Adam Smith

THE WEALTH OF NATIONS

Bald Investor

2024

ISBN: 978-83-8226-989-5

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Table of contents

1. Introductory Sketch of the History of Political Economy

2. Introduction and Plan of the Work

3. BOOK I

4. BOOK II

5. BOOK III

6. BOOK IV

7. BOOK V

8. Credits

Introductory Sketch of the History of Political Economy

Political Economy is essentially a modern department of learning. It may be defined as the science which treats of the production, distribution and exchange of commodities. In the ancient world we have only fitful adumbrations of the conception of such a science. In the Middle Ages proper, as might naturally be expected, no advance is made. Indeed, the idea itself is even lost. Production was almost exclusively for use, and trade or exchange were so little developed that the economic aspect of things never presented itself distinctively. At the end of the fourteenth century, however, when the medieval order was gradually breaking up, and the germination of the modern industrial system was beginning to be apparent, a French bishop in the service of Charles V. of France, and a translator of Aristotle, revived the teaching of the great master of ancient speculation, but with no immediate results. Early in the sixteenth century, the famous astronomer and mathematician, Copernicus, wrote a treatise on the coining of money, again based on the principles of Aristotle; and toward the end of the century modern economic science began to take shape in the great mercantile theory which held sway more or less almost until the days of Adam Smith. Before his time there were, however, isolated writers who attacked with more or less perspicuity the fallacies of this theory, and had glimpses, in some cases not inconsiderable, of the more scientific doctrines developed in later times. The leading developments of political economy since Adam Smith's time have been (1) the classical economy expounded by Ricardo, Malthus, J. B. Say, James Mill, etc., which for a long time held almost undisputed possession of the field; (2) as a later development, what is known as the "vulgar economy," consisting of the attempts made by writers such as Wagner, Laveleye, Jevons, and Sidgwick, to modify the classical economy in such a way as to justify legislative interference with the unrestrained freedom of modern capitalist production; and (3) the socialistic economy of Karl Marx and his school.

Among the Greeks, where commerce (in the ancient sense of the word, implying the direct exchange of commodities) was considerably extended, are found the first germs of this as of all other sciences. Economic questions could hardly escape the notice of philosophers, least of all of those in the first rank. Accordingly we find Plato and Aristotle alluding to the more important matters connected with the exchange of wealth in a manner which shows considerable insight into the question. Its production, however, entered but slightly into their calculations. The institution of slavery, upon which ancient industry was based, could not fail to obscure the importance of this aspect of the subject. Plato, indeed, perceives that labor is the source of all wealth; but the conditions of his time prevented him from seeing in their true light the consequences of this doctrine. In the "Republic" he says: "That which gives rise to society is our inability to satisfy our own desires, and the need we have for a large number of things. Thus necessity having compelled men to combine with one another, society is established for the sake of mutual assistance.… One gives to another what he has in return for what he has not, only because he believes it will be to his advantage." And then he goes on to show the beneficial results of the division of labor.

A much less important figure, Xenophon, has also some interesting observations on the subject. His "Oikonomikos," or "The Economist," though primarily dealing with the domestic economy of the Greeks and the practice of agriculture, is interspersed with passages concerned with social economy in its wider sense. He quaintly speaks of wealth as whatever is useful to a man. "A man's wealth is only what benefits him. Suppose a man used his money to buy a mistress by whose influence his body, his soul, and his household would be all made worse, how could we then say that his money was of any advantage to him?… We may then exclude money also from being counted as wealth, if it is in the hands of one who does not know how to use it." But he believes that money differs essentially from other kinds of wealth. "There is this difference," he writes, "between silver-getting and other professions, that whereas other men—braziers and blacksmiths, for instance—when their trades are overstocked, are injured because the price of their commodities is necessarily lowered by the multitude of sellers, similarly a good harvest and a plentiful vintage does harm to the farmers, and forces them to leave their occupations, and to turn merchants or bankers; with silver it is otherwise; the more ore is found, and the more mines are worked, the more people seek to possess it, and the more men are employed.… If there are any who have more than they require, they hoard it up with as much pleasure as if they actually made use of it.… And in war what resource have we left but silver to purchase necessaries for our support, and to hire allies for our defence?" We find here the germs of the mercantile theory, although Xenophon, in common with most of his contemporaries, regarded agriculture as the only industrial occupation not altogether contemptible for the free man. His view of the relative advantages to the human constitution of the agricultural and the handicraft life displays a considerable amount of enlightenment, on one side of the question at least. "Not only are the mechanical arts despised, but States also have a bad opinion of them—and justly. For they injure the health of the workmen and overseers, by compelling them to sit indoors, and often all day before a fire, and when the body is weakened the mind also is made weaker and weaker." But in this depreciation of the artisan's craft we see the beginning of the physiocratic fallacy that agriculture is the only original source of wealth. The following extract from the "Oikonomikos" will illustrate the view of slavery common to the ancients, and which appears, as will be seen, no less in Aristotle and later writers. He takes it for granted that the citizen will have slaves to work for him. "Men do not live as animals do, under the open vault of heaven, but evidently require shelter. To have anything to bring within that shelter, they must also have men to perform the works of the field, such as tilling and sowing, planting trees, tending the flocks, from which are obtained the necessaries of life. And, further, when these necessaries are brought within, they must have others to look after them, as well as a wife to superintend the business of the house."

