Chapter XXXIII: Book V: ) The language is identical with that of the Physiocrats. But (2)

[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.

[148] James Watt in 1756 had set up his workshop within the precincts of the University of Glasgow, for which he manufactured mathematical instruments. The corporation had refused him permission to set it up in the town—a striking illustration of the narrowness and inflexibility of “the corporative _régime_.”

[149] A combination of Hargreave’s spinning jenny and Arkwright’s water frame.

[150] Marx speaks of Smith as the economist who is the very epitome of the manufacturing period. (_Das Kapital_, vol. i, p. 313, note.)

[151] See Mantoux’ work, _La Révolution industrielle au XVIIIe Siècle_, p. 75 (Paris, 1905). “We are mistaken,” says he, “if we think that manufacture was the dominant feature of the period preceding the factory system. Logically it may be the necessary antecedent, but historically its claim to priority is weak, although it left its indelible marks upon industry. The appearance of industry at the time of the Renaissance is an event of the greatest importance and significance, but it only played a part of secondary importance for a century or two.”

[152] Rae’s _Life of Adam Smith_, p. 89.

[153] _Wealth of Nations_, Book I, chap. 11; Cannan, vol. i. p. 250.

[154] _Wealth of Nations_, Book I, chap. 8; Cannan, vol. i, p. 80.

[155] _Ibid._, Book I, chap. 9, in fine; vol. i, p. 100.

[156] _Ibid._, Book I, chap. 10, part ii; vol. i, p. 143.

[157] _Ibid._, Book I, chap. 10, part ii; vol. i, p. 128. The whole passage contains a curious eulogy of proprietors and farmers.

[158] _Wealth of Nations_, Book IV, chap. 2; Cannan, vol. i, p. 427.

[159] For the connection between Smith’s system and the philosophy of his time see W. Hasbach, _Die allgemeinen philosophischen Grundlagen der von F. Quesnai und A. Smith begründeten politischen Oekonomie_ (Leipzig, 1890).

[160] _Wealth of Nations_, Book I, chap. 2; Cannan, vol. i, p. 15.

[161] The whole passage, almost word for word, may be found in Smith’s course of lectures at Glasgow, and the whole is taken from Mandeville’s _Fable des Abeilles_.

[162] _Wealth of Nations_, Book I, chap. 4; Cannan, vol. i, p. 24.

[163] For a long time economists were quite content with Smith’s theory of capital. Like other portions of his work, it readily became classic, and subsequent writers simply repeated it. To-day, however, this success hardly seems to have been warranted. “It can scarcely be denied,” writes Cannan, “that Smith left the whole subject of capital in the most unsatisfactory state.” (_Theories of Production and Distribution_, p. 89.) If this remark needs any justification we have it in the many discussions which have taken place on this subject during the last fifty years, and which are not yet at an end. Some of the most original works of recent years, Böhm-Bawerk’s _Positive Theory of Capital_, for example, are entirely taken up with this topic. In England, America, and Italy the best-known economists, Cannan, Fisher, and Pareto, have recently revived the ancient notions, and the discussions which have followed are sufficient evidence that Smith had by no means exhausted the subject. If we carefully read Book II of the _Wealth of Nations_, which is entirely devoted to this topic, what do we find? We have a distinction drawn between fixed and circulating capital borrowed from practical affairs, but possessing no great scientific value; the very doubtful identification of national capital with the sum of private capitals; a very unsatisfactory attempt at differentiating between the notions of capital and revenue; the affirmation that saving involves consumption, a paradox repeated _ad nauseam_ down to the days of Mill; the commonplace statement that capital increases as saving grows; and, finally, the proposition that “capital limits industry.”

[164] _Wealth of Nations_, Book II, chap. 3; Cannan, vol. i, p. 325. “The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed. The number of its productive labourers, it is evident, can never be much increased, but in consequence of an increase of capital, or of the funds destined for maintaining them. The productive powers of the same number of labourers cannot be increased, but in consequence either of some addition and improvement to those machines and instruments which facilitate and abridge labour; or of a more proper division and distribution of employment. In either case an additional capital is almost always required.”

[165] _Ibid._, Book IV, chap. 2; vol. i, p. 423.

[166] “The general industry of the society never can exceed what the capital of the society can employ.” (_Ibid._, Book IV, chap. 2; vol. i, p. 419.) John Stuart Mill was the first to employ the formula in its condensed form, “Industry is limited by capital.”

[167] We have spoken of the controversies as threadbare, for every economist is by this time persuaded that, assuming the necessity for the co-operation of capital, land, and labour in production, it is quite clear that the amount of produce raised must depend upon the amount of each of these factors employed, and not upon the amount of any one of them.

