book I, chap. 6; vol. i, p. 54.) J. B. Say was the first to give us a definite idea of the entrepreneur. Had Smith realised more clearly the functions of the entrepreneur he would probably have perceived: (1) That the entrepreneur, in addition to paying interest on his capital, frequently has to pay rent for the use of the soil; (2) that profit strictly so called includes an element analogous to rent. According to Smith, profit was simply payment for risks undergone or for work undertaken.