The World's Greatest Books — Volume 14 — Philosophy and...

Adam Smith, greatest of discoverers in the science of Political Economy, was born at Kirkcaldy, Scotland, on June 5, 1723, after the death of his father, who had been Comptroller of Customs at that port. He was educated at Kirkcaldy Grammar School, then at Glasgow University, and finally at Balliol College, Oxford, where he studied for seven years. From 1748 he resided in Edinburgh, where he made a close friendship with David Hume, and gave a course of lectures on literature; in 1751 he became professor of Logic in Glasgow University, and in the following year professor of Moral Philosophy. A philosophical treatise entitled "A Theory of Moral Sentiments," published in 1759, has no longer any interest; but it was during his thirteen years' residence in Glasgow that Smith arrived at the principles formulated in his immortal "Inquiry into the Nature and Causes of the Wealth of Nations." He left Glasgow in 1763 to become the tutor of the youthful Duke of Buccleuch, with whom he lived at Toulouse, Geneva and Paris, studying the politics and economics of France on the eve of the Revolution. In 1766 Adam Smith retired to Kirkcaldy, with an annuity from the Buccleuch family; devoted himself to his life's work; and in 1776 published the "Wealth of Nations," which at once achieved a permanent reputation. The author was appointed, in 1778, Commissioner of Customs for Scotland, and died on July 17, 1790. Adam Smith was a man of vast learning and of great simplicity and kindliness of character.

His reasonings have had vast influence not only on the science of Economics but also on practical politics; his powerful defence of free trade, and his indictment of the East India Company have especially modified the history of his country.

The division of labour has been the chief cause of improvement in the productiveness of labour. For instance, the making of a single pin involves eighteen separate operations, which are entrusted to eighteen separate workmen; and the result is, that whereas one man working alone could only make perhaps twenty pins in a day, several men working together, on the principle of division of labour, can make several thousands of pins per man in one day. Division of labour, in a highly developed state of society, is carried into almost every practical art; and its great benefits depend upon the increase of dexterity in each workman, upon the saving of time otherwise lost in passing from one kind of work to another, and finally, upon the use of many labour-saving machines, which is made possible by the division of labour.

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom which foresees and intends the opulence to which it gives rise; it is rather the gradual result of the propensity, in human nature, to barter and exchange one thing for another. The power of exchanging their respective produce makes it possible for one man to produce only bread, and for another to produce only clothing. The extent to which the division of labour can be carried is therefore limited by the extent of the market. There are some sorts of industry, even of the lowest kind, which can be carried on nowhere but in a great town; a porter, for example, cannot find employment and subsistence in a village. In the highlands of Scotland every farmer must be butcher, baker, and brewer for his own family.

As water-carriage opens a more extensive market to every kind of industry than is afforded by land-carriage, it is on the sea coast and on the banks of navigable rivers, that industry begins to subdivide and improve itself, and it is riot till long afterwards that these improvements extend to the inland parts. It was thus that the earliest civilised nations were grouped round the coasts of the Mediterranean Sea; and the extent and easiness of its inland navigation was probably the chief cause of the early improvement of Egypt.

As soon as the division of labour is well established, every man becomes in some measure a merchant, and the society becomes a commercial society; and the continual process of exchange leads inevitably to the origin of money. In the absence of money or a general medium of exchange, society would be restricted to the cumbersome method of barter. Every man therefore would early endeavour to keep by him, besides the produce of his own industry, a certain quantity of some commodity such as other people will be likely to take in exchange for the produce of their particular industries. Cattle, for example, have been widely used for this purpose in primitive societies, and Homer speaks of a suit of armour costing a hundred oxen.

But the durability of metals, as well as the facility with which they can be subdivided, has led to their employment, in all countries, as the means of exchange; and in order to obviate the necessity of weighing portions of the metals at every purchase, as well as to prevent fraud, it has been found necessary to affix a public stamp upon certain quantities of the metals commonly used to purchase goods. The value of commodities thus comes to be expressed in terms of coinage.