Smith had anticipated the arguments advanced by such socialists as Rodbertus and Lassalle, who regard saving rather than labour as the source of capital. “Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater.” (_Wealth of Nations_, Book II, chap. 3; Cannan, vol. i, p. 320.)

[168] _Ibid._, Book II, chap. 3; vol. i, pp. 323, 324, 325.

[169] _Wealth of Nations_, Book I, chap. 7; Cannan, vol. i, p. 58. “The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it.”

[170] For Smith oppression meant the tyranny either of producers or consumers. When profits are above the normal rate “it is a proof that something is either bought cheaper or sold dearer than it ought to be, and that some particular class of citizens is more or less oppressed either by paying more or by getting less than what is suitable to that equality which ought to take place, and which naturally does take place among all the different classes of them.” (_Ibid._, Book IV, chap. 7, part iii; vol. ii, p. 128.)

The correspondence between selling price and the cost of production seemed to Smith to be of the very essence of justice. Complete correspondence would realise the ideal of the just price.

[171] _Wealth of Nations_, Book I, chap. 4; Cannan, vol. i, p. 30. The passage is well known. “The word ‘value,’ it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use,’ the other ‘value in exchange.’ The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.”

[172] The statement has been qualified because in the passage referred to Smith seems to define utility in the vulgar sense (_i.e._ utility as contrasted with mere agreeableness). This want of exactness was corrected by Ricardo, and is the subject of a searching criticism by Mill. The following passage from his _Lectures on Justice_ may serve to throw some light upon the definition: “There is no demand for a thing of little use; it is not a rational object of desire.” Smith could not conceive the possibility of a demand or even a desire for a commodity which was useless from a rational point of view. But this is evidently a great mistake.

[173] The radical separation of the two ideas was perhaps more a matter of expression than of reasoning, for in his _Lectures on Justice_, p. 176, value in use, coupled with the purchasing power possessed by those who desired the commodity, was regarded as one of the elements which determined the demand for it and fixed its market price. The whole discussion of the theory of value by Smith is very unsatisfactory.

[174] We ought perhaps to have said that he had to choose between three possible definitions, for in the _Lectures on Justice_ we find a third definition of “natural price” (p. 176).

[175] _Wealth of Nations_, Book I, chap. 7; Cannan, vol. i, p. 58.

[176] _Ibid._, Book I, chap. 5; vol. i, p. 33.

[177] Pareto in his recent article _L’Économie et la Sociologie au point de vue scientifique_ (_Rivista di Scienza_, 1907, No. 2) expresses himself as follows: “Underneath the actual prices quoted on the exchanges, prices varying according to the exigencies of time and place and dependent upon an infinite number of circumstances, is there nothing which has any constancy or is in any degree less variable? This is the problem that political economy must solve.”

[178] _Wealth of Nations_, Book I, chap. 5; Cannan, vol. i, p. 32. In this passage Smith seems to imply that the value of an object is determined, not by the amount of labour which it cost to produce it, but by the amount of labour which can be bought in exchange for it. Fundamentally the two ideas are one, for objects of equal value only can be exchanged, so that the amount of labour anyone can buy with any given object is equal to the amount of labour which that object cost to produce. “Goods,” says Smith, “contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity.”

[179] _Ibid._, Book I, chap. 5; vol. i, p. 33.

[180] _Ibid._, Book I, chap. 6; vol. i, p. 50.

[181] _Wealth of Nations_, Book I, chap. 7; Cannan, vol. i, p. 57.

[182] _Ibid._, chap. 6; vol. i, p. 51. Here, for example, is a passage in which, as Böhm-Bawerk forcibly remarks (_Kapital und Kapitalzins_, 2nd ed., 1900, p. 84), the two conceptions are found in juxtaposition without any attempt at reconciliation: “In this state of things [where labour and capital have already been appropriated] the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.” At the beginning of the passage the workman shared the produce of his labour and profits constituted a deduction from the value created by labour alone; at the end of the paragraph profits issue from a supplementary value which is an addition to the value already given it by labour. Other passages where the two conceptions come into contact are also cited by Böhm-Bawerk. Interest and rent are also occasionally taken as evidence that the workman is being exploited, and this entitles Smith to be regarded as the father of socialism. More than one passage in his work seems to point to this conclusion. “In other countries, rent and profit eat up wages, and the two superior orders of people oppress the inferior one.” (Book IV, chap. 7, part ii; vol. ii, p. 67.) Concerning property he writes: “Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.” (Book V, chap. 1, part ii; vol. ii, p. 207.) And finally there is the famous passage from the sixth chapter: “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.… He [the workman] must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part.” (Book I, chap. 6; vol. i, p. 51.) Dr. Cannan in his _History of the Theories of Production and Distribution_ goes the length of declaring that the theory of spoliation is the only one in Smith’s work. It is to Smith that we owe that idea so frequently expressed by socialists, namely, that the workman in modern society never really obtains the produce of his toil.

