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General Introduction - Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 2a An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. 1 
An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. I ed. R. H. Campbell and A. S. Skinner, vol. II of the Glasgow Edition of the Works and Correspondence of Adam Smith (Indianapolis: Liberty Fund, 1981).
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Scope and Method
Although it would be extravagant to claim that Adam Smith was the last of the great polymaths, it is nonetheless true that he wrote on a remarkable range of subjects including as it does economics and history; law and government; language and the arts, not to mention essays on astronomy, ancient logics and metaphysics. Indeed, the latter group of essays, apparently written in the 1750s, although not published until 1795, moved J. A. Schumpeter to remark that ‘Nobody, I venture to say, can have an adequate idea of Smith’s intellectual stature who does not know these essays’ and to describe that on astronomy as the ‘pearl of the collection’1 .
The Astronomy is especially valuable as an exercise in ‘philosophical history’; a form of enquiry in which Smith was particularly interested, and which, in this case, led him to examine the first formation and subsequent development of those astronomical theories which had culminated in the work of Newton. But at the same time, the essay was designed to illustrate the principles which lead and direct philosophical enquiries. The essay was thus concerned with the question of motivation, and as such may tell us a good deal about Smith’s own drives as a thinker, contributing in this way to our understanding of the form which his other works in fact assumed.
Smith’s main purpose in the Astronomy was to consider the stimulus given to the exercise of the understanding by the sentiments of surprise, wonder, and admiration; sentiments which he did not necessarily consider to be the sole sources of stimuli to philosophical work, but which represented forces whose influence was, he believed, ‘of far wider extent than we should be apt upon a careless view to imagine’ (Intro., 7). In elaborating on this statement Smith made a number of simple assumptions: that man is endowed with certain faculties and propensities such as reason, reflection, and imagination, and that he is motivated by a desire to acquire the means of pleasure and to avoid pain, where in this context pleasure relates to a state of the imagination involving tranquility and composure; a state attained from the contemplation of relation, similarity, or customary connection. He went on to argue that we feel surprise when some object or relation does not fall into an expected pattern; a sentiment which is quickly followed by wonder, which is in turn associated with the perception of something like a gap or interval (i.e. a lack of known connection or failure to conform to an established classification) between the object or objects of examination. For Smith, the essence of wonder was that it gave rise to a feeling of pain (i.e. disutility) to which the normal response is an act of attempted explanation, designed to restore the mind to a state of equilibrium; a goal which can only be attained where an explanation for the phenomena in question is found, and where that explanation is coherent, capable of accounting for observed appearances, and stated in terms of plausible (or familiar) principles.
Smith considered these feelings and responses to be typical of all men, while suggesting that the philosopher or scientist was particularly subject to them, partly as a result of superior powers of observation and partly because of that degree of curiosity which normally leads him to examine problems (such as the conversion of flesh into bone) which are to the ordinary man so ‘familiar’ as not to require any explanation at all (II.11).
Nature as a whole, Smith argued, ‘seems to abound with events which appear solitary and incoherent’ (II.12) so that the purpose of philosophy emerges as being to find ‘the connecting principles of nature’ (II.12) with, as its ultimate end, the ‘repose and tranquility of the imagination’ (IV.13). It is here especially that the sentiment of admiration becomes relevant in the sense that once an explanation has been offered for some particular problem, the very existence of that explanation may heighten our appreciation of the ‘appearances’ themselves. Thus, for example, we may learn to understand and thus to admire a complex economic structure once its hidden ‘springs’ have been exposed, just as the theory of astronomy leads us to admire the heavens by presenting ‘the theatre of nature’ as a coherent and therefore as a more ‘magnificent spectacle’ (II.12). Scientific explanation is thus designed to restore the mind to a state of balance and at the same time productive of a source of pleasure in this rather indirect way. Smith also added, however, that men pursue the study of philosophy for its own sake, ‘as an original pleasure or good in itself, without regarding its tendency to procure them the means of many other pleasures’ (III.3).
There are perhaps three features of this argument which are worth emphasizing at this point. First, Smith’s suggestion that the purpose of philosophy is to explain the coherence of nature, allied to his recognition of the interdependence of phenomena, leads directly to the idea of a system which is designed to explain a complex of phenomena or ‘appearances’. It is interesting to recall in this connection that the history of astronomy unfolded in terms of four systems of this kind, and that Smith should have likened such productions of the intellect to machines whose function was to connect together ‘in the fancy those different movements and effects which are already in reality performed’ (IV.19). Secondly, it is noteworthy that Smith should have associated intellectual effort, and the forms which the corresponding output may assume, with certain sources of pleasure. He himself often spoke of the beauty of ‘systematical arrangement’ (WN V.i.f.25) and his ‘delight’ in such arrangement was one of the qualities of his mind to which Dugald Stewart frequently drew attention. In the Imitative Arts (II.30) Smith likened the pleasure to be derived from the contemplation of a great system of thought to that felt when listening to ‘a well composed concerto of instrumental Music’ ascribing to both an almost sensual quality. Points such as these are relevant at least in the sense that a general preference for order or system may lead the thinker to work in certain ways and even to choose a particular method of organizing his arguments. Smith in fact considered the various ways of organizing scientific (or didactic) discourse in the LRBL where it is stated that the technique whereby we ‘lay down certain principles, [primary?] or proved, in the beginning, from whence we account for the severall Phaenomena, connecting all together by the same chain’ is ‘vastly more ingenious’ and for that reason ‘more engaging’ than any other. He added: ‘It gives us a pleasure to see the phenomena which we reckoned the most unaccountable, all deduced from some principle (commonly, a wellknown one) and all united in one chain’. (LRBL ii.133–4, ed. Lothian, 140.) Elsewhere he referred to a propensity, common to all men, to account for ‘all appearances from as few principles as possible’ (TMS VII.ii.2.14).
However, while there is little doubt that Smith’s major works (including of course the Astronomy itself) are dominated by such a choice, it would be as wrong to imply that such works are to be regarded as deductive exercises in practical aesthetics as it would be to ignore the latter element altogether. The fact is that the dangers as well as the delights of purely deductive reasoning were widely recognized at this time, and the choice of Newton rather than Descartes (who was also a proponent of the ‘method’ described above) as the model to be followed is indicative of the point. The distinctive feature of Newton’s work was not, after all, to be found in the use of ‘certain principles’ in the explanation of complex phenomena, but rather in the fact that he (following the lead of others) sought to establish those principles in a certain way. Those interested in the scientific study of man at this time sought to apply the Newtonian vision of a law governed universe to a new sphere, and to employ the ‘experimental method’ as an aid to the discovery of those laws of nature which governed the behaviour of the machine and disclosed the intention of its Design.
Smith’s contribution to what would now be defined as the ‘social sciences’ is contained in his work on ethics, jurisprudence, and economics, which correspond in turn to the order in which he lectured on these subjects while Professor of Moral Philosophy at Glasgow. All are characterized by certain common features which are readily apparent on examination: in each case Smith sought to explain complex problems in terms of a small number of basic principles, and each conforms to the requirements of the Newtonian method in the broad sense of that term. All three make use of the typical hypothesis that the principles of human nature can be taken as constant, and all employ the doctrine of ‘unintended social outcomes’—the thesis that man, in following the prompting of his nature, unconsciously gives substantial expression to some parts of the [Divine?] Plan. Again, each area of Smith’s thought is marked by a keen sense of the fact that manners and institutions may change through time and that they may show striking variations in different communities at the same point in time—a feature which was rapidly becoming quite common in an age dominated by Montesquieu.
It is perhaps even more remarkable that not only were Smith’s ethics, jurisprudence, and economics, marked by a degree of systematic thought of such a kind as to reveal a great capacity for model–building, but also by an attempt to delineate the boundaries of a single system of thought, of which these separate subjects were the component parts. For example, the TMS may be seen to offer an explanation as to the way in which so self–regarding a creature as man succeeds (by natural as distinct from artificial means) in erecting barriers against his own passions; an argument which culminates in the proposition that some system of magistracy is generally an essential condition of social stability. On the other hand, the historical treatment of jurisprudence complements this argument by showing the way in which government originates, together with the sources of social and political change, the whole running in terms of a four stage theory of economic development.2 The economic analysis as such may be seen to be connected with the other areas of Smith’s thought in the sense that it begins from a specific stage of historical development and at the same time makes use of the psychological assumptions established by the TMS.