But labour is the real measure of the exchangeable value of all commodities; the value of any commodity to the person who possesses it is equal to the quantity of labour which it enables him to purchase or to command. What is bought with money or with goods is purchased by labour as much as what we acquire by the toil of our own body. "Labour alone, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and in all places be estimated and compared. It is their real price; money is their nominal price only. Equal quantities of labour will at distant times be purchased more nearly with equal quantities of corn, the subsistence of the labourer, than with equal quantities of gold, or of any other commodity."

Several elements enter into the price of commodities. In a nation of hunters, if it costs twice the labour to kill a beaver which it costs to kill a deer, one beaver will be worth two deer. But if the one kind of labour be more severe than the other, some allowance will naturally be made for this superior hardship; and thirdly, if one kind of labour requires an uncommon degree of dexterity and ingenuity, it will command a higher value than that which would be due to the time employed in it. So far, the whole produce of labour belongs to the labourer.

But as soon as stock has accumulated in the hands of particular persons, some of them will employ it in setting to work industrious workmen, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work. The profits of stock are not to be regarded as the wages of a particular sort of labour, the labour of inspection and direction; for they are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock.

There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock; and this rate is regulated partly by the general circumstances of the society, its richness or poverty, and partly by the peculiar nature of each employment. There is also in every society or neighbourhood an ordinary or average rate of rent, which is regulated too by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land. What we may call the natural price of any commodity depends upon these natural rates of wages, profit and rent, at the place where it is produced. But its market price may be above, below, or identical with its natural price, and depends upon the proportion between the supply and the demand.

When the stock which a man possesses is no more than sufficient to maintain him for a few days or weeks, he seldom thinks of deriving any revenue from it; but when he possesses enough to maintain him for months or years, he endeavours to derive a revenue from the greater part of it. The part of his stock from which he expects to derive revenue is called his capital.

There are two ways in which capital may be employed so as to yield a profit to its employer. First, it may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit; this is circulating capital. Secondly, it may be employed in the improvement of land, or in the purchase of machines and instruments; and this capital, which yields a profit from objects which do not change masters, is called fixed capital.

The general stock of any country or society is the same as that of all its inhabitants or members, and is therefore divided into the same three portions, each of which has a different function. The first is the portion which is reserved for immediate consumption, and so affords no revenue or profit. The second is the fixed capital, which consists of

(d) the acquired and useful abilities of all the inhabitants or members of the society, for the acquisition of such talents, by the maintenance of the learner during his education or apprenticeship, costs a real expense, which is a capital fixed in his person.

The substitution of paper in the place of gold and silver money replaces a very expensive instrument of commerce by one much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which it costs less both to erect and to maintain than the old one. The effect of the issue of large quantities of bank-notes in any country is to send abroad the gold, which is no longer needed at home, in order that it may seek profitable employment. It is not sent abroad for nothing, but is exchanged for foreign goods of various kinds in such a way as to add to the revenue and profits of the country from which it is sent; unless, indeed, it is spent abroad on such goods as are likely to be consumed by idle people who produce nothing.

The greatest commerce of every civilised society is that carried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of paper which represents money. The country supplies the town with the means of subsistence, and the materials for manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole subsistence from the country. And in how great a degree the country is benefited by the commerce of the town may be seen from a comparison of the cultivation of the lands in the neighbourhood of any considerable town with that of those which He at some distance from it.

As subsistence is, in the nature of things, prior to conveniency and luxury, so the rural industries which procure the former must be prior to the urban industries which minister to the latter. The greater part of the capital of every growing society is therefore first directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. But this natural order of things has, in all the modern states of Europe, been in many respects entirely inverted. The foreign commerce of some of their cities has given rise to their finer manufactures, and manufactures and foreign commerce together have given birth to the principal improvements of agriculture. The manners and customs which the nature of their original government introduced, and which remained after that government was greatly altered, necessarily forced them into this unnatural and retrograde order.

In the ancient state of Europe, after the fall of the Roman Empire, agriculture was greatly discouraged by several causes. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between the towns and the country; the towns were deserted and the country was left uncultivated. The western provinces of Europe sank into the lowest state of poverty, and the land, which was mostly uncultivated, was engrossed by a few great proprietors.