Before leaving Xenophon we will give one more extract which may be taken as the anticipation in the ancient world of the modern economic objection to war as held by the Cobden-Bright school. "If any man," he writes, "can have so wild a notion as to imagine that war will contribute more to the increase of riches than peace, I know no better way to decide the controversy than by appealing to the experience of former ages, and producing precedents to the contrary out of our own story.… It is an absurd supposition to imagine that peace will weaken our strength, and ruin our authority and reputation abroad, for of all governments those are happiest who have continued longest without war."

The views of Aristotle on the subject of economy are contained partly in his "Ethics" and partly in his "Politics." The chapters of the fifth book of the "Ethics," relating to the subject, are too familiar to need quotation. The "Politics" contains the following statement on the subject of money, in which, as will be seen, an approximation is made to a correct view of the function of money. Plato also appears to have had reasonable views upon this subject. Speaking of early societies, Aristotle writes: "There were different things which they had to give in exchange for what they wanted, a kind of barter which is still practiced among barbarous nations who exchange with one another the necessaries of life: giving and receiving wine, for example, in exchange for coin and the like.… But the various necessaries of life are not easily carried about, and hence men agreed to employ in their dealings with each other something which was intrinsically useful, and easily applicable to the purposes of life—for example, iron, silver, and the like. Of this the value was at first measured by size and weight; but in process of time a stamp was put upon it to save the trouble of weighing, and to mark the value.… Wealth is assumed by many to be only a quantity of coin.… Others maintain that coined money is a sham, a thing not natural, but conventional only, which would have no value or use for any of the purposes of daily life if another commodity were substituted by the users. Indeed, he who is rich in coin may often be in want of necessary food. And how can that be wealth of which a man may have a great abundance, and yet perish with hunger, like Midas in the fable, whose insatiable prayer turned everything that was set before him into gold."

In the same connection Aristotle considers the various ways of money-making, and incidentally refers to the abhorrence of the trade of money-lending, which was universal throughout the ancient world. "The most hated sort," he writes, "of money-making, and with reason, is usury."

Another passage, also from the "Politics," shows that the ancients looked upon slavery as no less a natural and permanent institution, than the modern middle-class economists regard the system of wage labor at the present time. Aristotle would have considered quite as Utopian the idea of a condition of society in which the relation of master and slave no longer existed, as the late Professor Jevons, for example, might have looked upon the conception of a society in which the antithesis of capitalist and laborer did not obtain. The passage in question is as follows: "It is nature herself who has created slavery.… There are in the human race individuals as inferior to others as the body is to the soul, or as the beast is to man; these are beings suitable for the labors of the body alone, and incapable of doing anything more perfect. These individuals are destined by nature to slavery because there is nothing better for them to do than to obey.… Let us conclude from these principles that nature creates some men for liberty and others for slavery; that it is useful and just that the slave should obey." The reader will perceive how exactly this passage is paralleled by the statements of middle-class economists, that incapacity, laziness, and thriftlessness will inevitably condemn a large portion of the population always to labor for a mere subsistence wage.

Such ideas as the Romans had upon economy were, as might be expected, essentially similar to those of the Greeks. The trade of the Roman Empire was so intimately bound up with the fiscal system that it consisted of little more than the gathering of taxes, either in the form of agricultural products or the precious metals. Hence there was even less likelihood than among the Greek peoples of the foundation of an economical science properly so called. The only question which seems to have interested the Roman mind in this connection was that as to the nature of money. Pliny advocates the prevention of the exportation of money on mercantilist grounds, and in common with other Roman writers condemns usury in most unqualified terms. In the second century, the great jurisconsult, Paullus, expounds clearly enough the true origin and function of money: "The origin of buying and selling is in exchange. Formerly there were no coins, and merchandise was in no way distinguished from money. Every man, according to the necessity of the time and of things, exchanged what was useless to him for what was useful, and it was generally the case that what one had abundance of, another was deficient in. But as it did not always easily happen that when one person had what another desired, that other had also what the first desired: a substance was chosen whose general and durable value obviated the difficulties of exchange by being a common measure. This substance, having received a public stamp, has use and value less as a material than as a quantity, and is no longer called merchandise, but money."

Henceforward, as already intimated, there is a great gap in the history of economic science. Agriculture had been throughout the entire ancient world the dominating branch of production. During the Empire the system of latifundia, or agriculture on a large scale, increasingly tended to sweep away the petite culture. The latifundium was a large estate which was cultivated by a large number of slaves, under the command of a villicus, or overseer, who was also a slave, though his power was practically absolute over his subordinates. A similar system was adopted in the case of pasture lands. But as the owners became impoverished and the towns decayed, the latifundia were divided up into small portions, which were distributed among the cultivators. These received for their labor only a sixth or even a ninth part of the year's produce. Then many of these were united together into colonies, and paid a total fixed sum every year to the owners. They were not slaves, nor yet were they free, and were the direct forerunners of the villeins or serfs of the Middle Ages.