Before proceeding to the economics it may therefore be useful to review the main elements of the other branches of Smith’s work, and to elucidate some of their interconnections. This may be an appropriate choice not only because Smith himself taught the elements of economics against a philosophical and historical background, but also because so much of that background was formally incorporated in the WN itself—a book, after all, which is concerned with much more than economics as that term is now commonly understood.
Smith’s Theory of Moral Sentiments is, of course, an important contribution to moral philosophy in its own right, and one which attempted to answer the two main questions which Smith considered to be the proper province of this kind of philosopher:
First, wherein does virtue consist? Or what is the tone of temper, and tenour of conduct, which constitutes the excellent and praise–worthy character, the character which is the natural object of esteem, honour, and approbation? And, secondly, by what power or faculty in the mind is it, that this character, whatever it be, is recommended to us? Or in other words, how and by what means does it come to pass, that the mind prefers one tenour of conduct to another?
On Smith’s argument, the process by which we distinguish between objects of approval or disapproval depends largely on our capacity for ‘other–regarding’ activities and involves a complex of abilities and propensities which include sympathy, imagination, reason and reflection. To begin with, he stated a basic principle in arguing that man is possessed of a certain fellow feeling which permits him to feel joy or sorrow according as the circumstances facing others contribute to their feelings of pleasure or pain. An expression of sympathy (broadly defined) for another person thus involves an act of reflection and imagination on the part of the observer in the sense that we can only form an opinion with regard to the mental state of another person by ‘changing places in the fancy’ with him. Smith was also careful to argue in this connection that our judgement with regard to others was always likely to be imperfect, at least in the sense that we can have ‘no immediate experience of what other men feel’ (I.i.1.2). Given these basic principles, Smith then proceeded to apply them in considering the two different ‘aspects’ or ‘relations’ under which we may judge an action taken by ourselves or others, ‘first, in relation to the cause or object which excites it; and, secondly, in relation to the end which it proposes, or to the effect which it tends to produce’ (II.i.2).
We may take these in turn:
In dealing with the first question we go beyond the consideration of the circumstances in which the subject of our judgement may find himself, and his state of mind (i.e. whether he is happy or sad) to consider the extent to which his actions or ‘affections’ (i.e. expressions of feeling) are appropriate to the conditions under which they take place or the objects which they seek to attain. In short, the purpose of judgement is to form an opinion as to the propriety or impropriety of an action, or expression of feeling, where these qualities are found to consist in ‘the suitableness or unsuitableness, in the proportion or disproportion which the affection seems to bear to the cause or object which excites it’ (I.i.3.6).
Given the principles so far established it will be evident that when the spectator of another man’s conduct tries to form an opinion as to its propriety, he can only do so by ‘bringing home to himself’ both the circumstances and feelings of the subject. Smith went on to argue that exactly the same principles apply when we seek to form a judgement as to our own actions, the only difference being that we must do so indirectly rather than directly; by visualizing the manner in which the real or supposed spectator might react to them. Or, as Smith put it:
We can never survey our own sentiments and motives, we can never form any judgement concerning them; unless we remove ourselves, as it were, from our own natural station, and endeavour to view them as at a certain distance from us. But we can do this in no other way than by endeavouring to view them with the eyes of other people, or as other people are likely to view them.
Given these points, we can now examine the second ‘relation’, that is, the propriety of action ‘in relation to the end which it proposes, or the effect which it tends to produce’. Here, as far as the agent is concerned, Smith argued that the spectator can form a judgement as to whether or not an action is proper or improper in terms, for example, of motive as well as by reference to the propriety of the choice of means to attain a given end. In the same way, the spectator can form a judgement with regard to the propriety of the reaction of the subject (or person affected) to the circumstances created by the action of the agent.
Now while it is evident that the spectator can form these judgements when examining the actions of the two parties taken separately, it is an essential part of Smith’s argument that a view with regard to the merit or demerit of a given action can be formed only by taking account of the activities of the two parties simultaneously. He was careful to argue in this connection, for example, that we might sympathize with the motives of the agent while recognizing that the action taken had had unintended consequences which might have either harmed or benefited some third party. Similarly, the spectator might sympathize with the reaction of the subject to a particular situation, while finding that sympathy qualified by recognition of the fact that the person acting had not intended another person either to gain or lose. It is only given a knowledge of the motives of the agent and the consequences of an action that we can form a judgement as to its merit or demerit, where that judgement is based on some perception of the propriety or impropriety of the activities of the two parties. Given these conditions Smith concluded that as our perception of the propriety of conduct ‘arises from what I shall call a direct sympathy with the affections and motives of the person who acts, so our sense of its merit arises from what I shall call an indirect sympathy with the gratitude of the person who is, if I may say so, acted upon’ (II.i.5.1).
Smith went on from this point to argue that where approval of motive is added to a perception of the beneficent tendency of the action taken, then such actions deserve reward; while those of the opposite kind ‘seem then to deserve, and, if I may say so, to call aloud for, a proportionable punishment; and we entirely enter into, and thereby approve of, that resentment which prompts to inflict it’ (II.i.4.4). As we shall see, this principle was to assume considerable importance in terms of Smith’s discussion of justice.
Before going further there are perhaps three points which should be emphasized and which arise from Smith’s discussion of the two different ‘relations’ in terms of which we can examine the actions of ourselves or other men.
First, Smith’s argument is designed to suggest that judgement of our actions is always framed by the real or supposed spectator of our conduct. It is evident therefore that the accuracy of the judgement thus formed will be a function of the information available to the spectator with regard to action or motive, and the impartiality with which that information is interpreted.
Secondly, it follows from the above that wherever an action taken or a feeling expressed by one man is approved of by another, then an element of restraint (and therefore control of our ‘affections’) must be present. For example, it is evident that since we have no immediate experience of what other men feel, then we as spectators can ‘enter into’ their situation only to a limited degree. The person judged can therefore attain the agreement of the spectator only:
by lowering his passion to that pitch, in which the spectators are capable of going along with him. He must flatten, if I may be allowed to say so, the sharpness of its natural tone, in order to reduce it to harmony and concord with the emotions of those who are about him.
Finally, it will be obvious that the individual judged will only make the effort to attain a certain ‘mediocrity’ of expression where he regards the opinion of the spectator as important. In fact Smith made this assumption explicit in remarking:
Nature when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren. She taught him to feel pleasure in their favourable, and pain in their unfavourable regard. She rendered their approbation most flattering . . . for its own sake; and their disapprobation most mortifying and most offensive.
Given the desire to acquire the sources of pleasure and to avoid pain, this aspect of the psychology of man would appear to ensure that he will generally act in ways which will secure the approbation of his brethren, and that he is to this extent fitted for the society of other men. At the same time, however, Smith makes it clear that this general disposition may of itself be insufficient to ensure an adequate source of control over our actions and passions, and this for reasons which are at least in part connected with the spectator concept and the problem of self–interest.
We have already noted that the spectator can never be entirely informed with regard to the feelings of another person, and it will be evident therefore that it will always be particularly difficult to attain a knowledge of the motive which may prompt a given action. Smith noted this point in remarking that in fact the world judges by the event, and not by the design, classifying this tendency as one of a number of ‘irregularities’ in our moral sentiments. The difficulty is, of course, that such a situation must constitute something of a discouragement to virtue; a problem which was solved in Smith’s model by employing an additional (and explicit) assumption with regard to the psychology of man. As Smith put it, a desire for approval and an aversion to the disapproval of his fellows would not alone have rendered man fit:
for that society for which he was made. Nature, accordingly, has endowed him not only with a desire of being approved of, but with a desire of being what ought to be approved of; or of being what he approves of in other men. The first desire could only have made him wish to appear to be fit for society. The second was necessary in order to render him anxious to be really fit.
