The Online Library of Liberty

A project of Liberty Fund, Inc.

• The Works and Life of Walter Bagehot, Volume VII.
• Adam Smith As a Person. (1876.)
• Mr. Disraeli As a Member of the House of Commons. (1876.)
• Lord Althorp and the Reform Act of 1832. 1 (1877.)
• The Chances For a Long Conservative Regime In England. 1
• Economic Studies.
• The Postulates of English Political Economy.
• I.—: The Transferability of Labour.
• II.—: The Transferability of Capital.
• The Preliminaries of Political Economy. 1
• Adam Smith and Our Modern Economy.
• Malthus.
• Ricardo.
• The Growth of Capital.
• Cost of Production.
• Appendix.
• Matthew Arnold On the London University. ( Fortnightly Review, June, 1868.)
• Senior’s Journals. ( Fortnightly Review, August, 1871.)

ADAM SMITH AND OUR MODERN ECONOMY.

I.

If we compare Adam Smith’s conception of Political Economy with that to which we are now used, the most striking point is that he never seems aware that he is dealing with what we should call an abstract science at all. The Wealth ofNations does not deal, as do our modern books, with a fictitious human being hypothetically simplified, but with the actual concrete men who live and move. It is concerned with Greeks and Romans, the nations of the middle ages, the Scotch and the English, and never diverges into the abstract world. Considering the natural progress of opulence as an item in greater studies, as part of the natural growth of human civilisation, Adam Smith always thought how it had been affected by human nature, taken as a whole.

Adam Smith approximates to our modern Political Economist, because his conception of human nature is so limited. It has been justly said that he thought “there was a Scotchman inside every man”. His Theory of Moral Sentiment, indeed, somewhat differs in tone, but all through The Wealth of Nations, the desire of man to promote his pecuniary interest is treated as far more universally intense, and his willingness to labour for that interest as far more eager and far more commonly diffused, than experience shows them to be. Modern economists, instructed by a larger experience, well know that the force of which their science treats is neither so potent nor so isolated as Adam Smith thought. They consistently advance as an assumption what he more or less assumes as a fact.

Perhaps a little unfairly, nothing has more conduced to the unpopularity of modern political economists, and to the comparative fame of Adam Smith, than this superiority of their view over his. Of course Adam Smith was infinitely too sensible a man to treat the desire to attain wealth as the sole source of human action. He much overrated its sphere and exaggerated its effect, but he was well aware that there was much else in human nature besides. As a considerate and careful observer of mankind, he could not help being aware of it. Accordingly he often introduces references to other motives, and describes at length and in an interesting way what we should now consider non-economic phenomena; and, therefore, he is more intelligible than modern economists, and seems to be more practical. But in reality he looks as if he were more practical, only because his analysis is less complete. He speaks as if he were dealing with all the facts of human nature, when he is not; modern economists know their own limitations; they would no more undertake to prescribe for the real world, than a man in green spectacles would undertake to describe the colours of a landscape. But the mass of mankind have a difficulty in understanding this. They think Adam Smith practical because he seems to deal with all the real facts of man’s life, though he actually exaggerates some, and often omits others; but they think modern economists unpractical because they have taken the most business-like step towards real practice—that of dealing with things one at a time.

And it is precisely this singular position of Adam Smith which has given him his peculiar usefulness. He fulfilled two functions. On the one hand, he prepared the way for, though he did not found, the abstract science of Political Economy. The conception of human nature which underlies The Wealth of Nations is near enough to the fictitious man of recent economic science to make its reasonings often approximate to, and sometimes coincide with, those which the stoutest of modern economists might use. The philosophical and conscious approximation which we now use has been gradually framed by the continual purification of the rough and vague idea which he employed. In this way Adam Smith is the legitimate progenitor of Ricardo and of Mill. Their books would not have been written in the least as they now are, most likely would never have been written at all, unless Adam Smith, or some similar writer, had written as he has. But, on the other hand, Adam Smith is the beginner of a great practical movement too. His partial conception of human nature is near enough to the entire real truth of it to have been assumed as such in his own mind, and to be easily accepted as such by the multitude of readers. When he writes, he writes about what interests most practical men in a manner which every one will like who is able to follow any sort of written reasoning; and in his time there was a great deal of most important new truth, which most practical people were willing to learn, and which he was desirous to teach. It is difficult for a modern Englishman, to whom “Free Trade” is an accepted maxim of tedious orthodoxy, to remember sufficiently that a hundred years ago it was a heresy and a paradox. The whole commercial legislation of the world was framed on the doctrines of Protection; all financiers held them, and the practical men of the world were fixed in the belief of them. “I avow,” says Monsieur Mollien, the wise Finance Minister of the first Napoleon, “to the shame of my first instructors,” the previous officials of France, “that it was the book of Adam Smith, then so little known, but which was already decried by the administrators with whom I had served, which taught me better to appreciate the multitude of points at which public finance touches every family, and which raised judges of it in every household.” There were many Free Traders before Adam Smith, both writers and men of business, but it is only in the antiquarian sense in which there were “poets before Homer, and kings before Agamemnon”. There was no great practical teacher of the new doctrine; no one who could bring it home to the mass of men; who connected it in a plain emphatic way with the history of the past and with the facts of the present; who made men feel that it was not a mere “book theory,” but a thing which might be, and ought to be, real. And thus (by a good fortune such as has hardly happened to any other writer) Adam Smith is the true parent of Mr. Cobden and the Anti-Corn Law League, as well as of Ricardo and of accurate Political Economy. His writings are semi-concrete, seeming to be quite so, and, therefore, they have been the beginning of two great movements, one in the actual, and the other in the abstract world.

Probably both these happy chances would have amazed Adam Smith, if he could have been told of them. As we have seen, the last way in which he regarded Political Economy was as a separate and confined speciality; he came upon it as an inseparable part of the development of all things, and it was in that vast connection that he habitually considered it. The peculiar mode of treating the subject which we now have, had never occurred to him. And the idea of his being the teacher, who more than any one else caused Free Trade to be accepted as the cardinal doctrine of English policy, would have been quite as strange to him. He has put on record his feeling: “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceania or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it. Were the officers of the army to oppose with the same zeal and unanimity any reduction in the number of forces, with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home market; were the former to animate their soldiers, in the same manner as the latter inflame their workmen, to attack with violence and outrage the proposers of any such regulation; to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish in any respect the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the Government, and upon many occasions intimidate the legislature. The member of Parliament who supports every proposal for strengthening this monopoly is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists.”

Yet, in fact, the “Utopia” of Free Trade was introduced into England by the exertions of the “master manufacturers,” and those who advocated it, and who were “thought to understand trade,” said that they had learned the doctrines they were inculcating from The Wealth of Nations above and beyond every other book.

II.

If we look at The Wealth of Nations as if it were a book of modern Political Economy, we should ask four questions about it.

1. What, by its teaching, is the cause which makes one thing exchange for more or less of other things?

2. What are the laws under which that cause acts in producing these things?—the full reply to which gives the laws of population and growth of capital.