Trade and industry were never the special characteristics of the conquering Romans; it was in usury and tax-gathering that their talents chiefly lay so far as concerns matters economic. What had already been acquired from trade rapidly broke up under the pressure of taxation; what remained existed chiefly in the eastern part of the Empire. "Universal impoverishment, retrogression in the matter of communication, of manufactures, of art, decline of population, decay of towns, the degeneration of agriculture into more primitive forms—such was the final result of the Roman world-empire." The feudal system, which arose on the ruins of the Roman world, was, in many respects, a return to the early forms of tribal and gentile life in which so-called primitive or natural communism prevailed, and which had been the stage of social evolution obtaining among the Germanic peoples previous to their migrations.

From all this it will be seen that the conditions of life in the Middle Ages were such as to render economic science an impossibility, even had the intellectual development of the time permitted it. Nicole Oresme, bishop of Lisieux, was the first to break the long silence. In Aristotle, the fount of medieval philosophy, he naturally looked for light on the economic question now with the growth of towns again beginning to present itself. In his treatise on the origin, etc., of money, following and expanding Aristotle, he speaks of it as "an artificial instrument invented for the easier exchange of wealth." He does not fall into the common error of supposing that money is the only form of wealth, but writes: "All moneys are artificial wealth, and not otherwise, for it may happen that a man has abundance of them, and yet may die of hunger"; and he quotes the story of Midas, previously cited by Aristotle in his "Politics," to prove this. He goes on to show what make gold and silver the most suitable substances to use as money, and the evils which result from debasing the coinage. After Oresme, who died in 1382, there is again silence until the small treatise by Copernicus, previously mentioned, which appeared in 1526. Both were directly inspired by the necessities of taxation, the one by those of France, and the other of Poland.

Toward the close of the sixteenth century, when the conditions of medieval, were rapidly giving place to those of modern, life, attention begins to be directed, in various quarters, toward economic problems. Almost simultaneously in Italy, France, and England we find the first modern economical treatises published. Unconsciously in the minds of men a theory of commerce had grown up, based upon the simplest and most superficial observation of economic phenomena, to wit, that the precious metals were the concentrated form of all wealth, and this in spite of the clear insight of Aristotle and his followers to the contrary. Enthusiasm for commerce had arisen with the recent expansion of the world-market, and men, seeing trade continually produce large fortunes, instinctively came to the conclusion that in trade—that is, exchange—is to be found the source of wealth, and that its symbol and agent, money, was its sole repository. This was the celebrated mercantile system; the great corollary from it being the doctrine of the balance of trade, so called, which declared it necessary to the prosperity of a country that the exports should always exceed the imports, inasmuch as by this means bullion flowed into the country, while otherwise there was a loss. The rise in prices, due to the influx of gold and silver from the newly discovered America, had dislocated the commercial relations of the time, and set men thinking on the nature of economic processes, while the attempts of government, arising out of the mercantile theory, to debase the coinage in the hope of thereby increasing their wealth, gave a practical turn to the various controversies.

Jean Bodin, a French writer, was author of "Les six livres de la Republique," and also of a book on witchcraft, in which he was a firm believer. The latter work, "Le Demonomanie des Sorciers," advocates the enactment of ferocious penalties against sorcery. In the person of Bodin it will thus be seen that the medieval and the modern curiously blend themselves. His most important economical treatise is a little tract against a Sieur Malestroict, who had denied that there had been a general rise of prices during the preceding three centuries. In this little book Bodin showed very conclusively that prices had risen, and also the cause of their rise: "The abundance of gold and silver, which is the wealth of a country, ought in part to explain the rise in prices: for if there was a scarcity of them as in the past times, it is very certain that everything would be as much cheaper as the gold and silver were dearer."

A book with practically the same purpose was published in England shortly after Bodin's by W. S. (William Stafford), in which the rise in prices is again discussed, and shown to be due to the influx of gold and silver from America. About the same time two Italian writers, Count Gasparo Scaruffi and Bernardo Davanzati, both published works dealing with the money question. Both attack the debasement of the coinage, and the former propounds a scheme for the adoption of universal money. A little later Antonio Serra published his "Brief Tract on the Causes which produce abundance of gold and silver."

The first writer who employed the term "political economy" in its modern sense was a Frenchman named M. Chrétien de Watteville. In his "Treatise on Political Economy," he gives a formal exposition of the mercantile system. This system also found in Thomas Mun, a large English merchant, a zealous and able defender. Mun wrote two works, one published at the beginning of the century on the East India trade, and the second in 1664, with the title, "England's Treasure by Foreign Trade." The latter work contains the following statements, which embody the teaching of the mercantile school: "The ordinary means to encrease our wealth and treasure is by Forraign Trade, wherein we must ever observe this rule; to sell more to strangers yearly than we consume of theirs in value" (p. 11); and, "we have no other means to get treasure but by forraign trade" (p. 85). He pleads for sumptuary laws, "so that men would soberly refrain from excessive consumption of foreign wares in their diet and rayment, with such often change of fashions as is used so much the more to encrease the waste and charge; which vices are more notorious amongst us than in former ages" (p. 16). In this way, he thinks, importations would be diminished, and the amount of wealth, i.e., treasure, annually received, be increased. He is, however, obliged to slightly modify his system, so far as to allow money to be occasionally carried out of the country, but only in order that it might return with other money that it had gathered as it rolled.