Hence the importance in Smith’s argument of the ideal or supposed spectator, of the ‘man within the breast’, the abstract, ideal, spectator of our sentiments and conduct who is always well informed with respect to our own motives, and whose judgement would be that of the actual spectator where the latter was possessed of all the necessary information. It is this tribunal, the voice of principle and conscience, which, in Smith’s argument, helps to ensure that we will in fact tread the path of virtue and which supports us in this path even when our due rewards are denied us or our sins unknown.
However, having made this point, Smith drew attention to another difficulty, namely that even where we have access to the information necessary to judge our own conduct, and even where we are generally disposed to judge ourselves as others might see us, if they knew all, yet there are at least two occasions on which we may be unlikely to regard our own actions with the required degree of impartiality: ‘first, when we are about to act; and, secondly, after we have acted. Our views are apt to be very partial in both cases; but they are apt to be most partial when it is of most importance that they should be otherwise’ (III.4.2). In this connection he went on to note that when ‘we are about to act, the eagerness of passion will very seldom allow us to consider what we are doing with the candour of an indifferent person’, while in addition a judgement formed in a cool hour may still be lacking in sufficient candour, because ‘It is so disagreeable to think ill of ourselves, that we often purposely turn away our view from those circumstances which might render that judgement unfavourable’ (III.4.4).
The solution to this particular logical problem is found in the idea of general rules of morality or accepted conduct; rules which we are disposed to obey by virtue of the claims of conscience, and of which we attain some knowledge by virtue of our ability to form judgements in particular cases. As Smith argued:
It is thus that the general rules of morality are formed. They are ultimately founded upon experience of what, in particular instances, our moral faculties, our natural sense of merit and propriety, approve, or disapprove of. We do not originally approve or condemn particular actions; because, upon examination, they appear to be agreeable or inconsistent with a certain general rule. The general rule, on the contrary, is formed, by finding from experience, that all actions of a certain kind, or circumstanced in a certain manner, are approved or disapproved of.
It will be noted that such rules are based on our experience of what is fit and proper to be done or to be avoided, and that they become standards or yardsticks against which we can judge our conduct even in the heat of the moment, and which are therefore ‘of great use in correcting the misrepresentations of self–love’ (III.4.12).
Yet even here Smith does not claim that a knowledge of general rules will of itself be sufficient to ensure good conduct, and this for reasons which are not unconnected with (although not wholly explained by) yet a further facet of man’s nature.
For Smith, man was an active being, disposed to pursue certain objectives which may be motivated by a desire to be thought well of by his fellows but which at the same time may lead him to take actions which have hurtful consequences as far as others are concerned. It is indeed one of Smith’s more striking achievements to have recognized the social objective of many economic goals in remarking:
it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty. For to what purpose is all the toil and bustle of this world? what is the end of avarice and ambition, of the pursuit of wealth, of power and pre–eminence? . . . what are the advantages we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it.
However, Smith was well aware that the pursuit of status, the desire to be well thought of in a public sense, could be associated with self–delusion, and with actions which could inflict damage on others either by accident or design. In this connection, he remarked that the individual:
In the race for wealth, and honours, and preferments . . . may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of.
Knowledge of the resentment of the spectators thus emerges as something of a deterrent as far as the agent is concerned, although Smith placed more emphasis on the fact that a feeling of resentment generated by some act of injustice produces a natural approval of punishment, just as the perception of the good consequences of some action leads, as we have seen, to a desire to see it rewarded. In this world at least, it is our disposition to punish and approval of punishment which restrains acts of injustice, and which thus helps to restrain the actions of individuals within due bounds. Justice in this sense of the term is of critical importance, and Smith went on to notice that while nature ‘exhorts mankind to acts of beneficence, by the pleasing consciousness of deserved reward’, beneficence is still the ‘ornament which embellishes, not the foundation which supports the building’. He continued:
Justice, on the contrary, is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble into atoms.
In Smith’s eyes, a fundamental pre–condition of social order was a system of positive law, embodying our conception of those rules of conduct which relate to justice. He added that these rules must be administered by some system of government or ‘magistracy’, on the ground that:
As the violation of justice is what men will never submit to from one another, the public magistrate is under a necessity of employing the power of the commonwealth to enforce the practice of this virtue. Without this precaution, civil society would become a scene of bloodshed and disorder, every man revenging himself at his own hand whenever he fancied he was injured.
It now remains to be seen just how ‘government’ originates, to explain the sources of its authority, and the basis of obedience to that authority.
The Stages of Society
It was in the lectures on justice rather than the TMS that Smith set out to consider the grounds on which we were disposed to obey our ‘magistrates’, finding the basis of obedience in the principles of utility and authority. In practice, Smith placed most emphasis on the latter and identified four main sources: personal qualifications, age, fortune, and birth. Taking these four sources in turn, he argued that personal qualities such as wisdom, strength, or beauty, while important as sources of individual distinction, were yet of rather limited political value, since they are all qualities which are open to dispute. As a result, he suggests that age, provided there is no ‘suspicion of dotage’, represents a more important source of authority and of respect, since it is ‘a plain and palpable quality’ about which there can be no doubt’. Smith also observed that as a matter of fact age regulates rank among those who are in every other respect equal in both primitive and civilized societies, although its relative importance in the two cases is likely to vary.
The third source of authority, wealth, of all the sources of power is perhaps the most emphasized by Smith, and here again he cites two elements. First, he noted that through an ‘irregularity’ of our moral sentiments, men tend to admire and respect the rich (rather than the poor, who may be morally more worthy) as the possessors of all the imagined conveniences of wealth. Secondly, he argued that the possession of riches may also be associated with a degree of power which arises from the dependence of the poor for their subsistence. Thus, for example, the great chief who has no other way of spending his surpluses other than in the maintenance of men, acquires retainers and dependents who:
depending entirely upon him for their subsistence, must both obey his orders in war, and submit to his jurisdiction in peace. He is necessarily both their general and their judge, and his chieftainship is the necessary effect of the superiority of his fortune.
Finally, Smith argues that the observed fact of our tendency to venerate antiquity of family, rather than the upstart or newly rich, also constitutes an important source of authority which may reinforce that of riches. He concluded that:
Birth and fortune are evidently the two circumstances which principally set one man above another. They are the two great sources of personal distinction, and are therefore the principal causes which naturally establish authority and subordination among men.
Having made these points, Smith then went on to argue that just as wealth (and the subsequent distinction of birth) represents an important source of authority, so in turn it opens up an important source of dispute. In this connection we find him arguing that where people are prompted by malice or resentment to hurt one another, and where they can be harmed only in respect of person or reputation, then men may live together with some degree of harmony; the point being that ‘the greater part of men are not very frequently under the influence of those passions; and the very worst men are so only occasionally.’ He went on to note:
As their gratification too, how agreeable soever it may be to certain characters, is not attended with any real or permanent advantage, it is in the greater part of men commonly restrained by prudential considerations. Men may live together in society with some tolerable degree of security, though there is no civil magistrate to protect them from the injustice of those passions.
But in a situation where property can be acquired, Smith argued there could be an advantage to be gained by committing acts of injustice, in that here we find a situation which tends to give full rein to avarice and ambition.
The acquisition of valuable and extensive property, therefore, necessarily requires the establishment of civil government. Where there is no property, or at least none that exceeds the value of two or three days labour, civil government is not so necessary.
Elsewhere he remarked that ‘Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all’ (V.i.b.12). It is a government, on Smith’s argument, which in some situations at least is supported by a perception of its utility, at least on the side of the ‘rich’, but which must gradually have evolved naturally and independently of any consideration of that necessity. In Smith’s own words:
Civil government supposes a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principal causes which naturally introduce subordination gradually grow up with the growth of that valuable property.
In this way Smith stated the basic principles behind the origin of government and illustrated the four main sources of authority. In the subsequent part of the argument he then tried to show the way in which the outlines of society and government would vary, by reference to four broad socio–economic types: the stages of hunting, pasture, agriculture, and commerce.3 One of the more striking features of Smith’s argument is in fact the link which he succeeded in establishing between the form of economy prevailing (i.e. the mode of earning subsistence) and the source and distribution of power or dependence among the classes of men which make up a single ‘society’.