3. If it turns out (as of course it does) that these things are produced by the co-operation of many people, what settles the share of each of those people in those things, or in their proceeds? The answer to this question gives what are called the laws of distribution.

4. If this co-operation costs something (as of course it does), like all other co-operations, who is to pay that cost, and how is it to be levied? The reply to this inquiry is the theory of taxation.

To persons who have not been much accustomed to think of these subjects, these questions may seem a little strange. They will be apt to think that I ought to have spoken of the laws of wealth and of its production and distribution, rather than of the causes which make one thing exchange for more or less of other things, and of the consequent laws. But the truth is that for the purposes of Political Economy, “wealth” means that which possesses exchange value, and on that ground Archbishop Whately wanted to call the science “catalactics”. The air and the sunlight—the riches of nature—are nothing in Political Economy, because every one can have them, and therefore no one will give anything for them. “Wealth” is not such for economic purposes, unless it is scarce and transferable, and so desirable that some one is anxious to give something else for it. The business of the science is not with the general bounty of nature to all men, but with the privileged possessions—bodily and mental powers included—which some have, and which others have not.

Unluckily when we come to inquire what makes these things exchange for more or less of value, one among another, we find ourselves in the middle of a question which involves many and difficult elements, and which requires delicate handling. Most of the difficulties which are felt in reflecting on the entire subject are owing to a deficient conception of the primitive ingredient. And this will surprise no one conversant with the history of science, for most errors in it have been introduced at the beginning, just as the questions which a child is apt to ask are in general the ones which it is hardest to answer.

It is usual to begin treating the subject by supposing a state of barter, and this is in principle quite right, for “money” is a peculiar commodity which requires explanation, and the simplest cases of exchange take place without it. But it is apt to be forgotten that a state of barter is not a very easy thing fully to imagine. The very simplicity which renders it useful in speculation, makes it more and more unlike our present complex experience. Happily, though barter has died out of the adult life of civilised communities, there remains an age when we, most of us, had something to do with it. To schoolboys money is always a scarce and often a brief possession, and they are obliged to eke out the want by simpler expedients. The memories of most of us may help them in the matter, though their present life certainly will not.

Suppose, then, that one boy at school has a ham sent him from home (those who object to trivial illustrations must be sent back to the Platonic Socrates to learn that they are of the most special use in the most difficult matters, and be set to read the history of philosophy that they may learn what becomes of the pomposity which neglects them), and suppose that another boy has cake, and that each has more of his own than he cares for and lacks something of the other, what are the proportions in which they will exchange? If boy A likes his own ham scarcely at all, or not very much, and if he is very fond of cake, he will be ready to barter a great deal of it against a little of boy B’s cake; and if boy B is fond of cake too and does not care so much for ham, cake will be at a premium, and a very little of it will go a great way in the transaction, especially if the cake is a small one and the ham a big one; but if, on the contrary, both boys care much for ham, and neither much for cake, and also the ham be small and the cake large, then the ham will be at a premium, the cake at a discount, and both sides of the exchange will be altered. The use of this simplest of all cases is that you see the inevitable complexity of, and that you cannot artificially simplify, the subject. There are in every exchange, as we here see, no less than six elements which more or less affect it in general; first, the quantities of the two commodities, and next, two feelings in each exchanger—first, his craving for the commodity of the other, and secondly, his liking or disinclination for his own. In every transaction, small or great, you will be liable to blunder unless you consider all six.

The introduction of money introduces in this respect no new element. The inseparable use of that incessant expedient is that which ingrains into civilised life the abstract idea of a “purchasing power”; of a thing which, when possessed, will obtain all other things. And independently of the hand-to-hand use of money, this idea of it as a universal equivalent, with the consequent means of counting, has been incalculably beneficial to civilisation. But into a mere single interchange its use introduces nothing new. Money, in that aspect, is simply a desirable commodity; it often happens to be particularly coveted, but at other times, in comparison with some simpler and more essential things, its worth is insignificant.

Nor do the common bargains of commerce contain any additional ingredient. There are always six things to be considered. Suppose that a holder of £10,000 “Peruvians” wants to sell them on the London Exchange, the price he will get will obviously vary with the quantity of Peruvian stock there is about in the market, and the quantity of money which the owners are ready to invest in it; but also according to four other things.

First,—Whether he is anxious for money or not; if he has a bill to meet to-morrow morning and must have money, the chances are great that some one will take advantage of his necessities, and he will have to take less; if, on the other hand, he be a rich man—a strong holder, as the phrase is—he will say, “Ah, if I cannot get my price to-day I will wait till tomorrow,” and so he will get a better price.

Secondly,—Even if he is not violently in want of money, the price will vary according as he thinks “Peruvians” more or less likely to fall or not. If he thinks them a declining or “treacherous” stock, he will be anxious to get rid of them, and will be less difficult as to price; if he had private and peculiar knowledge that Peru was about to imitate Spain and to stop payment the next day, he will sell at once for any price that those not in the secret would be ready to give him. In these two ways the bargain would be influenced by the mental state of the seller, and it will be influenced in two ways also by the mental state of the buyer.

Thirdly,—If the buyer is desirous of the article, because he thinks it will get rapidly up, he of course will give more than if he thinks it is likely to be stationary, or even for a time to fall. He will “discount” the prospect of improvement, as the market phrase has it.

Fourthly,—If he can make little of his money in other ways, say, if it is earning 2 per cent., he will be ready to put it into “Peruvians” at a much lower price than he would if he could get 7 per cent. for it in other ways. If there were a crisis, and money had risen in value to 10 per cent., he would hardly put it out of his own control by buying “Peruvians” with it, at any price, no matter how low. He would prize the money at such a time, because in a general disturbance it may often be used to untold advantage, or may save its owner from ruin.

In the bargains in all other commodities the same considerations have to be taken account of, and no others. A bargain in foreign stocks or railway shares is in essentials the same as one in corn or cheese. The same six elements are in each case to be thought of, and no others.

Every transaction in commerce is in a legal sense separate; it is a contract in which one side engages to do certain things in return for certain other things which are to be done by the other side. But in a practical sense most important commercial phenomena are interlaced one with another. The feelings of each seller as to parting, or not parting, with his goods, are mainly caused—or much caused at any rate—by the amount of goods which other dealers have now in or are about to bring to market, and also by what he imagines to be their “strength” or “weakness”; that is, their more or less of inclination to part with their goods or to retain them in every market, and a most able living economist1 has justly observed that nowadays this is what we mean by “a market”; the estimate formed of all which the dealers have, and of all which they expect to have, is all pretty much collected into one corporate opinion, which floats variously about upon the lips of men, though often it would not be easy to condense into a formula, or to bring it home on evidence to any single speaker. For the most part it is an imbibed, not a discovered, fact, that the market is “dull, and likely to be dull,” “lively, and likely to be so”. These are in part truths of observation, but in part also accredited hypotheses. A market knows its own present state, and anticipates its own future, by signs which an outside observer would not see, and by the unconscious contribution of many minds to a daily growing opinion. A market in the higher commercial sense of the word—in the sense in which we speak of the “money market”—does not mean, as it once did, a place where goods were exposed, but an historical result of the proximity of traders, a set of dealers cognisant of one another, and acquainted more or less with each other’s position, and each other’s intentions.