[183] Cf. _supra_, p. 64, note 2.

[184] _Wealth of Nations_, Book I, chap. 7; Cannan, vol. i, p. 59.

[185] Smith only gives at most seven or eight lines to monopoly price. He simply states that “the price of monopoly is upon every occasion the highest which can be got.” (_Ibid._, Book I, chap. 7; vol. i, p. 63.) To-day the theory of monopoly prices is one of the most important in the whole of economics.

[186] _Wealth of Nations_, Book I, chap. 8; Cannan, vol. i, pp. 81-82.

[187] “That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value.” (_Wealth of Nations_, Book IV, chap. 1; Cannan, vol. i, p. 396.) The whole chapter is an attempt to get rid of this prejudice.

[188] _Ibid._, Book IV, chap. 1; vol. i, p. 416; also Book II, chap. 2; vol. i, p. 274. “Though the weekly or yearly revenue of all the different inhabitants of any country, in the same manner, may be, and in reality frequently is, paid to them in money, their real riches, however, the real weekly or yearly revenue of all of them taken together, must always be great or small in proportion to the quantity of consumable goods which they can all of them purchase with this money. The whole revenue of all of them taken together is evidently not equal to both the money and the consumable goods; but only to one or other of those two values, to the latter more properly than to the former.”

[189] We meet with this expression several times: in Book I, chap. 11, part iii (vol. i, pp. 4 and 240), and in Book II, chap. 3 (vol. i, pp. 315, 323).

[190] An expression that is met with three times—in chap. 2 of Book II (vol. i, pp. 272, 275, 279).

[191] _Wealth of Nations_, Book II, chap. 2; Cannan, vol. i, p. 275.

[192] All these questions so obscurely treated in Smith’s work are handled with admirable lucidity in Irving Fisher’s _Nature of Capital and Income_ (New York, 1907). Revenue is entirely stripped of that material suggestion which was always associated with it in Smith’s work, and is looked upon as a continual flow of services, whilst capital as a whole is regarded as total wealth existing at one particular moment and from which these services flow out.

[193] _Wealth of Nations_, Book II, chap. 2; Cannan, vol. i, p. 304.

[194] _Ibid._, Book IV, chap. 1; vol. i, pp. 402, 406.

[195] _Ibid._, Book II, chap. 3; vol. i, p. 322.

[196] Hume’s treatment of the quantity theory of money in his essays on _Money_ and _The Balance of Trade_ is much clearer than Smith’s.

[197] _Wealth of Nations_, Book II, chap. 2; Cannan, vol. i, p. 285.

[198] For instance, a high rate of exchange immediately readjusts the commercial indebtedness of nations. (_Ibid._, Book IV, chap. 1; vol. i, p. 400.) Elsewhere he points out that the advantages enjoyed by Europe from the possession of colonies were not exactly sought by her. The search for colonies, their discovery and exploitation, all this was undertaken without any preconceived plan, and in spite of the disastrous regulations imposed by European Governments. (_Ibid._, Book IV, chap. 7, part ii; vol. ii, pp. 90, 91.)

[199] _Wealth of Nations_, Book IV, chap. 5; Cannan, vol. i, p. 324; Book II, chap. 9; vol. ii, p. 43; Book IV, chap. 9; vol. ii, p. 172.

[200] “It is thus that the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society.” The word “passion” was not inserted by chance. It occurs no less than three times on the same page. (_Ibid._, Book IV, chap. 7, part iii; vol. ii, p. 129.)

[201] _Ibid._, Book III, chap. 4; vol. i, pp. 389, 390.

[202] _Ibid._, Book II, chap. 1, in fine; vol. i, p. 267.

[203] _Wealth of Nations_, Book II, chap. 4, beginning of chapter; Cannan, vol. i, p. 332.

[204] _Ibid._, Book II, chap. 2; vol. i, p. 278.

[205] _Ibid._, Book IV, chap. 2; vol. i, p. 421. After having just said: “By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”

[206] _Ibid._, Book IV, chap. 5; vol. ii, p. 43.

[207] _Wealth of Nations_, Book IV, chap. 9; Cannan, vol. ii, p. 172.

[208] “The great object of the political œconomy of every country, is to increase the riches and power of that country.” (_Wealth of Nations_,