The first stage of society was represented as the ‘lowest and rudest’ state, such ‘as we find it among the native tribes of North America’ (WN V.i.a.2). In this case, life is maintained through gathering the spontaneous fruits of the soil, and the dominant activities are taken to be hunting and fishing—a mode of acquiring subsistence which is antecedent to any social organization in production. As a result, Smith suggested that such communities would be small in size and characterized by a high degree of personal liberty—due of course to the absence of any form of economic dependence. Smith also observed that in the absence of private property which was also capable of accumulation, disputes between different members of the community would be minor ‘so there is seldom any established magistrate or any regular administration of justice’ (V.i.b.2) in such states. He added:
Universal poverty establishes there universal equality, and the superiority, either of age, or of personal qualities, are the feeble, but the sole foundations of authority and subordination. There is therefore little or no authority or subordination in this period of society.
The second social stage is that of pasture, which Smith represented as a ‘more advanced state of society, such as we find it among the Tartars and Arabs’ (V.i.a.3). Here the use of cattle is the dominant economic activity and this mode of subsistence meant, as Smith duly noted, that life would tend to be nomadic and the communities larger in size than had been possible in the preceding stage. More dramatically, Smith observed that the appropriation of herds and flocks which introduced an inequality of fortune, was that which first gave rise to regular government. We also find here a form of property which can be accumulated and transmitted from one generation to another, thus explaining a change in the main sources of authority as compared to the previous period. As Smith put it:
The second period of society, that of shepherds, admits of very great inequalities of fortune, and there is no period in which the superiority of fortune gives so great authority to those who possess it. There is no period accordingly in which authority and subordination are more perfectly established. The authority of an Arabian scherif is very great; that of a Tartar khan altogether despotical.
At the same time it is evident that the mode of subsistence involved will ensure a high degree of dependence on the part of those who must acquire the means of subsistence through the exchange of personal service, and those who, owning the means of subsistence, have no other means of expending it save on the maintenance of dependents, who also contribute to their military power. Smith added that while the distinction of birth, being subsequent to the inequality of fortune, can have no place in a nation of hunters, this distinction ‘always does take place among nations of shepherds’ (V.i.b.10). Since the great families lack, in this context, the means of dissipating wealth, it follows that ‘there are no nations among whom wealth is likely to continue longer in the same families’ (ibid.).
The third economic stage is perhaps the most complicated of Smith’s four–fold classification at least in the sense that it seems to have a lower, middle and upper phase. Thus for example the initial stage may be seen to correspond to that situation which followed the overthrow of Rome by the barbarians; pastoral nations which had, however, acquired some idea of agriculture and of property in land. Smith argued that such peoples would naturally adapt existing institutions to their new situation and that their first act would be to divide the available territories, introducing by this means a settled abode and some form of rudimentary tillage; i.e. the beginnings of a new form of productive activity. Under the circumstances outlined, each estate or parcel of land would assume the character of a separate principality, while presenting many of the features of the second stage. As in the previous case, for example, the basis of power is property, and, as before, those who lack the means of subsistence can acquire it only through the exchange of personal service, thus becoming members of a group who ‘having no equivalent to give in return for their maintenance’ must obey their lord ‘for the same reason that soldiers must obey the prince who pays them’ (III.iv.5). Each separate estate could thus be regarded as stable in a political sense in that it was based on clear relations of power and dependence, although Smith did emphasize that there would be an element of instability in terms of the relations between the principalities; a degree of instability which remained even after the advent of the feudal period with its complex of rights and obligations. In Smith’s words the authority possessed by the government of a whole country ‘still continued to be, as before, too weak in the head and too strong in the inferior members’ (III.iv.9), a problem basically created by the fact that:
In those disorderly times, every great landlord was a sort of petty prince. His tenants were his subjects. He was their judge, and in some respects their legislator in peace, and their leader in war. He made war according to his own discretion, frequently against his neighbours, and sometimes against his sovereign.
It was a situation which effectively prevented economic development, and one where the open country remained ‘a scene of violence, rapine, and disorder’ (III.iv.9).
The middle stage of this period may be represented as preserving the institutions of the previous stage (save with the substitution of the feudal for the allodial system of land–tenure), albeit with the significant addition of self–governing cities paying a ‘rent certain’ to the king. In this way, Smith suggested, the kings were able to acquire a source of power capable of offsetting that of the great lords, by way of a tactical alliance with the cities. Smith made exactly this point when remarking that mutual interest would lead the burghers to ‘support the king, and the king to support them against the lords. They were the enemies of his enemies, and it was his interest to render them as secure and independent of those enemies as he could’ (III.iii.8). Two significant developments were then traced from this situation, itself a response to the political instability of the agrarian period. First, the cities, as self–governing communities (a kind of independent republics Smith calls them) would create the essential conditions for economic development (personal security), while, secondly, their development would also generate an important shift in the balance of political power.
The upper stage of the period differs from the previous phase most obviously in that Smith here examines a situation where the trade and manufactures of the cities had had a significant impact on the power of the nobles, by providing them for the first time with a means of expending their surpluses. It was this trend, Smith suggested, which led the great proprietors to improve the form of leases (with a view to maximizing their exchangeable surpluses) and to the dismissal of the excess part of their tenants and retainers—all with consequent effects on the economic and thus the political power of this class. As Smith put it:
For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them.
The fourth and apparently final economic stage (commerce) may be simply described as one wherein all goods and services command a price, thus effectively eliminating the direct dependence of the feudal period and to this extent diminishing the power to be derived from the ownership of property. Thus for example Smith noted that in the present stage of Europe a man of ten thousand a year might maintain only a limited number of footmen, and that while tradesmen and artificers might be dependent on his custom, none the less ‘they are all more or less independent of him, because generally they can all be maintained without him’ (III.iv.11).
From the standpoint of the economics of the situation, the significant development was that of a two sector economy at the domestic level where the constant drive to better our condition could provide the maximum stimulus to economic growth within an institutional framework which ensured that the pursuit of private interest was compatible with public benefit. From the standpoint of the politics of the situation, the significant development was a new source of wealth which was more widely distributed than previously, and which ultimately had the effect of limiting the power of kings by shifting the balance of consideration away from the old landed aristocracy and towards a new mercantile class. In the words of John Millar, it was a general trend which served to propagate sentiments of personal independence, as a result of a change in the mode of earning subsistence; a trend which must lead us to expect that ‘the prerogatives of the monarch and of the ancient nobility will be gradually undermined, that the privileges of the people will be extended in the same proportion, and that power, the usual attendant of wealth, will be in some measure diffused over all the members of the community.’4
Once again we face a situation where a change in the mode of earning subsistence has altered the balance and distribution of political power, with consequent effects on the nature of government. Once again, we find a situation where the basis of authority and obedience are found in the principles of utility and authority, but where the significance of the latter is diminished (and the former increased) by the change in the pattern of dependence. It is also a situation where the ease with which fortunes may be dissipated makes it increasingly unlikely that economic, and thus political, power, will remain in the hands of particular families over long periods of time.
The two areas of argument just considered disclose a number of interesting features.
The TMS for example can be seen to accept the proposition that mankind are always found in ‘troops and companies’ and to offer an explanation as to how it is that man is fitted for the society of his fellows. In developing this argument Smith, as we have seen, makes much of the importance of the rules of morality (including justice), while offering an explanation of their origin of a kind which places him in the anti–rationalist tradition of Hutcheson and Hume. At the same time it is evident that the form of argument used discloses Smith’s awareness of the fact that human experience may vary; a point which is made explicitly in the TMS, and which is reflected in the fact that he did not seek to define the content of general rules in any but the most general terms.
The historical argument on the other hand, can be seen to offer an explanation for the origin of government (whose necessity was merely postulated in the TMS), and at the same time indirectly to throw some light on the causes of change in accepted patterns of behaviour as a result of the emphasis given to the four socio–economic stages of growth. This same argument may also throw into relief certain problems which the TMS does not formally handle; by drawing attention to the fact that societies are not homogeneous, and to the possibility of a conflict of values. Interestingly enough, exactly this point is made in the WN in the course of a discussion of religion: ‘In every civilized society, in every society where the distinction of ranks has once been completely established, there have been always two different schemes or systems of morality current at the same time’ (V.i.g.10).