It must not be supposed, however, that the process of bargain-making approaches in general to a statistical calculation. A person proposing to buy, looks at a trade circular to see what the writer of it thinks the price is; he asks the broker what price has been given, what offered, what refused; he inquires whether holders are strong or weak, whether they are under supplied or over supplied; he asks if other buyers are many or few, whether they are eager or indifferent, whether they have much money, or whether they have little; and out of these inquiries he forms an idea of the price at which he is likely to buy the commodities. A person intending to sell a commodity forms in like manner a notion of the price he is likely to obtain for it; on the surface the appearance is often frivolous enough. Many persons go about inquiring, “In what state do you think the market, sir?” and getting, as it would seem, not much reply in return. But underneath there are some of the keenest anxieties and most ardent hopes of human nature. A large quantity of goods is on the market, by selling which many holders must live, if they live at all. A great, though uncertain, quantity of money is in the market, which the owners mean to live by investing. The main interest of many lives is at stake, and the subsistence of many families, little as on the outside the market looks so.

On the whole, then, we may sum the matter up thus:—

Firstly,—That a bargain will be struck when four conditions are satisfied, viz.:—

“When the seller thinks he cannot obtain more from the buyer with whom he is dealing, or from any other;

“When he is sufficiently desirous to sell his article, or enough in want of money to take that price;

“When the buyer thinks that he cannot obtain the article for less, either from that seller or from any one else;

“When he is so eager for the article, or so anxious to invest his money, as to give it.”

Secondly,—That every bargain is a datum for other bargains, and influences the opinions on which they are based.

Thirdly,—That the average price of such bargains is the market price.

Fourthly,—That the main elements of market price are those which prevail in most bargains, viz., the actual quantity of the article in the market, the quantity of money actually ready to be invested in it, and the average strength with which the wish to hold the article, the wish to acquire it, the wish to obtain money, and the wish to invest it, operate through the whole class of buyers and of sellers.

These formulæ may seem complex, but I do not think that any of them can be left out or shortened except by omitting necessary facts.1

An attempt is, indeed, commonly made to abbreviate these rules. Very much the same is meant by the common phrase that market price is determined by “supply and demand,” which is a good phrase enough when you know how to manage it. But the effect of using so few words for so much meaning is that they are continually being used in various senses; no one signification of the terms can be stretched over the whole matter. And in consequence a literature has come to exist discussing their ambiguities. The most obvious objection is that, if the words are taken in their natural sense, they imply a relation between two things of wholly different natures; demand is a desire in the mind, supply a quantity of matter; how then can there be an equality between them? And even when demand is used in the best sense,2 for the quantity of money or purchasing power, the formula has the defect of mentioning only the two quantities of the changing commodities, of not saying that they are only estimates of quantities, and of not warning those who use it that they must likewise consider the other elements—the four wishes of the two exchangers.

It is most important to be clear upon the matter, because confusion about it has led, and still leads, to many most mischievous fallacies. For example, it has been vigorously argued that “Trades Unions” could not alter the price of labour. “The supply, the number of labourers,” it was said, “is the same as before, and also the demand, viz., the quantity of money wanting to buy labour—the two causes being thus identical, the effect cannot be different.” But, in fact, a Trades Union establishment at once alters the mental conditions. It turns the labourer, in the Stock Exchange language, from a weak holder into a strong one; it enables him to hold. Before, he must either take the master’s terms or starve; now, he has money to live, and will often get more, because he can stand out for a good bargain.

The complete view of the facts thus effaces at once the ingrained mistake of the last generation, and it also destroys as quickly a recent error now common. It is imagined that because Trades Unions have sometimes raised wages to some extent, they can raise them, at any rate gradually, to any extent. But we now see the limit of their power. They can only win when the funds of the Union are stronger than the funds of the capitalists; and this will sometimes be so, and sometimes not be so. A clear view of the facts also explains (that which is a difficulty in the ordinary theory) the difference between a speculative market and an ordinary one. So long as it is imagined that market price is determined by the supply of the article in the market, and the money here eager to buy it, it is not possible to explain why two markets in which both these elements coincide should be so different as a dull market and an excited one always are. But as soon as we understand that we have to deal likewise with opinions and with wishes, we see how there is great scope for discrepancy and for mutability.

Again, on another side of the subject, it has been incessantly said that (at all events since the Act of 1844, which limits the power of issue) the Bank of England cannot alter the rate of discount. There exist, it is said, a certain number of bills, and a certain amount of money ready to be invested in bills, and this determines the way in which one will be exchanged for the other. But, in fact, much of such money is held by the Bank of England, and the fact of its being unwilling to lend, inevitably alters “the equation of exchange”. The desire of the principal dealers to operate, or not to operate, is a vital element in every market. When you read in the jargon of trade circulars that “yarns are sluggish, and that teas are lively,” the palliation for the use of these ridiculous adjectives is that in the facts described there is as much of mental state as of physical supply.

It is in consequence of the extreme importance of these mental elements that in all markets you hear so much of “flying and often concocted rumours”. On the Stock Exchange “the lie of the day,” as Dr. Johnson would have called it, always has some influence, because the momentary wishes of sellers to sell, and buyers to buy, are greatly affected by what they hear as to possible wars and revolutions of the nations whose debts they are buying and selling. The best States only care for such rumours at critical instants, but more or less the repute of minor ones lies at the “truth of him that makes it,” and their credit is incessantly talked up and talked down much more than they themselves desire.

The league of the moment—“rig,” “ring,” “syndicate,” or “pool,” or what not—“one form with many names”—operates in the same way. It is a mental expedient for changing the mental state of the market. By combining, the same persons are able to make the same amount of speech and the same amount of money go farther. They affect opinion more, because they say the same things, and they are more tenacious holders, or more desperate buyers, because they rely one on another.

We see, too, from this analysis why it is that one man is a good seller and another a bad one. A good seller is a good advocate, who acts effectually on the opinions and feelings of persons inclined to deal with him, who makes them think that the article is very excellent, that it is growing very scarce, that it is going to be scarcer, that a great many people are wanting it, that much money is going to be had for it, that the holders in general are anxious not to sell as yet because they believe it will get dearer, that he himself is above all unwilling to part with his article and will do so only as a personal favour. He weakens the judgment and intensifies the desire of his opponent as he wishes.