The importance, indeed, of the mercantile error lay not so much in the belief that money was synonymous with wealth as in the corollary from it, that wealth was only to be obtained by means of trade; and the later English writers were all more or less conscious of this. Glimmerings of the truth begin to appear among them. Sir William Temple, in his "Observations upon the United Provinces of the Netherlands" (1672), writes: "The time of laboring or industrious men is the greatest native commodity of any country"; and Charles Davenant writes in 1696 ("Works," i. 382): "Industry and skill to improve the advantages of soil and situation are more truly riches to a people than even the possession of gold and silver mines." In Germany the mercantile theory had a great hold. Schröder gives one of the most thoroughgoing statements of the mercantilist position: "A country grows rich in proportion as it draws gold or money from the earth or from other countries, poor in proportion as money leaves it. The wealth of a country must be estimated by the quantity of gold and silver in it."

Schröder's book provoked a passionate attack from a French writer, Pierre Boisguillebert, in his "Dissertation on the Nature of Wealth" (1697), while in England the mercantilist advocates found in Sir William Petty a powerful opponent. Petty is by far the most important figure in political economy which the seventeenth century produced, although he wrote no large treatise specially concerned with economical matters. To him was first due the conception of labor as the ground or basis of value. "Labor," he wrote, "is the father and active principle of wealth; lands are the mother." And, again, in another place: "If a man can bring to London an ounce of silver out of the earth in Peru, in the same time that he can produce a bushel of corn, then one is the natural price of the other; now if by reason of new and more easie mines a man can get two ounces of silver as easily as formerly he did one, then Corn will be as cheap at ten shillings the bushel as it was before at five shillings, ceteris paribus." He also anticipates, as the following passage will show, the theory of economic rent, its full conception only escaping him just as it escaped Adam Smith nearly a century later. "Suppose a man could with his own hands plant a certain scope of land with corn, could dig or plow, harrow, weed, reap, carry home, thresh and winnow so much of the husbandry as this land requires; and had withal seed wherewith to sow the same, I say that when this man hath subducted his seed out of the process of his harvest, and also what himself hath both eaten and given to others in exchange for clothes and other natural necessaries, that the remainder of corn is the natural and true rent for that year."

Among seventeenth century economists, Sir Dudley North ranks next to Petty in reputation and influence upon after-thought. In his "Discourses upon Trade" (1691) he shows very clearly that commerce is the exchange of commodities, and that it is not money people want when trade is bad, but other commodities for which to exchange their products. "Commerce and Trade, as hath been said, first springs from the Labor of Man, but as the Stock increases it dilates more and more. If you suppose a Country to have nothing in it but the Land itself and the Inhabitants; it is plain that at first the People have only the Fruits of the Earth and the Metals raised from the Bowels of it, to Trade withal, either by carrying out into Foreign parts, or by selling to such as will come to buy of them, whereby they may be supplied with the Goods of other Countries wanted there. In this course of Trade Gold and Silver are in no sort different from other commodities, but are taken from them who have plenty and carried to them who want, or desire them, with as good profit as other Merchandises. So that an active, prudent Nation groweth rich and the sluggish Drones grow poor; and there cannot be any other Policy than this, which being introduced and practiced shall avail to increase Trade and Riches. But this Proposition, as single and plain as it is, is seldom so well understood, as to pass with the generality of mankind; but they think by force of Laws to retain in their Country all the Gold and Silver which Trade brings in; and thereby expect to grow rich immediately: All which is a profound Fallacy" (p. 11, et seq.).

And on page 11: "What do these people want who cry out for more money?… Money is not their want but a Price for their Corn & Cattle, which they would sell but cannot." Summing up the whole of his principles in his postscript, he exclaims: "We may labor to hedge in the Cuckoo but in vain: for no People ever yet grew rich by Policies; but it is Peace, Industry and Freedom that brings Trade and Wealth, and nothing else." John Bellers wrote his "Proposals for raising a College of Industry" in 1696, in which he attacks the mercantilist system, and at the same time anticipates many doctrines of the classical economists.

Of all the opponents of the mercantile system none seem to have had so much sympathy with the toiling and suffering classes as Le Prestre de Yauban, Marshal of France. Yauban was probably a survival of the benevolent feudal baron who hated the progress of trade and the trading class, and, above all, the policy of the representative of that class, Colbert, the great financial minister of Louis XIV. He proposed that a tax, le dixme Royale, should be levied impartially on all incomes, to be paid in kind by the agriculturists, and in money by manufacturers and traders, all other taxes being abolished. It was probably only by his death, which occurred shortly after the publication of his book, "Le Dixme Royale," in 1707, that he escaped the vengeance of the powerful trading faction. His principal opinions may be gleaned from the following extracts: "… The real wealth of a people consists in an abundance of those things the use of which is so necessary to sustain the life of man, that they cannot at all be dispensed with" (p. 26). "It is the lower class of the people that by its labor and its commerce, and by that which it pays to the king, enriches both him and all his kingdom.… It is they who make all the commerce and the manufactures of the kingdom; who furnish all the laborers, vine-dressers, and tillers of the fields; who tend the cattle; who sow the corn and harvest it; who tend the vine, and make the wine; in short, it is they who do all things great and small in the country and in the towns. Such is this portion of the nation, so useful and so despised, who have suffered, and who still suffer so much" (p. 21).