But for the present purpose the most important connections are those which exist between the ethics and jurisprudence on the one hand, and the economics on the other.
The historical analysis, for example, has the benefit of showing that the commercial stage or exchange economy may be regarded as the product of certain historical processes, and of demonstrating that where such a form of economy prevails, a particular social structure or set of relations between classes is necessarily presupposed. At the same time the argument (developed especially in Book III of the WN) helps to demonstrate that a particular form of government will be associated with the same socio–economic institutions; a form of government which in the particular case of England had been perfected by the Revolution Settlement, and which reflected the growing importance of the ‘middling’ ranks.
But perhaps the links between the economic analysis and the TMS are even more readily apparent and possibly more important.
As we have seen, the whole point of the TMS is to show that society, like the individual men who make it up, represents something of a balance between opposing forces; a form of argument which gave due weight to our self–regarding propensities (much as Hutcheson had done) but which departs from the teaching of Hutcheson in denying that ‘Self–love was a principle which could never be virtuous in any degree or in any direction’ (TMS VII.ii.3.12). In much the same way Smith denied Mandeville’s suggestion that the pursuit of ‘whatever is agreeable in dress, furniture, or equipage’ should be regarded as ‘vicious’ (VII.ii.4.12). To both he in effect replied that the ‘condition of human nature were peculiarly hard, if those affections, which, by the very nature of our being, ought frequently to influence our conduct, could upon no occasion appear virtuous, or deserve esteem and commendation from any body’ (VII.ii.3.18).
In many respects Smith was at his most successful in showing that the desire to be approved of by our fellows, which was so important in the discussion of moral judgement, was also relevant in the economic sphere. As we have seen, he argued that the whole object of bettering our condition was to find ourselves as objects of general esteem, and noted elsewhere that ‘we cannot live long in the world without perceiving that the respect of our equals, our credit and rank in the society we live in, depend very much upon the degree in which we possess, or are supposed to possess’, the advantages of external fortune (VI.i.3). While the pursuit of status and the imagined conveniences of wealth were important sources of dispute, Smith also emphasized their economic advantage even within the confines of the TMS. It is such drives, he asserted, which serve to rouse and keep in ‘continual motion the industry of mankind’ (IV.i.1.10) and he went on to note that those who have attained fortune are, in expending it,
led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.
Equally interesting is the fact that Smith should also have discussed at such length the means whereby the poor man may seek to attain the advantages of fortune, in emphasizing the importance of prudence, a virtue which, being uncommon, commands general admiration and explains that ‘eminent esteem with which all men naturally regard a steady perseverance in the practice of frugality, industry, and application, though directed to no other purpose than the acquisition of fortune’ (IV.i.2.8). It is indeed somewhat remarkable that it is the TMS, and in particular that portion of it (Part VI) which Smith wrote just before his death, that provides the most complete account of the psychology of Smith’s public benefactor: the frugal man.
Economic Theory and the Exchange Economy
In terms of Smith’s teaching, his work on economics was designed to follow on his treatment of ethics and jurisprudence, and therefore to add something to the sum total of our knowledge of the activities of man in society. To this extent, each of the three subjects can be seen to be interconnected, although it is also true to say that each component of the system contains material which distinguishes it from the others. One part of Smith’s achievement was in fact to see all these different subjects as parts of a single whole, while at the same time differentiating economics from them. Looked at in this way, the economic analysis involves a high degree of abstraction which can be seen in a number of ways. For example, in his economic work, Smith was concerned only with some aspects of the psychology of man and in fact confined his attention to the self–regarding propensities; a fact which is neatly expressed in his famous statement that ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest’ (WN I.ii.2). Moreover, Smith was not concerned, at least in his formal analysis, with a level of moral or social experience other than that involved in a ‘mercenary exchange of good offices according to an agreed valuation’ (TMS II.ii.3.2); in short, all that the economic work requires is a situation where the minimum condition of justice obtains. Given this basic premiss, together with the hypothesis of self–interest, Smith then set out to explain the interdependence of economic phenomena. There are of course two types of account as to the way in which Smith fulfilled these purposes; one represented by the state of his knowledge when he left Glasgow in 1763, and the other by the WN itself.
We now have two versions of Smith’s lecture course, together with the so called ‘early draft’ of the WN; sufficient at least to provide an adequate guide to the ground covered. There are differences between these documents: LJ (A), for example, while generally more elaborate, is less complete than LJ (B): it does not, for example, consider such topics as Law’s Bank, interest, exchange, or the causes of the slow progress of opulence. The ED, on the other hand, contains a much more elaborate account of the division of labour than that provided in either of the lecture notes, although it has nothing to say regarding the link between the division of labour and the extent of the market. While the coverage of the ED is very similar to that found in LJ (B) it is also true to say that topics other than the division of labour are dealt with in note form. But these are basically differences in detail: the three documents are not marked by any major shifts of emphasis or of analytical perspective, and it is this fact which makes it quite appropriate to take LJ (B) as a reasonable guide to the state of Smith’s thought on economics in the early 1760s.
Turning now to this version of the lectures, one cannot fail to be struck by the same quality of system which we have already had occasion to note elsewhere. The lectures begin with a discussion of the natural wants of man; a discussion already present in the ethics. Smith links this thesis to the development of the arts and of productive forces, before going on to remark on the material enjoyments available to the ordinary man in the modern state as compared to the chief of some savage nation. In both the lectures and the ED Smith continued to note that, while it cannot be difficult to explain the superior advantages of the rich man as compared to the savage, it seems at first sight more difficult to explain why the ‘peasant should likewise be better provided’ (ED 2.2), especially given the fact that he who ‘bears, as it were, upon his shoulders the whole fabric of human society, seems himself to be pressed down below ground by the weight, and to be buried out of sight in the lowest foundations of the building’ (ED 2.3).
The answer to this seeming paradox was found in the division of labour, which explained the great improvement in the productive powers of modern man. Smith continued to examine the sources of so great an increase in productivity, tracing the origin of the institution to the famous propensity to ‘truck, barter and exchange’, while observing that the scope of this development must be limited by the extent of the market.
Examination of the division of labour led directly to Smith’s point that unlike the savage the modern man was largely dependent on the labour of others for the satisfaction of his full range of wants, thus directing attention to the importance of exchange. In the course of this discussion, Smith introduced the problem of price and the distinction between natural and market price.
In the Lectures, natural price (or supply price) was largely defined in terms of labour cost, the argument being that:
A man then has the natural price of his labour when it is sufficient to maintain him during the time of labour, to defray the expence of education, and to compensate the risk of not living long enough and of not succeeding in the business. When a man has this, there is sufficient encouragement to the labourer and the commodity will be cultivated in proportion to the demand.
(LJ (B) 227, ed. Cannan 176)
Market price, on the other hand, was stated to be regulated by ‘quite other circumstances’, these being: the ‘demand or need for the commodity’, the ‘abundance or scarcity of the commodity in proportion to the need of it’ and the ‘riches or poverty of those who demand’ (LJ (B) 227–8, ed. Cannan 176–7). Smith then went on to argue that while distinct, these prices were ‘necessarily connected’ and to show that where the market exceeded the natural price, labour would crowd into this employment, thus expanding the supply, and vice versa, leading to the conclusion that in equilibrium the two prices would tend to coincide. Smith quite clearly understood that resources would tend to move between employments where there were differences in the available rates of return, thus showing a grasp of the interdependence of economic phenomena which led him to speak of a ‘natural balance of industry’ and of the ‘natural connection of all trades in the stock’ (LJ (B) 233–4, ed. Cannan 180–81).
Progressing logically from this point, Smith proceeded to show that any policy which prevented the market prices of goods from coinciding with their supply prices, such as monopolies or bounties, would tend to diminish public opulence and derange the distribution of stock between different employments.