These lands might in the natural course of events have been soon divided again, and broken into small parcels by succession or by alienation; but the law of primogeniture hindered their division by succession, and the introduction of entails prevented their being divided by alienation. These hindrances to the division and consequently to the cultivation of the land were due to the fact that land was considered as the means not of subsistence merely, but of power and protection. In those disorderly times, every great landlord was a sort of petty prince.

Unfortunately these laws of primogeniture and entail have continued long after the circumstances which gave rise to them have disappeared. Unfortunately, because it seldom happens that a great landlord is a great improver. To improve land with profit requires an exact attention to small savings and small gains, of which a man born to a great fortune is seldom capable. And if little improvement was to be expected from the great proprietors, still less was to be hoped for from those who occupied the land under them. In the ancient state of Europe, the occupiers of land were all tenants at will, and practically slaves. To these succeeded a kind of farmers known at present in France by the name of "metayers," whose produce was divided equally between the proprietor and the farmer, after setting aside what was judged necessary for keeping up the stock, which still belonged to the landlord. To these, in turn, succeeded, though by very slow degrees, farmers properly so called, who cultivated the land with their own stock, paying a fixed rent to the landlord, and enjoying a certain degree of security of tenure. And every improvement in the position of the actual cultivation of the soil is attended by a corresponding improvement of the land and of its cultivation.

After the fall of the Roman empire the inhabitants of cities and towns were not more favoured than those of the country. The towns were inhabited chiefly by tradesmen and mechanics, who were in those days of servile, or nearly servile condition. Yet the townsmen arrived at liberty and independence much earlier than the country population; their towns became "free burghs," and were erected into commonalities or corporations, with the privilege of having magistrates and a town council of their own, of making by-laws for their own government and of building walls for their own defence. Order and good government, and the liberty and security of individuals, were thus established in cities at a time when the occupiers of land in the country were exposed to every sort of violence.

The increase and riches of commercial and manufacturing towns thenceforward contributed to the improvement and cultivation of the countries to which they belonged, in three different ways. First, by affording a great and ready market for the rude produce of the country. Secondly, the wealth acquired by the inhabitants of cities was employed in purchasing uncultivated lands and in bringing them under cultivation; for merchants are ambitious of becoming country gentlemen, and when they do so, are generally the best of all improvers. And lastly, commerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals, among the inhabitants of the country.

From the mistaken theory that wealth consists in money, or in gold and silver, there has arisen an erroneous and harmful system of political economy and of legislation in the supposed interests of manufacture, of commerce, and of the wealth of nations. A rich country is supposed to be a country abounding in money; and all the nations of Europe have consequently studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries. For example, they have at times forbidden, or hindered by heavy duties, the export of these metals. But all these attempts are vain; for on the one hand, when the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance can prevent their exportation; and on the other hand, if gold and silver should fall short in a country, there are more expedients for supplying their place than that of any other commodity. The real inconvenience which is commonly called "scarcity of money" is not a shortness in the medium of exchange, but is a weakening and diminution of credit, due to over-trading. Money is part of the national capital, but only a small part and always the most unprofitable part of it.

The principle of the "commercial system" or "mercantile system" is, that wealth consists in money, or in gold and silver. It is an utterly untrue principle. But once it had been established in general belief that wealth consists in gold and silver, and that these metals can be brought into a country which has no mines only by the "balance of trade," that is to say, by exporting to a greater value than it imports, it necessarily became the great object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the exportation of the produce of domestic industry. Its two great engines for enriching the country, therefore, were restraints upon importation and encouragements to exportation.

The restraints upon importation were of two kinds: first, restraints upon the importation of such foreign goods for home consumption as could be produced at home, from whatever country they were imported; and secondly, restraints upon the importation of goods of almost all kinds from those particular countries with which the balance of trade was supposed to be disadvantageous. These different restraints consisted sometimes in high duties, and sometimes in absolute prohibitions.

Exportation was encouraged sometimes by drawbacks, sometimes by bounties, sometimes by advantageous treaties of commerce with sovereign states, and sometimes by the establishment of colonies in distant countries. The above two restraints, and these four encouragements to exportation, constitute the six principal means by which the commercial or mercantile system proposes to increase the quantity of gold and silver in any country by turning the balance of trade in its favour.