By the middle of the eighteenth century, the extreme mercantile theory had wellnigh succumbed to the various attacks made upon it. The last English exponent of Mercantilism, pure and simple, was John Gee, who wrote "Trade and Navigation of Great Britain Considered," the second edition of which was published in 1730. In this he laments that: "So mistaken are many people, that they cannot see the difference between having a vast treasure of Silver and Gold in the Kingdom, and the Mint employed in coining Money, the only true token of Treasure and Riches, and having it carried away; but they say Money is a Commodity like other things, and think themselves never the poorer for what the nation daily exports" (p. 8).

Although, however, the mercantile theory was practically destroyed, the policy which had been based upon it continued to subsist even after the time of Adam Smith. This policy was the endeavor, by legislation or other arbitrary means, to secure a balance of trade in favor of a particular nation—its classical heroes being the great statesmen Colbert in France, and Walpole in England. Protection was one of the great cornerstones of the system, since by protection the imports of a country were diminished, even if the exports were not increased. The aim of middle-class statesmanship up to this time had been to secure monopolies. This notion of monopoly to be acquired by high imposts and other means was a relic of medieval methods, albeit applied for the advantage of a class, which as a class embodied the new principle opposed to that of the Middle Ages. It is needless to say, that with the more complete development of that principle and of its correlative class, it soon became apparent that while subserving the immediate ends of the individuals then representing the latter, it was really an obstacle to its complete success as a class. The unconsciousness of this fact is perceptible even in Adam Smith, who at times attacks protection, etc., apparently in the belief that he is attacking the special interests of the trading classes as such, whereas he is of course really placing those interests on a solid theoretic foundation.

The reaction against the fundamental principle of the mercantile system, that money was the sole repository of wealth, with its corollary that trade was the only means of attaining it, appeared in France in the guise of the "physiocratic" system, which maintained that land was the sole repository of wealth, with its corollary that agriculture was the sole means of realizing it. The ideas of this school first originated with a merchant named Cantillon, but did not attract attention until definitely formulated in detail by François Quesnay and Jean de Gournay, who were the chiefs of "The Economists," as they were called at the time, or "The Physiocrats," as they were afterward named. In Cantillon's "Essai," however, the root idea of the system is to be found. "The earth," he wrote, "is the source or the matter whence is drawn all wealth; the labor of man is the instrument which produces it." This was the idea that was worked out with great elaboration of detail in Quesnay's "Tableau Economique" (1755), and in his "Maximes générales de Grouvernement Economique d'un Royaume Agricole" (1758). In the latter work, which consists of a number of maxims for the guidance of rulers and peoples, the following passages occur:

"Maxim iii. Let the Ruler and the Nation never forget that the earth is the sole source of wealth, and that it is agriculture which augments it. For the increase of wealth assures that of the population; men and wealth make agriculture prosper, extend commerce, animate industry, add to and perpetuate wealth. On this abundant source depends the success of every part of the government of the nation."

"Maxim xxv. Let absolute freedom of commerce be maintained; for the surest guardian of internal and external commerce, the most exact and the most profitable to the Nation and the State, lies in the unlimited freedom of competition."

The "Tableau Economique" bears as its motto the phrase, Pauvres paysans, pauvre royaume; pauvre royaume, pauvre roi. To Gournay is due the phrase since become proverbial, Laissez faire, laissez aller. The most distinguished disciples of the physiocratic school were the elder Mirabeau and the celebrated finance minister, Turgot. Mirabeau wrote several works explaining the system, from one of which, "La Philosophie Rurale" (1763), we take the following: "The artisans who weave stuffs, the merchants who trade in them, the carriers who transport them, the tailors who make them into clothes, the lawyer who pleads a cause, the servant who attends him, all these people can consume only because of the recompense which is paid to them by those who employ them, or who buy their products. For their labor and their goods produce for them nothing beyond this recompense, which is itself an expense for those who pay. If this payment be traced to its source … it will be found to come solely from the earth, which alone produces all the commodities we use" (p. 15).

It is Turgot who gives perhaps the most complete and systematic exposition of the system of the economists or physiocrats. In his "Réflexions sur la formation et la Distribution des Richesses" (1766), he supplies a brief but fairly complete survey of the whole of the science of political economy, and begins, like Adam Smith, by showing the advantage and necessity of the division of labor and how from it results a systematic exchange of commodities. "Every one attaching himself to a particular species of labor, succeeds much better therein. The husbandman draws from his field the greatest quantity it is able to produce, and procures for himself, with greater facility, all the other objects of his wants, by an exchange of his superflux than he could have done by his own labor. The shoemaker by making shoes for the husbandman, secures to himself a portion of the harvest of the latter. Every workman labors for the wants of the workmen of every other trade who, on their side, toil also for him" (§ 4).

He then goes on to show that the labor of the husbandman upon the land is the original source of all wealth, since food is the first necessity of man, but then erroneously argues, as a physiocrat, that only the land produces wealth. "The husbandman is the only one whose industry produces more than the wages of his labor. He, therefore, is the only source of all wealth" (§ 7).