The requisites of a good buyer are in essentials the same. He also is an advocate, only on the other side. He has to show that the article in question is undesirable, that it is plentiful, that most holders are most anxious to sell it, that few persons, and those with little money, are coming forward to buy it, that though, perhaps, he might himself be induced to buy a little of it, yet it would only be under peculiar circumstances, and as a matter of private feeling. There is, indeed, a common saying that a good buyer is much rarer than a good seller; and I believe that the Manchester warehouse-keepers, as they are called—that is, the great dealers in underclothing,—great traders, but who do not produce anything, and must therefore both largely buy and sell—give higher salaries to their buyers than to their sellers. But this is only because the buyers are the advocates who have to address the more skilled audience. They buy of a few manufacturers who understand business well, and must, therefore, be careful what they say. The sellers for the firm, who distribute the goods among the country shops, have people of very inferior intelligence to deal with. A few good buyers, therefore, purchase what many less qualified sellers dispose of. But in its essence the business is identical. It consists in exciting desire and in modifying opinion.

It may strike some people that if prices thus depend on casual opinions and on casual desires, it is odd that prices in markets should be so uniform on particular days in particular markets as they really are. But in fact, at ordinary times, these casual opinions and casual desires form a sort of average. The timid seller is emboldened by knowing that others are courageous; the necessitous by knowing that others are strong; the cautious buyer is forced on because he knows that eager ones will outstrip him; the adventurous is restrained because he knows that others have doubts, and so on through the whole subject. In the infancy of trade no doubt there is ample room for great variations. A most graphic observer1 has said of Oriental markets: “The necessities of a savage are soon satisfied, and unless he belong to a nation civilised enough to live in permanent habitations, and secure from plunder, he cannot accumulate, but is only able to keep what he is actually able to carry about his own person. Thus, the chief at Lake N’gomi told Mr. Andersson that his beads would be of little use, for the women about the place already ‘grunted like pigs’ under the burden of those that they wore, and which they had received from previous travellers.”

In civilised times facts are known, advocacy is weak, and prices are usually uniform. But they are not so at a commercial crisis; then, as the phrase goes, prices are very “wide”. A necessitous seller must sell, and he pulls down the price for an instant, but if a buyer is stimulated by this, and wants to buy more at the same price, he will find that he cannot do it. There are no more equally necessitous sellers in the market; the rest do not want money for the instant, and will not sell, except at a much higher price. At such a moment, too, skilful people will act on the fears of others. I have heard it said of a bland and delicate operator, who was ultimately very successful, that at critical times “he encouraged others to be frightened”. And in panics cool heads and strong nerves make much by dealing with weak nerves and hot heads. But in common times the contrary tendencies are subdued to an average. The most anxious seller will depress a good stock but very little, and the most eager will raise it but a little also.

I have been obliged to state the facts carefully, before discussing Adam Smith’s doctrine, because I could not otherwise make an attempt to estimate it intelligibly, and I must go on with some further facts also, or even that estimate would be broken and faulty. At a glance it is plain that the doctrine of exchange which I have sketched, cannot be the final theory. It depends on the relative quantity of two things, but as most things can be increased at will by human labour, men have, therefore, in most cases the means of making these quantities what they please, and therefore these quantities cannot be ultimate causes. “Supply and demand” cannot be final regulators of value, for in most cases men can supply what they like, and to finish the subject we must know when they will begin to do so, and when they will leave off.

The first answer to be given to these questions is, that producers who produce in order to receive something in exchange for their products, will go on producing as long as the gain, pleasure, satisfaction (whatever word you choose to use) they receive from that something is a sufficient compensation to them for the bore and irksomeness of production, and they will stop producing when it ceases to be sufficient. In an early state of society it is easy to imagine simple cases of this. In the times of which the Scandinavian “kitchenmiddings” are the only extant vestige, the population lived partly by hunting and partly by fishing; most, I suppose, did both; some confined themselves to that which they did best. In that case a hunter, who only hunted, would work as long as the fish received in exchange seemed to him to repay the trouble of hunting; a fisherman, who only fished, would do the same. The man who tatooed the population would continue to do so as long as the game or the fish he received in return seemed to make it worth his while. The polisher of flint implements or bones would do just the same. The essence of the whole is the exchange of the produce of much labour and very little capital, so long as the labourer thinks what he thus obtains repays him for his labour. And the same thing goes on down to the end of civilisation in a subordinate way. An old woman gathers laver on the sea-shore of Somersetshire as long as any one will give the pittance she expects for it. A diver will bring up pearls as long as any one will give what he thinks is enough to make it worth while to go to the bottom of the sea for them. The primitive form of production still exists, and the primitive estimate of recompense, but in most cases they exist as “survivals” only. In two remarkable instances, of which I shall speak hereafter, they still alter the main tide of commerce. But for the most part the interest of the transactions is principally antiquarian; little money is now made by them, but they are worth thinking of now and then, because they remind us of what once was the only way in which the relative value of commodities was finally determined in the world.

The main part of modern commerce is carried on in a very different manner. It begins at a different point, and ends at a different point. The fundamental principle is, indeed, the same; the determining producer—the person on whose volition it depends whether the article shall be produced or not—goes on so long as he is satisfied with his recompense, and stops when he ceases to be so satisfied. But this determining producer is now not a labourer but a capitalist. In nine hundred and ninety-nine cases out of every thousand, it is the capitalist and not the labourer who decides whether or not an enterprise shall be commenced, and therefore whether the consequent commodity shall come on the market. He buys his labour just as he buys his raw material; he may calculate wrongly in both cases, he may think he will buy when labour or material is cheaper than it turns out ever to be; but his calculation will be the critical element in the whole business; that which decides whether it shall or shall not be entered upon.

This change has occurred in the organisation of industry, because the new mode of organising it is infinitely more efficient than the old. A body of separate labourers has many of the characteristics of a mob; but one acting under the control of a capitalist has many of those of an army. A capitalist provides his labourers with subsistence, directs each what he shall do and when, and educes the desired result of the whole combination at the proper time, much as a general does. He and his men will live and will produce riches where a mere multitude of labourers will starve. When, in very modern times, it has been endeavoured in schemes of “co-operation” to enable labourers to subsist without dependence on an individual capitalist, it has been necessary, under cloak of the combination, to invent a capitalist in disguise. A common fund subscribed beforehand, an elected board to invest it, a selected manager to combine it, are all refined expedients for doing in a complex way what the single rich capitalists does in a simple way; even yet we do not know how far they can be applied with comparable efficiency. In simpler times the rich man who has much beforehand, buys the labour of his poorer neighbours who have nothing, and directs their power towards results which no one of them could perhaps have conceived, and which a thousand times as many, without his controlling mind, would have been impotent to produce. On one point, however, the point which is most material for the present purpose, the old organisation, or disorganisation, of mere labourers acting separately, and the exact modern industry, where enterprise depends on the fiat of the capitalist, are alike; and are so because human nature is alike both in capitalist and labourer. Neither of them will take much trouble to obtain in one way that which he can obtain with very little trouble in another way. As far as labour can migrate from employment to employment, articles produced by the same labour will exchange for one another. If it were not so, the labourers who worked at the thing which fetched least would be throwing away some of their labour; they would do better to produce something else, and in the end they would do so. In the same way, as far as capital (including the capital which buys labour) can be transferred from employment to employment, things produced with the same amount of capital, in similar times and similar circumstances, exchange one for another. When it is not so, capital tends to go from the pursuit in which it is less profitably employed to those in which it is more so.