The discussion of price led in turn to the treatment of money as the means of exchange; to a review of the qualities of the metals which made them so suitable as a means of exchange and to the discussion of coinage.5 Smith also included an account of the problems of debasement at this stage of his analysis, making in the course of his argument a point with which he is not always associated, namely, that where the value of money is falling ‘People are disposed to keep their goods from the market, as they know not what they will get for them’ (LJ (B) 242, ed. Cannan 188).
It was in the course of this analysis that Smith defined money as merely the instrument of exchange, at least under normal circumstances, going on to suggest that it was essentially a ‘dead stock in itself’; a point which helped to confirm ‘the beneficial effects of the erection of banks and paper credit’ (LJ (B) 246, ed. Cannan 191).
This argument led quite naturally to a critique of the prejudice that opulence consists in money and to Smith’s argument that mercantile policy as currently understood was essentially self–contradictory, and that it hindered the division of labour by artificially restricting the extent of the market. It was a short step to the conclusion (stated with characteristic caution) that:
From the above considerations it appears that Brittain should by all means be made a free port, that there should be no interruptions of any kind made to forreign trade, that if it were possible to defray the expences of government by any other method, all duties, customs, and excise should be abolished, and that free commerce and liberty of exchange should be allowed with all nations and for all things.
(LJ (B) 269, ed. Cannan 209)6
It will be obvious that that section of the lectures which deals with ‘cheapness and plenty’ does in fact contain many of the subjects which were to figure in the WN. It also appears that many of his central ideas were already present in a relatively sophisticated form: ideas such as equilibrium price, the working of the allocative mechanism, and the associated concept of the ‘natural balance’ of industry. Smith also made allowance for the importance of ‘stock’ both in discussing the natural connection of all stocks in trade and with reference to the division of labour, while the distinction between employer and employed is surely implied in the discussion of the individual whose sole function is to contribute the eighteenth part of a pin.
Yet at the same time there is also a good deal missing from the lectures; there is, for example, no clear distinction between factors of production and categories of return,7 not to mention the macro–economic analysis of the second Book of the WN with its model of the ‘circular flow’ and discussion of capital accumulation. While the distinction between rent, wages, and profits, may have come from James Oswald, or emerged as the natural consequence of Smith’s own reflection on his lectures (which seems very probable), the macro–economic model which finally appeared in the WN may well have owed something, either directly or indirectly, to Smith’s contact with the Physiocrats, and especially those who revised the system, such as Mercier de la Rivière, Baudeau and Turgot.8
It is obviously difficult to the point of impossibility to establish the extent of Smith’s debts to his predecessors, and Dugald Stewart probably had the right of it when he remarked that ‘After all, perhaps the merit of such a work as Mr Smith’s is to be estimated less from the novelty of the principles it contains, than from the reasonings employed to support these principles, and from the scientific manner in which they are unfolded in their proper order and connexion’ (Stewart, IV.26). While Stewart duly noted that Smith had made an original contribution to the subject it need not surprise us to discover that the WN (like the TMS) may also represent a great synthetic performance whose real distinction was to exhibit a ‘systematical view of the most important articles of Political Economy’ (Stewart, IV.27); a systematical view whose content shows a clear development both from Smith’s state of knowledge as it existed in the 1760s, and from that represented by the Physiocrats as a School.9 While it would be inappropriate to review here the pattern of this development in detail (a task which we have attempted to fulfill in the notes to the text) it may be useful to delineate at least some of the elements of the reformulated system albeit in the broadest terms.
The first three chapters of the WN begin with an examination of the division of labour which closely follows the elaborate account provided in the ED.10 The most obvious changes, as regards the latter document, relate to the provision of a separate chapter linking the division of labour to the extent of the market using an account which often parallels that found in the two ‘fragments’, which W. R. Scott had thought to be part of the Edinburgh Lectures.11 It is also interesting to note that the discussion of inequality is omitted from the WN and that the argument as a whole is no longer prefaced by a statement of the thesis of ‘natural wants’. The following chapter is also recognizably a development of the earlier work, and deals with the inconveniences of barter, the advantages of the metals as a medium of exchange, and the necessity for coinage; the only major difference relates to arrangement in that the discussion of money now precedes that of price. Chapter v, which leads on from the previous discussion, does however break new ground in discussing the distinction between real and nominal price. In this place Smith was anxious to establish the point that while the individual very naturally measures the value of his receipts in money terms, the real measure of welfare is to be established by the money’s worth, where the latter is determined by the quantity of products (i.e. labour commanded) which can be acquired. In this chapter Smith was not so directly concerned with the problem of exchange value as normally understood, so much as with finding an invariable measure of value which would permit him to compare levels of economic welfare at different periods of time. It was probably this particular perspective which led him to state but not to ‘solve’ the so–called ‘paradox of value’—a paradox which he had already explained in the Lectures.12
Chapter vi leads on to a discussion of the component parts of the price of commodities and once more breaks new ground in formally isolating the three main factors of production and the three associated forms of monetary revenue: rent, wages and profit. These distinctions are, of course, of critical importance, and perhaps Smith’s acute awareness of the fact is reflected in his anxiety to show how easily they may be confused. Chapter vii then proceeds to discuss the determinants of price, developing ideas already present in the Lectures but in the more sophisticated form appropriate to the three–fold factor division. This section of Smith’s work is perhaps among the best from a purely analytical point of view, and is quite remarkable for the formality with which the argument unfolds. For example, the analysis is explicitly static in that Smith takes as given certain rates of factor payment (the ‘natural’ rates), treating the factors as stocks rather than flows. Smith’s old concept of ‘natural price’ is then redefined as obtaining when a commodity can be sold at a price which covers the natural rates of rent, wages, and profits, i.e. its cost of production. Market price, on the other hand, (the ‘actual’ price) is shown to be determined by specific relations of demand and supply while both prices are interconnected in that any divergence of the market from the natural price must raise or lower the rates of factor payment in relation to their natural rates, thus generating a flow of factors which has the effect of bringing the market and natural prices to equality.13
The argument then proceeds to the discussion of those forces which determine the ‘natural’ rates of return to factors. Chapter viii takes up the problem of wages, and argues that this form of return is payable for the use of a productive resource and normally arises where ‘the labourer is one person, and the owner of the stock which employs him another’ (I.viii.10). While making allowance for the relative importance of the bargaining position of the two parties, Smith concluded that the wage rate would normally be determined by the size of the wages fund and the supply of labour, where both are affected by the price of wage goods.
Now this argument means that the wage rate actually payable in a given (annual) period may vary considerably (i.e. the prevailing or natural rate of the theory of price) as compared to other such time periods, and that it may be above, below, or equal to, the subsistence wage (where the latter must be sufficient to maintain the labourer and his family, including an allowance for customary expense). Smith illustrates these possibilities in terms of the examples of advancing, stationary, and declining economies, using this argument to suggest that whenever the prevailing wage rate sinks below, or rises above, the subsistence wage, then in the long run there will be a population adjustment.
Chapter ix shows the same basic features: that is, Smith sets out to show why profit accrues and in so doing differentiates it from interest as a category of return, while arguing that it is not a return for the work of ‘inspection and direction’ but rather for the risks involved in combining the factors of production. Again, there is a ‘static’ element in that Smith, while admitting the difficulty of finding an average rate of profit, argues that some indication will be given by the rate of interest, and that the rate of profit will be determined by the level of stock in relation to the business to be transacted together with the prevailing wage rate. Once more there is also a concern with the dynamics of the case, i.e. with the trend of profits over time, the conclusion being that profits, like wages, would tend to fall, as the number of capitals increases.
The following chapter is a direct development from the two which preceded it and is chiefly concerned with the ‘static’ aspects of the theory of allocation and returns. In dealing with the theory of ‘net advantage’, Smith provides a more elaborate account of the doctrine already found in the Lectures, and there confined to the discussion of labour. In the present context Smith dropped the assumption of given rates of factor payment (as made at the beginning of I.vii) in explaining that rates of monetary return may be expected to vary with the agreeableness or disagreeableness of the work, the cost of learning a trade, the constancy or inconstancy of employment, the great or small trust which may be involved, and the probability or improbability of success. Of these it is argued that only the first and the last affect profits, thus explaining the greater uniformity of rates of return (as compared to wages) in different employments. The whole purpose of the first section of this chapter is to elaborate on the above ‘circumstances’ and to show, at least where there is perfect liberty, that different rates of monetary return need occasion no difference in the ‘whole of the advantages and disadvantages, real or imaginary’ which affect different employments (I.x.b.39).