He shows clearly how wages are reduced to the limit of subsistence by competition, and, like Petty and Smith, only just misses arriving at the conception of economic rent. Turgot writes (§ 12): "Every piece of ground is not equally fertile; two men with the same extent of land may reap a very different harvest; this is the second source of inequality."

He has a correct conception of exchange value. "Commerce gives to all merchandise a current value with respect to any other merchandise; from which it follows that all merchandise is the equivalent for a certain quantity of any other merchandise, and may be looked on as a pledge to represent it. Every merchandise therefore may serve as a scale or common measure, by which to compare the value of any other." Then he goes on to show that all money is merchandise and why it is that the most precious metals are most fitted to serve as money. He also has sound notions of the sources and function of capital. The work is very clear and succinct, and had, no doubt, a powerful influence, as one of its immediate precursors, on the "Wealth of Nations."

In England, Tucker, Hume, and Stewart may all be regarded as leading up to Adam Smith. Sir James Stewart, indeed, in his comprehensive but confused "Inquiry into the Principles of Political Economy" (1767), sees dimly many of the truths which Smith clearly expressed only ten years later. The Rev. Josiah Tucker wrote his "Important Questions on Commerce" in 1755, and in it argues against the mercantilists, and in favor of free-trade, while Hume, in his "Political Discourses" (1752), enunciates some detached economic truths, as when he says: "In the national stock of labor consists all real power and riches."

In 1776 the first edition of the "Wealth of Nations" was published, and with it scientific political economy first came into existence. Of the work and of its author it is not necessary to say much. The former largely speaks for itself, and the preceding historical review has shown the condition of economic science in its day. This historical review is, indeed, not so much intended to be a complete account of all that had been previously accomplished in the department of economic science, as a prefatory sketch which should contribute to a better understanding of the import of Adam Smith's great departure. The notes which have been appended to the text call attention to the more special features of the work. It remains for us to consider the further advances which have been made since Adam Smith's time in the elucidation and solution of economic problems.

First, perhaps, attention should be called to the third book, which is the earliest attempt to treat economic problems, and, indeed, it may be said, one of the earliest to treat any social problem from the historical point of view. This alone would constitute the "Wealth of Nations" an epoch-making work.

Adam Smith's book, as will be readily seen, was based upon the manufacture-industry which had as yet not been supplanted by the great machine-industry of modern times. It is important to bear this in mind in considering many of the views advanced in the work. Those who followed in his footsteps had necessarily to take into account the great industrial revolution which supervened but a few years after his death. The more immediate result of his teaching and the one which has maintained itself until the present day was the complete overthrow, in this country at least, of the doctrine of protection, and the establishment of free-trade as the basis of orthodox middle-class economics on their practical side.

Thomas Robert Malthus (1756-1834), originally led to speculate on economic questions by the Rousseauite theories of his father, supplied to the classical middle-class economy in his theory of population a new buttress—a buttress which was required against the socialistic aspirations the new conditions were calling forth, more than against the humanitarian sentimentalism of the eighteenth century which was the original occasion of it. The rapid extension of machinery and the consequent displacement of hand labor was driving thousands into the direst poverty and misery, and it behooved economists to find some explanation of this. Malthus thought he had discovered it in his theory that the growth of population always tends to outstrip the food supply, and that hence the cure of poverty lies in the limitation of the numbers of the human race. Since his time this has been accepted as axiomatic by almost all the writers of the classical school of economy, and is generally admitted in one shape or another even by their successors, the "vulgar" economists of today. The "Essay on the Principle of Population," in which his theory was elaborated, was first published in 1798 and expanded into a larger volume in 1803.

David Ricardo (1772-1823) was the first important successor to Adam Smith in the strictly economic field. He published his "Principles of Political Economy" in the year 1817. Ricardo's great service consisted in pointing out that wealth, whether in the form of capital or otherwise, is merely the accumulated product of labor, and in enforcing Adam Smith's position that labor is the sole basis of value, with its corollary that the "natural price" of a commodity expresses the total amount of embodied social labor it contains. We should also mention that he was the first to definitely formulate the theory of "economic rent," by which is meant the surplus yield or produce from any land over and above that of the worst land in cultivation.

Adam Smith, Malthus, and Ricardo constitute the trinity of the classical economy. The doctrines laid down by them were expanded, illustrated and popularized by a series of writers whom the Germans have named epigoni, and who consisted of James Mill, McCulloch, Senior, and others.

Before saying a few words on what is called the "vulgar" economy, we must not forget to mention John Stuart Mill (1806-1873), who, although in no sense an original thinker, is one of the most popular writers on political economy. His "Principles of Political Economy," published in 1848, though in substance little more than a manual of the classical system, is distinguished by breadth of sympathy, and by the consciousness that the so-called economic laws, that is, the deductions of political economy based on the present conditions of society, have not the absolute character other exponents of the science were apt to assign to them. At the same time it must be remembered that J. S. Mill was totally deficient in what has been sometimes called the "historical sense" and had little conception of the historical method. His heart rebelled against the hard and fast conclusions and pretended laws of the orthodox economy, but his intellect saw no effectual means of escaping them. In consequence, his book is an alternation of clear statements of the current views and confused attempts to evade their consequences.