As might be expected, the modern organisation is much more perfect in this respect as in most others. Labour always circulates from employment to employment. “Whatever,” says Adam Smith, “obstructs the free circulation of labour from one employment to another, obstructs that of stock likewise; the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it. Corporation laws, however, give less obstruction to the free circulation of stock from one place to another than to that of labour. It is everywhere much easier for a wealthy merchant to obtain the privilege of trading in a town corporate, than for a poor artificer to obtain that of working in it. The obstruction which corporation laws give to the free circulation of labour is common, I believe, to every part of Europe. That which is given to it by the poor laws is, so far as I know, peculiar to England. It consists in the difficulty which a poor man finds in obtaining a settlement, or even in being allowed to exercise his industry in any parish but that to which he belongs. It is not the labour of artificers and manufacturers only of which the free circulation is obstructed by corporation laws. The difficulty of obtaining settlements obstructs even that of common labour.”

Man is of all pieces of luggage the most difficult to be removed. In general an ill-paid labourer early in life gives hostages to misfortune, he burdens himself with the support of a wife and children; he cannot move, or they would starve. But civilisation has invented an elaborate machinery for holding capital in a transferable form. The basis of this machinery is the invention of money. One of the uses of money is that it is a mode in which capital may be held without loss in what may be called a provisional form. All capital originally comes from production—is, say, so much corn, or tin, or hemp—but if a man holds corn, or any other commodity, he may not be able to exchange it in a little while for so much as he can to-day. Most commodities are in their nature perishable, and most others are liable to depreciation from the change in human desires. But money is always wanted, for it will buy everything; any one who is not sure how he will ultimately employ his capital can hold it in the form of money. This provisional state—this interval of non-employment—is a great security for the substantial equality of equal capitals in equal employments, for it gives capitalists time to look before them and see what they should select because it will yield most, and what they should avoid because it will yield least.

But in this, its elementary form, the machinery for holding capital, so to say, in expectation, has an obvious defect; the capitalists derive no income from it while it is in a state of indecision. “Money is barren,” according to the old saying, and whoever holds mere coin will certainly derive no income. But in countries where banking is well developed, the machinery is far more efficient; a man who has capital lying idle can place it with a banker, who, if he will agree to give some notice before he withdraws it, will agree to pay him some interest on it. This interest, as far as it goes, is a source of income during the period of suspended investment, and is something on which the capitalist can subsist without trenching on his capital, and without hurrying to a premature use of it. This capital awaiting investment the banker employs in the same way that he employs the unused balances of people’s income, and that is in lending to the trades which are at the moment most profitable. As I have elsewhere explained: “Political Economists say that capital sets towards the most profitable trades, and that it rapidly leaves the less profitable and non-paying trades. But in ordinary countries this is a slow process, and some persons who want to have ocular demonstration of abstract truths have been inclined to doubt it, because they could not see it. In England, however, the process would be visible enough if you could only see the books of the bill-brokers and the bankers. Their bill cases as a rule are full of the bills drawn in the most profitable trades, and, cæteris paribus, in comparison empty of those drawn in the less profitable. If the iron trade ceases to be as profitable as usual, less iron is sold; the fewer the sales the fewer the bills; and in consequence the number of iron bills in Lombard Street is diminished. On the other hand, if in consequence of a bad harvest the corn trade becomes on a sudden profitable, immediately “corn bills” are created in great numbers, and, if good, are discounted in Lombard Street. Thus English capital runs as surely and instantly where it is most wanted, and where there is most to be made of it, as water runs to find its level.”

In this way “expectant capital,” while it is so expectant, forms part of a fund which is lent now to this trade, and now to that, according as for the moment each trade is more profitable; and at last instructed by reflection, its owner will invest it, other things being equal, in the trade which offers the most for it. In its temporary use it tends to equalise temporary profits; in its permanent use it does so too.

No doubt some callings are naturally pleasant, others unpleasant; some encouraged by opinion, others adverse to it; some easy to learn, some difficult; some easy to enter, others hedged in by tradition and privilege; some abounding in risk, some with little of it. But our principle is not affected by these. It is that, non-pecuniary encouragements and discouragements being reckoned, capitals employed in all trades yield an equal return in equal times.

What that return will be it would be premature here to speak of. It is only necessary to say that it is such as the capitalist will think worth while to invest his capital for, enough, that is, to compensate him for the inevitable trouble and attendant risk; if it is not enough he will let it continue uninvested at interest, or will eat it up and live on it.

We must carefully bear in mind, too, that the rule that equivalent returns are made to equal capitals in the same times, is only true of employments between which capital fluctuates freely. This is to an almost perfect extent true of employments in this country, and to a great extent, though far from an equal extent, of all employments within their own country. But it is not at all true of employments in different countries; English capital, by far the most locomotive of all capitals, will not go abroad for the same percentage of return that will suffice it at home. A great deal of the capital of all countries—by far the greater part of it everywhere, indeed—could hardly on any terms be tempted abroad. We have arrived, however, at the principle that within the same nation all commodities will tend to be of the same exchangeable value, whose cost of production is identical, and that this cost of production is that which the capitalist expends, and the return for which he is willing to take the pains of expending it.

And this will be enough for our present purpose.

III.

On all these subjects Adam Smith wrote in an extinct world, and one of the objects always before him was to destroy now extinct superstitions. In that age it was still believed, though the belief was dwindling away, that wealth consisted in “money,” and that its value was somehow different from that of anything else. As Adam Smith himself describes it: “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. In consequence of its being the instrument of commerce, when we have money we can more readily obtain whatever else we have occasion for than by means of any other commodity. The great affair, we always find, is to get money. When that is obtained, there is no difficulty in making any subsequent purchase. In consequence of its being the measure of value, we estimate that of all other commodities by the quantity of money which they will exchange for. We say of a rich man that he is worth a great deal, and of a poor man that he is worth very little money. A frugal man, or a man eager to be rich, is said to love money; and a careless, a generous, or a profuse man, is said to be indifferent about it. To grow rich is to get money; and wealth and money, in short, are, in common language, considered as in every respect synonymous.”

No true theory of “value” could be established till this false theory was cleared away. So long as even a vestige of it haunts the minds of thinkers and learners, they cannot think or learn anything on this subject properly. And therefore Adam Smith applied his whole force to the confutation of it. His success has been so complete that it has made this part of his writings now useless. No one now thinks or supposes that money is the essence of wealth; that it is anything but a kind of wealth, having distinct uses, like other kinds. The strongest interest in reading the chapters of The Wealth of Nations on the subject is given by the vigour with which they are written. They are essentially models of practical writing; they are meant to extirpate living error; they follow that error into the minds of those who believe it, and extirpate it in the forms in which it thrives and rules there. The error that the precious metals are the only real wealth, was a living error to Adam Smith, for he had lived with many persons who held it.