In terms of the discussion of the price mechanism, we now have a complex of rates of return in different employments and an equilibrium situation where the rate of return in each type of employment stands in such a relation to the others as to ensure that there is no tendency to enter or leave any one of them. The same argument adds a further dimension of difficulty to Smith’s account of the allocative mechanism, by drawing attention to the problem of moving between employments which require different skills or levels of training.14
Mobility is in fact the theme of the second part of the chapter where (again elaborating on ideas present in the Lectures) Smith shows the various ways in which the policy of Europe prevented the equality of ‘advantages and disadvantages’ which would otherwise arise; citing such examples as the privileges of corporations, the statute of apprenticeship, public endowments and especially the poor law.
The closing chapter of Book I is concerned with the third and final form of return—rent—and is among the longest and most complex of the whole work. But perhaps the following points can be made when looking at the chapter from the standpoint of Smith’s analytical system. First, and most obviously, the general structure of the chapter is similar to those which deal with wages and profit. That is, Smith initially tries to explain what rent is in suggesting that it is the price which must be paid for a scarce resource which is a part of the property of individuals, and in arguing that it must vary with the fertility and situation of the land. Unlike the other forms of revenue, Smith emphasized that rent was unique in that it accrued without necessarily requiring any effort from those to whom it was due, and that what was a cost to the individual farmer was really a surplus as far as society was concerned; a point which led Smith to the famous statement that rent ‘enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit, are the causes of high or low price; high or low rent is the effect of it.’ (I.xi.a.8.)
Secondly, it is noteworthy that the analysis continues the ‘static’ theme already found in the theory of price, wages, and profits, by concentrating attention on the forces which determine the allocation of land between alternative uses (such as the production of corn and cattle) and in suggesting, at least in the general case, that rent payments would tend to equality in these different uses.
Thirdly, it is noteworthy that Smith should have included a dynamic perspective in the discussion of allocation, of such a kind as to make his historical sketch of the changing pattern of land use an important, if rather neglected, aspect of his general theory of economic development.
Finally, Smith continues the dynamic theme in the form in which it appears in the previous chapters by considering the long term trends as far as this form of return is concerned; the conclusion being that rent payments must increase as more land is brought into use under the pressure of a growing population, and that the real value of such payments must rise given that the real price of manufactures tends to fall in the long run.
If we look back over this Book from the (rather narrow) perspective of Smith’s system, it will be evident that the argument is built up quite logically by dealing with a number of separate but inter–related subjects such as costs, price, and returns. At the same time two themes appear to run through the treatment of the different subjects: a static theme in that Smith is often concerned to explain the forces which determine the prevailing rates of return at particular points in time, together with the working of the allocative mechanisms, with factors treated as stocks rather than as flows; and, secondly, a dynamic aspect where Smith considers the general trends of factor payments over long periods, together with the pattern of land use and the probable changes in the real value of wage goods and manufactures. Both of these major themes were to find a place in the analysis of the following Books.
The Introduction to Book II sets the theme of the following chapters by taking the reader back to the division of labour and by re–iterating a point which had already been made in the Lectures, namely that the division of labour depends on the prior accumulation of stock. An important difference here, however, as compared to the Lectures, is to be found in the fact that the task of accumulation is now seen to face the employer of labour rather than the labourer himself. Chapter i then proceeds to elaborate on the nature of stock and its applications in suggesting that the individual may devote a part of his ‘stock’ to consumption purposes, and therefore earn no revenue or income from it, while a part may be devoted to the acquisition of income. In the latter case stock is divided, in the manner of the physiocrats, into circulating and fixed capital; it is also shown that different trades will require different combinations of the two types of stock and that no fixed capital can produce an income except when used in combination with a circulating capital.
Reasoning by analogy, Smith proceeded to argue that the stock of society taken as a whole could be divided into the same basic parts. In this connection he suggested that in any given period (such as a year) there would be a certain stock of goods, both perishable and durable reserved for immediate consumption, one characteristic being that such goods were used up at different rates. Secondly, he argued that society as a whole would possess a certain fixed capital, where the latter included such items as machines and useful instruments of trade, stocks of buildings which were used for productive purposes, improved lands, and the ‘acquired and useful abilities’ of the inhabitants (i.e. human capital). Finally, he identified the circulating capital of society as including the supply of money necessary to carry out circulation, the stocks of materials and goods in process held by the manufacturers or farmers, and the stocks of completed goods available for sale but still in the hands of producers or merchants as distinct from their ‘proper’ consumers.
Such an argument is interesting in that it provides an example of the ease with which Smith moved from the discussion of micro– to the discussion of macro–economic issues. At the same time it serves to introduce Smith’s account of the ‘circular flow’, whereby he shows how, within a particular time period, goods available for sale are used up by the parties to exchange. In Smith’s terminology, the pattern of events is such that the necessary purchases of goods by consumers and producers features a ‘withdrawal’ from the circulating capital of society, with the resulting purchases being used up during the current period or added to either the fixed capital or the stock of goods reserved for immediate consumption. As he pointed out, the constant withdrawal of goods requires replacement, and this can be done only through the production of additional raw materials and finished goods in both main sectors (agriculture and manufactures) thus exposing the ‘real exchange which is annually made between those two orders of people’ (II.i.28). The basic division into types of capital, and this particular way of visualizing the working of the process, may well owe a great deal to the Physiocrats, even if the basic sectoral division had already been suggested by Hume.
The remaining chapters of the Book are basically concerned to elaborate on the relations established in the first. For example, chapter ii makes the division into classes (proprietors, undertakers, wage–labour) explicit and establishes another connection with the analysis of Book I by reminding the reader that if the price of each commodity taken singly comprehends payments for rent, wages, and profits, then this must be true of all commodities taken ‘complexly’, so that in any given (annual) period aggregate income must be divided between the three factors of production in such a way as to reflect the prevailing levels of demand for, and supply of, them. Once again we find an implicit return to the ‘static’ analysis of Book I, save at a macro–economic level. The relationship between output and income adds something to Smith’s general picture of the ‘circular flow’ and at the same time enabled him to expand on his account by drawing a distinction between gross and net aggregate output where the latter is established by deducting the cost of maintaining the fixed capital (together with the costs of maintaining the money supply) from the gross product. In this way Smith was able to indicate the desirability of reducing the maintenance costs of the fixed capital, and of the money supply (a part of society’s circulating capital), introducing by this means the discussion of paper money (a cheaper instrument than coin) and of banks. The chapter goes on to provide a very long account of Scottish affairs in the 1760s and 1770s, together with a history of the Bank of England. Law’s Bank is accorded a single paragraph, in contrast to the treatment in the Lectures, on the ground that its activities had already been adequately exposed by Messrs. DuVerney and DuTot. The Bank of Amsterdam, also mentioned in the conclusion of this chapter and in the Lectures, was accorded a separate digression in WN IV.iv.
The third chapter of the Book elaborates still further on the basic model by introducing a distinction between income in the aggregate and the proportion of that income devoted to consumption (revenue) or to savings. Smith also introduced the famous distinction between productive and unproductive labour at this point, where the former is involved in the creation of commodities and therefore of income while the latter is involved in the provision of services. Smith does not, of course, deny that services (such as defence or justice) are useful or even necessary, he merely wished to point out that the labour which is involved in the provision of a service is always maintained by the industry of other people and that it does not directly contribute to aggregate output. Smith’s argument was of course that funds intended to function as a capital would always be devoted to the employment of productive labour, while those intended to act as a revenue might maintain either productive or unproductive labour. Two points arise from this argument: first, that the productive capacity of any society would depend on the proportion in which total income was distributed between revenue and capital; and, secondly, that capitals could only be increased through parsimony, i.e. through a willingness to forego present advantages with a view to attaining some greater future benefit. It was in fact Smith’s view that net savings would always be possible during any given annual period, and that the effort would always be made through man’s natural desire to better his condition. Moreover, he evidently believed that wherever savings were made they would be converted into investment virtually sur le champ (thus providing another parallel with Turgot) and that the rapid progress which had been made by England confirmed this general trend. In Book II economic dynamics begins to overshadow the static branch of the subject: an important reminder that Smith’s version of the ‘circular flow’ is to be seen as a spiral of constantly expanding dimensions, rather than as a circle of constant size. It is also worth emphasizing in this connection that Smith’s concern with economic growth takes us back in a sense to the oldest part of the edifice, namely his treatment of the division of labour, the point being that the increasing size of the market gives greater scope to this institution, thus enhancing the possibilities for expansion, which are further stimulated by technical change in the shape of the flow of invention (I.i.8).