The recent developments of Socialist economy, combined with general economic conditions, have resulted in the formation of a school of economists called in Germany the "Katheder-Sozialisten," or the "Socialists of the Professorial Chair," which, while criticising the classical economy, both as to premises and conclusions, recognizes its fundamental principles, and seeks to harmonize them with rejection of laissez-faire and a systematized State regulation of industrial relations. Among its representatives the names of Held, Rösler, and Wagner are the most prominent. Schäffle may also be noticed in this connection, though, in some respects, leaning more to the Socialist side. Similar tendencies have not been wanting on other parts of the continent or in this country. Prominent among non-German exponents of this school, though differing in the degree of their alienation from the orthodox system, as well as in the nature of their results, are the Belgian writer Laveleye and the English economists Jevons and Sidgwick. Emile de Laveleye would apparently refuse to recognize the existence of any determinate lines of economic development, and hence of economics at all as a science. He would thus reduce the solution of the whole question to the goodwill of individuals, a position which necessarily cuts at the root of the historical method, though the only consistent one for the Christian or Sentimental Socialist to adopt.

A very different writer, Professor Henry Sidgwick, is one of the most prominent exponents in the direction above referred to. His avowed aim is to amend the laissez-faire economy so as to leave room under certain circumstances for industrial action by government. His work on political economy, published in 1883, is so well known that it is unnecessary to say more about it here.

The late Professor Jevons may be roughly classed as belonging to this school. Value he expresses in terms of what he calls the "final utility" of a commodity, that is the degree of need for it, at the moment, on the part of the consumer. This degree of utility is determined by the supply, and the supply in turn is dependent on the cost of production or the labor expended on it. This, it will be seen, does not absolutely differ from the labor theory of Adam Smith, and still less from Ricardo's; but the mathematical language in which this writer exhibits much of his reasoning is pedantic, and often meaningless. Some of his equations are perhaps useful as a concise mode of expression: others appear to illustrate the impossibility of dealing with abstract ideas by mathematical processes. He is, consequently, often credited with the obviously absurd theory that the ultimate criterion of value is the current estimation of a commodity, or, to use the ill-chosen Jevonian expression, "the final degree of utility." Such a theory, like many others of a similar kind, would confound the essence or the substance of a thing with its mere phenomenal expression or manifestation. No one denies, or ever has denied, that supply and demand enter into the temporary value or the price of anything, but this is very different from confounding the mere expression of value in any particular instance with that value which constitutes the substance of every economic object, and without which that object could not be. It has never been denied that "supply and demand" is the ratio existendi, the empirical cause, of the value of a commodity; but this does not touch the fact that the ground of its essential being (its ratio essendi) is "labor." This economic value is the point round which the temporary differences of price due to the fluctuations of the market, that is, the inequalities between supply and demand, circulate. Whenever supply and demand balance each other this essential or substantive value is realized, and in all the fluctuations of the market, however great, it tends toward realization. The above mixed systems, viz., those of the "Katheder-Sozialisten" of Germany, and of the non-orthodox political economists of other countries whose views tend in the same direction, are, as already stated, sometimes collectively known as the "vulgar economy."

The Socialist school, of which the late Karl Marx is the foremost exponent, while accepting the Smith-Ricardian doctrine of value, draws from it conclusions very divergent from those of the classical economy. When Adam Smith wrote things were very different from what they are now. He stood in no fear of consequences, and therefore followed out the natural results of his own thought. Nowadays, every non-socialist economist has the dread of Socialism before his eyes, and, consequently, feels bound to caution in the statement of conclusions. For instance, the doctrine that labor is the basis of value seems to the ordinary economist to remove any theoretic justification in the nature of things for the independent function of the capitalist. In consequence, we have the various attempts of the "vulgar economy" to "nibble" at this and other orthodox definitions which seem to have dangerous implications.

Marx draws from the Ricardian theory of value the following conclusions:

1. That the value of a commodity is the labor power embodied in that commodity.

2. That the primal form of exchange is an exchange of equivalent values embodied in commodities.

3. That money is a commodity whose value is also the labor power embodied in it.

4. That in the exchange of commodities for money and of money for commodities— i.e., buying and selling—the primal form would still be the same—an exchange of equal values.

5. That in the inverted, or "commercial" form of exchange this is not so; but money is exchanged for commodities and commodities back into money, in order that money may be increased, the increase being called surplus value.

6. That it is this power of money of increasing by exchange which converts it into capital.

But next arises the question, whence comes this surplus value? How is it that money can increase itself in a way in which no other commodity can? "The common-sense mind explains it at once, by seeing in the whole affair merely a swindling transaction, in which the capitalist gets more commodities than he pays for, and is paid for more commodities than he sells. But," says Marx, "the totality of the capitalist class in a country cannot outwit itself." "The change of value that occurs in the case of money intended to be converted into capital cannot take place in the money itself.… In order to be able to extract value from the consumption of a commodity, our friend Moneybags must be so lucky as to find within the sphere of circulation, in the market, a commodity whose use-value possesses the peculiar property of being a source of value; whose actual consumption, therefore, is itself an embodiment of labor, and, consequently, a creator of value. The possessor of money does find on the market such a special commodity in capacity for labor or labor power." From this, therefore, comes the surplus value. In other words, the surplus value is unpaid labor. This idea Marx develops with great detail, embodying much trenchant criticism of previous economists. In Part IV. of the first volume of "Das Kapital" Marx shows the development of the modern capitalist system historically, beginning at the break-up of the Middle Ages, during which simple individual or family labor obtained; leading up to simple co-operation, this rapidly developing into the manufacture system prevalent during the so-called période manufacturière, which dates, roughly speaking, from the middle of the sixteenth to the end of the eighteenth century; and this mode of production again, toward the close of the last century and the beginning of the present, passing into the "great industry" of modern times, in which all but the simplest forms of direct human labor are superseded by machinery.