The efficacy of Adam Smith’s refutation is not wholly derived exactly from its literary merit. Hume had before given a brief exposure, which in mere writing is at least as good. But Hume impressed on this, as on so much else, a certain taint of paradox. He seems to be playing with his subject; he hardly appears to believe what he says, and a plain reader is often puzzled to know whether he ought to believe it either. On a strong-headed man of business, semi-insincere exposition produces no effect. But Adam Smith takes up the subject in a solid, straightforward way, such as he knew would suit the Glasgow merchants with whom he had once lived, and he talks to them, not only as a man acquainted with present mercantile things, but also as one possessing much other culture and authority. He impressed practical men by his learning, at the same time that he won them by his lucidity and assured them by his confidence.

But when we pass from the refutation of ancient errors to the establishment of coherent truth, we shall not be equally satisfied. Students are, indeed, still sometimes told that they will find such truth in Adam Smith, but those who had nothing else to read, and who wanted to read accurately, did not find it so. What in fact a student will find in Adam Smith is a rough outline of sensible thoughts; not always consistent with themselves, and rarely stated with much precision; often very near the truth, though seldom precisely hitting it; a great mental effort in its day, though always deficient in the consecutiveness required by careful learners, and, except for the purpose of exciting an interest in the subject, altogether superseded and surpassed now.

“Gold and silver, however,” says Adam Smith, “like every other commodity, vary in their value, are sometimes cheaper and sometimes dearer, sometimes of easier and sometimes of more difficult purchase. The quantity of labour which any particular quantity of them can purchase or command, or the quantity of other goods which it will exchange for, depends always upon the fertility or barrenness of the mines which happen to be known about the time when such exchanges are made. The discovery of the abundant mines of America reduced in the sixteenth century the value of gold and silver in Europe to about a third of what it had been before. As it cost less labour to bring those metals from the mine to the market, so when they were brought thither they could purchase or command less labour; and this revolution in their value, though perhaps the greatest, is by no means the only one of which history gives some account. But as a measure of quantity, such as the natural foot, fathom, or handful, which is continually varying in its own quantity, can never be an accurate measure of the quantity of other things; so a commodity which is itself continually varying in its own value can never be an accurate measure of the value of other commodities. Equal quantities of labour, at all times and places, may be said to be of equal value to the labourer. In his ordinary state of health, strength, and spirits, in the ordinary degree of his skill and dexterity, he must always lay down the same portion of his ease, his liberty, and his happiness. The price which he pays must always be the same, whatever may be the quantity of goods which he receives in return for it. Of these, indeed, it may sometimes purchase a greater and sometimes a smaller quantity; but it is their value which varies, not that of the labour which purchases them. At all times and places that is dear which it is difficult to come at, or which it costs much labour to acquire; and that cheap which is to be had easily, or with very little labour. Labour alone, therefore, 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 places be estimated and compared. It is their real price; money is their nominal price only.”

But in the present day it is not true at all that things are dear simply in proportion to the mere labour which it has cost to produce them. A thousand men’s labour assisted, say, by ten steam-engines, will produce many more valuable things than a thousand men’s labour without those steam-engines. The result of the labour of the two sets of men will not exchange for one another at all. Besides immediate labour there is a vast apparatus of the assisting results of past labour. These must be paid for in some way, or their owner will not let them be used. There is something else essential to modern industry besides labour, and that is saving, or the refraining from the immediate consumption of past labour. Sometimes this saving is used to co-operate with labour, as in machines, sometimes to support it, as with food and necessaries. But in either case its existence must be remunerated, and its use paid for. As modern economists say, the value of an article must be such as to compensate not only for the labour, but for the abstinence by which it was produced.

Again,—Adam Smith speaks of the quantity of labour which a commodity will buy, as if it were identical with the quantity of labour by which it was produced. He says: “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is but a very small part of these with which a man’s own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of the labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself and which it can impose upon other people. 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. That money or those goods indeed save us this toil. They 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. Labour was the first price, the original purchase money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.”

But the quantity of labour which a thing will purchase depends on the degree in which it is desired by labourers. A grand piano in a coarse community will buy less labour than a barrel of beer. Mere labour is the worst “measure” of value conceivable, because it varies with the appetites and differs with the tastes of mankind. There is nothing more uncertain, more changeable, or more casual than the number of days’ labour that an article will purchase. As some one expressed it: “Gin will purchase more than it ought, and tracts less than they ought”.

Adam Smith did not put the matter graphically enough before his mind. He speaks of a man’s fortune being equal “to the quantity either of other men’s labour, or what is the same thing, of the produce of other men’s labour which it enables him to command”. But unless you suppose that some general instrument of purchasing power, like money, exists, and that a man’s fortune consists in it, the two things are not the same at all. One man’s fortune may consist of a valuable library, which would buy no manual labour at all, but for which bookish people would barter many other commodities; another may have a heap of coarse meat and drink, which will bring crowds of labourers to share them, but for which few refined persons would give anything.

Unquestionably, as has been shown, in a rude state of society, where labour is the principal cost of production, two articles produced with the same amounts of labour will tend to exchange one for another because every labourer will tend to migrate to the place where his labour is better rewarded, and leave the place where it is worse. And this is what Adam Smith vaguely saw, and several times meant to say, but he did not exactly say it; he never says it, and often says something quite different.

In another passage Adam Smith sets forth a similarly vague view of the doctrine of exchangeable value as it stands after capital has accumulated. But, as will be shown, he does not work it out fully, and he does not reconcile it, or feel that there is a difficulty in reconciling it, with his former doctrine of value based on mere labour, and yet they are plainly incompatible. “There is,” he says, “in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter, partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition, and partly by the particular nature of each employment. There is likewise in every society or neighbourhood an ordinary or average rate of rent, which is regulated too, as I shall show hereafter, partly 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. These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail. When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. The commodity is then sold precisely for what it is worth, or for what it really costs the person who brings it to market; for though in common language what is called the prime cost of any commodity does not comprehend the profit of the person who is to sell it again, yet if he sells it at a price which does not allow him the ordinary rate of profit in his neighbourhood, he is evidently a loser by the trade; since by employing his stock in some other way he might have made that profit. His profit, besides, is his revenue, the proper fund of his subsistence. As, while he is preparing and bringing the goods to market, he advances to his workmen their wages, or their subsistence; so he advances to himself, in the same manner, his own subsistence, which is generally suitable to the profit which he may reasonably expect from the sale of his goods. Unless they yield him this profit, therefore, they do not repay him what they may very properly be said to have really cost him. Though the price, therefore, which leaves him this profit, is not always the lowest at which a dealer may sometimes sell his goods, it is the lowest at which he is likely to sell them for any considerable time; at least where there is perfect liberty, or where he may change his trade as often as he pleases.”