The above cannot, of course, give more than a hint on one or two points dealt with, in what is, in its bearing on human life generally, perhaps the most important work of the century. We may here again remind the reader that the preceding introduction does not profess in any way to be a complete history of the science. Such a history is at present a desideratum. What has been attempted has been to outline the course of the development of economic theory, so that the "Wealth of Nations" may be better understood, both in its relation to the past, and its bearing on the present and future.

Introduction and Plan of the Work

The annual labor 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 labor, or in what is purchased with that produce from other nations.

According, therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion.

But this proportion must in every nation be regulated by two different circumstances; first, by the skill, dexterity, and judgment with which its labor is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labor, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.

The abundance or scantiness of this supply too seems to depend more upon the former of those two circumstances than upon the latter. Among the savage nations of hunters and fishers, every individual who is able to work, is more or less employed in useful labor, and endeavors to provide, as well as he can, the necessaries and conveniences of life, for himself, or such of his family or tribe as are either too old, or too young, or too infirm to go a-hunting and fishing. Such nations, however, are so miserably poor, that from mere want, they are frequently reduced, or at least think themselves reduced, to the necessity sometimes of directly destroying and sometimes of abandoning their infants, their old people, and those afflicted with lingering diseases, to perish with hunger, or to be devoured by wild beasts. Among civilized and thriving nations, on the contrary, though a great number of people do not labor at all, many of whom consume the produce of ten times, frequently of a hundred times more labor than the greater part of those who work; yet the produce of the whole labor of the society is so great, that all are often abundantly supplied, and a workman, even of the lowest and poorest order, if he is frugal and industrious, may enjoy a greater share of the necessaries and conveniences of life than it is possible for any savage to acquire.

The causes of this improvement, in the productive powers of labor, and the order, according to which its produce is naturally distributed among the different ranks and conditions of men in the society, make the subject of the First Book of this Inquiry.

Whatever be the actual state of the skill, dexterity, and judgment with which labor is applied in any nation, the abundance or scantiness of its annual supply must depend, during the continuance of that state, upon the proportion between the number of those who are annually employed in useful labor, and that of those who are not so employed. The number of useful and productive laborers, it will hereafter appear, is everywhere in proportion to the quantity of capital stock which is employed in setting them to work, and to the particular way in which it is so employed. The Second Book, therefore, treats of the nature of capital stock, of the manner in which it is gradually accumulated, and of the different qualities of labor which it puts into motion, according to the different ways in which it is employed.

Nations tolerably well advanced as to skill, dexterity, and judgment, in the application of labor, have followed very different plans in the general conduct or direction of it; and those plans have not all been equally favorable to the greatness of its produce. The policy of some nations has given extraordinary encouragement to the industry of the country; that of others to the industry of towns. Scarce any nation has dealt equally and impartially with every sort of industry. Since the downfall of the Roman empire, the policy of Europe has been more favorable to arts, manufactures, and commerce, the industry of towns; than to agriculture, the industry of the country. The circumstances which seem to have introduced and established this policy are explained in the Third Book.

Though those different plans were, perhaps, first introduced by the private interests and prejudices of particular orders of men, without any regard to, or foresight of, their consequences upon the general welfare of the society; yet they have given occasion to very different theories of political economy; of which some magnify the importance of that industry which is carried on in towns, others of that which is carried on in the country. Those theories have had a considerable influence, not only upon the opinions of men of learning, but upon the public conduct of princes and sovereign states. I have endeavored in the Fourth Book, to explain, as fully and distinctly as I can, those different theories, and the principal effects which they have produced in different ages and nations.

To explain in what has consisted the revenue of the great body of the people, or what has been the nature of those funds, which, in different ages and nations, have supplied their annual consumption, is the object of these four first books. The fifth and last book treats of the revenue of the sovereign, or commonwealth. In this book I have endeavored to show; first, what are the necessary expenses of the sovereign, or commonwealth; which of those expenses ought to be defrayed by the general contribution of the whole society; and which of them, by that of some particular part only, or of some particular members of it: secondly, what are the different methods in which the whole society may be made to contribute toward defraying the expenses incumbent on the whole society, and what are the principal advantages and inconveniences of each of those methods: and, thirdly and lastly, what are the reasons and causes which have induced almost all modern governments to mortgage some part of this revenue, or to contract debts, and what have been the effects of those debts upon the real wealth, the annual produce of the land and labor of the society.

BOOK I

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BOOK II

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BOOK III

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BOOK IV

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BOOK V

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Credits

Adam Smith

THE WEALTH OF NATIONS

Cover design: Avia Artis

Picture of Adam Smith was used in the cover design.

Picture by: James Tassie

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2024