As every one will see, this second doctrine is much more like real life than the former. But in Adam Smith’s mind it did not supersede it. All through The Wealth of Nations there is recurring confusion between three things, the “natural price” of an article estimated as in the above passage, the quantity of labour required to make it, and the quantity of labour which it will buy; of which three things no one ever for the most part coincides with the others.

Even this second exposition contains one error, which unfits it for scientific use, and which the sharp eye of Hume at once perceived. “I cannot think,” Hume wrote, “that the rent of farms makes any part of the price of produce.” And very clearly it does not. For, if it does, of what farm? The rent of various pieces of corn-growing land varies infinitely; is it the rent of the dearest which enters into the price of the half-and-half, or of the cheapest? We know that the price of corn is the same, no matter on what quality of land it is grown. Does that price pay the rent of good, of indifferent, or of bad land? This question Adam Smith does not answer, nor seemingly does the necessity of answering it occur to him.

On the other hand, it must be owned that there is a great naturalness in Adam Smith’s idea. It is that which would strike every one on a first view of the facts. The capitalist pays the rent of the land, just as he pays the wages and buys the seed corn: and it is as much necessary that he should be recouped for the payment of that rent as for either of the other payments. If the “rent” of the farm is not an element in the price of the corn, how then is that rent to be paid?

The answer is, that the rent of extra good land is paid out of the extra quantity (or extra good quality) of what it produces. If one acre of land yields twice as much as another, it will answer the capitalist’s purpose to pay twice as much for its use. But if he does pay twice as much, the cost at which he will grow each ear of corn will be the same as that of the farmer on less good land; the extra fertility will be compensated by the extra rent. It may, of course, be that the owner of the best land will farm it himself, and then he will have no rent to pay for its unusual goodness. But he will not sell his produce the least cheaper for that; he will get all that he can for it. We have seen how “market price” is determined: it depends on certain desires of the seller and the buyer, in part generated by the quantity of the article and the quantity of money, and in part not. But none of those desires would make a man say: “I produce this at a less cost than others, and therefore I will let them charge a higher price than I do.” No producer sets himself to introduce fairness into the reward of production, by letting those who possessed less facilities than he did, receive more than he does. The nature of market-going man is formed quite differently.

The only reason why the cost of production in the end tends to determine market value is that every one who wants an article will take the easiest means to get it. If a capitalist wants to invest his money to gain an income, he will, cœteris paribus, be apt to engage in pursuits which are reputed profitable, and to avoid those which are reputed unprofitable; and this will reduce the profits of all trades not to a level, but towards a level. But the argument assumes that all means of production are equally open to every one. If any one has exclusive possession of an especially good opportunity, he will get something out of it proportioned to that especial goodness. The owner of extremely good land, who farms it himself, will get a return over and above the ordinary rate of profit in proportion to that goodness. He will sell a great deal at the price which will yield the required profit to those who can sell only much less.

This is only another way of saying that the capital which yields the least permanent return—the least profit for which farmers as a class will carry on agriculture—is that which determines the price of agricultural produce. This is the least which the farmer in the long run will sell for, and the most which he will be able to obtain. And this capital is that which pays the least rent.

In all countries where land is easily accessible to capital, that “least” rent is no rent, because land is taken into cultivation as soon as its cultivation will pay the usual profit, and because after it is in cultivation, more and more capital is expended upon it, so long as expenditure meets with the usual return. The production of valuable things on the surface of the ground is exactly like the extraction of valuable things from beneath that surface. It is the worst mine which can in the long run be kept going, that in the long run determines the price of the produce; the owner of the better mine does not sell his ore cheaper than his neighbour, because he can get that ore at less cost than his neighbour; the best-circumstanced miner exacts as much as the worst-circumstanced miner is able to obtain. And the “worst-circumstanced” mine pays no royalty to the owner at all; it only pays a bare profit on the capital.

Adam Smith’s idea, therefore, that in ordinary circumstances the rent of land entered as an element into the price of agricultural produce, though a very natural idea, was a complete mistake, because he could not have told what rent he meant—the rent of best, or middling, or bad land—and because much capital employed in agriculture yields only the ordinary profit on capital, and therefore pays no rent at all. The mode of estimating “cost of production,” given by Adam Smith, in this case was most imperfect, because one of its terms was undetermined, a variable which might be anything, and often is nothing.

This opinion of Adam Smith’s as to the rent of land is closely connected with a peculiar opinion of his as to agriculture. He held that it was the most profitable employment to which the capital and industry of a country could be directed. This opinion, like many of his others, was a modification of that which he had learned in France. The Économistes in Paris at that time held that agriculture was the only profitable occupation of labour and capital. And it would take many pages to give an account, in the least comprehensible, of the elaborate reasoning by which they had persuaded themselves of this ridiculous result. Adam Smith, of course, rejected it; his strong sense particularly revolted from that kind of argumentative absurdity. But he was nevertheless influenced by it. Though he did not hold agriculture to be the only source of profit, he held that it was a particularly prolific one. “It keeps three people,” he would have said, “the landlord, the capitalist farmer, and the labourer; manufacturers and trade keep only two, the labourer and capitalist; clearly therefore agriculture has the advantage.” He assigned at length what he thought was the philosophical reason. “The labourers and labouring cattle, therefore, employed in agriculture, not only occasion, like the workmen in manufactures, the reproduction of a value equal to their own consumption, or to the capital which employs them, together with its owner’s profits; but of a much greater value. Over and above the capital of the farmer and all its profits, they regularly occasion the reproduction of the rent of the landlord. This rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer. It is greater or smaller according to the supposed extent of those powers, or, in other words, according to the supposed natural or improved fertility of the land. It is the work of nature which remains after deducting or compensating everything which can be regarded as the work of man. It is seldom less than a fourth, and frequently more than a third, of the whole produce. No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing; man does all; and the reproduction must always be in proportion to the strength of the agents that occasion it. The capital employed in agriculture, therefore, not only puts into motion a greater quantity of productive labour than any equal capital employed in manufactures, but, in proportion too to the quantity of productive labour which it employs, it adds a much greater value to the annual produce of the land and labour of the country, to the real wealth and revenue of its inhabitants. Of all the ways in which a capital can be employed, it is by far the most advantageous to the society.”

Probably few passages in so eminent a writer on the subject for which he is eminent, contain so much curious falsehood. If nature does nothing in manufactures, in what is it that it does anything? “Manufactures” are but applications of natural forces, just as agriculture is another application. And the reasoning assumes that the natural causes which produce dear things are more beneficial to mankind than those which produce cheap things, though had Adam Smith seen that he was making such an assumption he would have been the first to reject it. The causes which produce dear things are not necessarily more beneficial than those which produce cheap ones; they are only less plentiful. A diamond mine is not more useful to the State than a coal mine; probably in the strictest sense of the word not so useful. The fact that a particular occupation keeps three classes of men, while other occupations only keep two, only shows that there is a special difficulty in getting into that occupation, and a special scarcity in its opportunities; it proves nothing as to the degree of good which it does for the public. And Adam Smith’s conclusion is encumbered with the further absurdity that agriculture in new colonies does not create rent, and does not keep three people, though of course it is just as good for the public there as in old countries.

Although, therefore, Adam Smith had the merit of teaching the world that the exchangeable value of commodities is proportioned to the cost of their production, his analysis of that cost was so very defective as to throw that part of Political Economy into great confusion for many years, and as quite to prevent his teaching being used as an authority upon it now.

The causes which regulate the value of securities, whether debts or shares, Adam Smith did not attempt to investigate at all; and it was not to be expected that he should do so, for such things were in his day a very unimportant part of wealth, compared with that which they are now. And if, as we have seen, Adam Smith’s conception of “average” value, and of the causes producing it, was then imperfect, his idea of monetary or market value was much worse. He says: “The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price. 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.”

But the actual price at which a thing is sold is determined not solely by the demands of those who are willing to pay the average price of the commodity, but by everybody’s demand who bids for it. It is, as we have seen, an exchange determined by the quantity of the commodity in the market and the desires of its holders, as compared with the quantity of money in that market and the desires of its holders; it is a case of barter determined by relative quantities and relative feelings. And the phrase “effectual demand,” if defined to mean the demand of those willing to pay cost price, is misleading, because the money offered by those willing to pay cost price is not sufficient to be effectual when articles are particularly in demand, and therefore sell for more than it cost to make them, and is more than sufficient to be effectual when the demand for articles is particularly slack, and when therefore they sell for less than it cost to make them. The whole idea is confused.

In other passages, Adam Smith takes a view far better than in this. But this is the place where he ought to have taken the best, for it is the guiding paragraph of his special disquisition upon the subject. And his being not so good upon it here as elsewhere shows that his elementary conception was defective in definiteness. And nothing is more natural than that it should be so. Perhaps, as I have said before, Adam Smith’s mind was by nature rather disinclined to an anxious accuracy in abstract ideas, and a century of critics on these facts and these times have sharpened our perception since he wrote on them. We must not expect from him the use of modern “words of precision,” any more than we should find fault with a marksman of his generation for not using a rifle. Neither such “arms of precision,” nor such “words of precision,” then existed. And there was then little encouragement to think out the subject. Adam Smith evidently hurries over the abstract part of it, because he thinks his readers will not attend to it. Even now a writer, who wishes to be read beyond a very narrow circle, must be careful not to be too elaborate. And in the last century the case was certainly far worse. Many great writers—Montesquieu and Hume especially—would have written far more instructively, and as we should now think, far better, if they could have relied on any careful attention from their readers. They evidently thought that their writings would be principally read by persons who would cease to read as soon as they became dull. Nowadays the diffusion of physical science—even of popular physical science—has partly taught us that much truth is dull and complex, and that the most interesting parts of truth can only be understood by those who have mastered that dull and complex part. But even now we do not remember this half enough.

After these specimens, it would evidently be tedious to criticise The Wealth of Nations as if it were a treatise of modern Political Economy. We have given some account of what would be its answer to the first question of that science, “What makes all things exchange for more or less of other things?” And we see from it what the answer to other similar questions would be like. Nothing could be more unjust to a great writer than to judge of him by a standard which he did not expect, and to blame his best book for not being what he never thought of making it, especially when, except for him, we should never have imagined the standard, or conceived the possibility of the book being that which we now blame it for not being. We might as well expect that the first cultivators of a country should make the best permanent road, as that the first propounders of great conceptions should shape them into the finished form most useful to posterity.

The ways really to appreciate Adam Smith are two. First,—You should form a clear notion of the state of the received Political Economy of the world at the time he wrote. The last treatise on the subject published in England before The Wealth of Nations, was The Principles of Political Economy, by Sir James Steuart. The author was a man of culture and travel, acquainted with a great variety of economic facts, and conversant with what had been written before upon the subject. He was a man of considerable natural ability, respected and consulted in his time, and his book is still worth looking over, for it contains many facts and reasonings which are curious. And this is the sort of thing he writes. Much foreign trade he considers mischievous. He propounds a plan—a foreign trade that is really desirable for a nation founded on the three following “easy principles”.

“The first,—That in a country entirely taken up with the object of foreign trade, no competition should be allowed to come from abroad for articles of the first necessity, and principally for food, so as to raise prices beyond a certain standard.

“The second,—That no domestic competition should be encouraged upon articles of superfluity, so as to raise prices beyond a certain standard.

“The third,—That when these standards cannot be preserved, and that, from natural causes, prices get above them, public money must be thrown into the scale to bring prices to the level of those of exportation.

“The greater the extent of foreign trade in any nation is, the lower these standards must be kept; the less the extent of it is, the higher they may be allowed to rise.”1

And taking the subject more practically, he says: “It is a general maxim to discourage the importation of work, and to encourage the exportation of it,” and upon that footing he asks and discusses: “What is the proper method to put a stop to a foreign trade in manufactures when the balance of it turns against a nation?” This is the kind of authoritative doctrine which ruled in Adam Smith’s time, and from which he delivered us.

The second way is to take up Adam Smith himself and read him. There are scarcely five consecutive pages in The Wealth of Nations, which do not contain some sound and solid observation important in practice and replete with commonsense. The most experienced men of business would have been proud of such a fund of just maxims fresh from the life, and it is wonderful that they should have occurred to an absent student, apparently buried in books and busy with abstractions. Most of such students, so far from being able to make such remarks, would not comprehend their value—would acknowledge that they could not see much in them, if they were elaborately explained to them. Adam Smith himself probably did not know their exceeding merit, and preferred more learned parts of his writings, which are now obsolete, and more refined parts, which are now seen to have little value. Lord Bacon says of some one that he was “like Saul, who went in search of his father’s asses and found a kingdom”; and this is exactly what happened to Adam Smith. He was engaged in a scheme of vast research, far surpassing the means at his disposal, and too good for any single man. In the course of that great pursuit, and as a small part of it, he came upon the “Wealth of Nations,” for dealing with which his powers and his opportunities peculiarly fitted him, and on that he wrote a book, which has itself deeply influenced thought and policy, and which has been the beginning of a new science. He has obtained great fame, though it was not that fame which was the dream of his life, for—

• What was before us we know not,
• And we know not what shall succeed.1

[1 ] Professor Jevons’ Theory of Political Economy, page 84.

[1 ] See Appendix, Note A on Market Price, page 279.

[2 ] See the admirable dissertation of Professor Cairnes, Leading Principles, pages 17-40. A most ingenious collection of the difficulties of the doctrine of supply and demand as usually stated, will be found in Thornton on Labour, book ii. chap. 1.

[1 ] Galton’s Art of Travel, under “Presents and Articles for Payment”.

[1 ]Principles of Political Economy, by Sir James Steuart, vol. i., p. 358.

[1 ] Matthew Arnold.

[Note A—](to Page 187, Line 2, and to Page 250, Line 24).