The fourth and fifth chapters of this book offer further insights into the working of the ‘flow’ on the one hand, and the theory of economic growth on the other. II.iv, for example, contains not only an account of the determinants of interest, but confirms that interest is distinct from profit as a form of return, while introducing the monied interest as something separate from the manufacturing and agricultural interests.
The following chapter adds four additional uses for capitals (again providing a close parallel with Turgot) in stating that they may be used in the wholesale or retail trades in addition to all those above mentioned. Thus as far as our understanding of the circular flow is concerned, Smith argues that the retailer in purchasing from the wholesale merchant in effect replaces the capital which the latter had laid out in purchasing commodities for sale; purchases which had themselves contributed to replace the capitals advanced by the farmers or manufacturers in creating them. In the same way, the manufacturer, for example, in making purchases of the instruments of trade replaces the outlay of some fellow ‘undertaker’ while his purchases of raw materials contribute to restore the capitals laid out by the farmers on their production.15 Smith’s enumeration of the different employments of capital is also relevant as far as his theory of growth is concerned, because each one can be shown to give employment to different quantities of productive labour. While he had already observed in the Lectures that agriculture was the most productive form of investment, the argument was here expanded to suggest that manufacture was the next most productive, followed by the wholesale and retail trades. He also argued with regard to the wholesale trade, that its contribution to the maintenance of productive labour varied, in declining order of importance, according as it was concerned with the home trade, the foreign trade of consumption, or the carrying trade, where the critical factor was the frequency of returns. A further dimension was added to this discussion in the opening chapter of Book III where it is suggested that, when left to their own devices, men would naturally choose to invest in agriculture, manufactures, and trade (in that order) thus contributing to maximize the rate of growth by choosing those forms of investment which generated the greatest level of output for a given injection of capital.
Smith’s thesis concerning the different productivities of capital and the associated (although logically distinct) argument concerning the natural progress of opulence are sometimes regarded as being among the less successful parts of the edifice; a fact which makes it all the more important to observe the great burden which they are made to bear in the subsequent argument. In Book III, for example, Smith uses the history of Europe since the fall of the Roman Empire to confirm that the pattern of development had inverted the ‘natural’ order, in the sense that the stimulus to economic advance had initially come through the cities with their trade in surpluses. As we shall see in another context, (below, p. 55) the development of trade had given a stimulus to domestic manufactures based on the refinement of local goods or on imitation of the foreigner; a pattern of events which eventually impinged on the agrarian sector, and which is made to explain the transition to the final economic stage. Smith thus suggests that a process of development regarded as ‘natural’ from the standpoint of the theory of history, was essentially ‘unnatural’ from the standpoint of the analysis of the progress of opulence. However, the argument does explain the position of the third Book and the use there made of historical material which had been included in the Lectures, where it had been mainly intended to serve a very different purpose to that found in the WN.
The second main application of the thesis is in Book IV where Smith returns to a theme which had already figured prominently in the Lectures; the critique of mercantilism. Many of the points which had been made in the earlier work undoubtedly re–appear in this section of the WN. In the WN, the mercantile system, with its associated patterns of control over the import, export, and production of commodities, is again shown to be based on an erroneous notion of wealth. Smith also argues, as he had before, that the chief engines of mercantilism, such as monopoly powers, adversely affect the allocative mechanism and to this extent affect economic welfare. But the main burden of his argument concerning distortion in the use of resources runs in terms not of the static allocative mechanism, so much as the essentially dynamic theory of the natural progress of opulence, the argument being that mercantile policy had diverted stock to less productive uses, with slower returns, than would otherwise have been the case. This argument is particularly marked in Smith’s treatment of the colonial relationship with America; a relationship which was central to the mercantile system as presented by Smith, and which sought to create a self–sufficient economic unit.16 In this connection Smith argued that the mercantile system was essentially self–contradictory: that by encouraging the output of rude products in America, Great Britain had helped (unwittingly) only to accelerate an already rapid rate of growth to an extent which would inevitably make the restrictions imposed on American manufactures unduly burdensome. As far as Great Britain was concerned, Smith believed that her concentration on the American market had in effect drawn capital from trades carried on with European outlets and diverted it to the more distant one of America, while at the same time forcing a certain amount of capital from a direct to an indirect trade. Obviously, all of this must have had an adverse effect on the rate of economic growth in Great Britain; a matter of some moment, in that, as Smith represents the case, a country with a suboptimal rate of growth happened to face an increasing burden of costs from the colonies themselves. It is a plausible, powerful, thesis which may be defended on a variety of grounds other than those on which Smith relied. But, as one shrewd contemporary critic noted, Smith’s view on the different productivities of investment was central to his case, and he begged leave to arrest his steps ‘for a moment, while we examine the ground whereon we tread: and the more so, as I find these propositions used in the second part of your work as data; whence you endeavour to prove, that the monopoly of the colony trade is a disadvantageous . . . institution.’17
The Role of the State
While the immediately preceding sections have concentrated to a large extent on the structure and organization of Smith’s thought, perhaps enough has also been said regarding its content to illustrate the existence of another kind of ‘system’; an analytical system which treats the economy as a type of model analogous to some kind of machine whose parts are unconscious of their mutual connection, or of the end which their interaction serves to promote, but where that interaction is governed by the laws of the machine. In economic terms, these law–governed processes refer, for example, to the working of the allocative mechanism, the theory of distribution, or of economic growth. The components of the ‘model’ are of course the sectors, the classes, and the individuals whose pursuit of gain contributes to the effective working of the whole. Thus, for example, the undertaker in pursuit of gain contributes to economic efficiency by endeavouring to make ‘such a proper division and distribution of stock’ amongst his workmen as to enable them to ‘produce the greatest quantity of work possible’. The individual workman or undertaker offers his services in the most lucrative employments and helps to ensure, by this means, that goods are sold at their cost of production, and all factors are paid at their ‘natural’ rates. Similarly, the constant desire to better one’s condition contributes to the flow of savings and thus to the process of economic growth. In all these cases social benefit and economic order are the result of the self–interested actions of individuals rather than the consequences of some formal plan; indeed, Smith went further in insisting that public benefit would not and need not form any part of the normal motivation of the main actors in the drama. The famous doctrine of the invisible hand, already prefigured in the TMS in precisely this connection, was designed to show that the individual, in pursuing his own objectives, contributed to the public benefit, thereby promoting an end ‘which was no part of his intention’ (WN IV.ii.9).18
Now this general view of the working of economic processes is important in that it helps to explain the functions which any government ought ideally to undertake, and the way in which these functions should be performed; broadly speaking, a subject which provides the focal point of Book V. In terms of the model itself, for example, governments have no strictly economic functions, at least in the sense that the sovereign should be discharged from ‘the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society’ (IV.ix.51). And yet, the functions of the state, if minimal, are quite indispensable in the sense that it must provide for such (unproductive) services as defence, justice, and those public works which are unlikely to be provided by the market because ‘the profit could never repay the expence to any individual or small number of individuals’ (IV.ix.51).
Smith’s list of public services is a short one, but the discussion of the principles on which their provision should be organized is developed at some length and is interesting for two main reasons. First, Smith argued that public services should be provided only where the market has failed to do so; secondly, he suggested that the main problems with regard to such services were those of equity and efficiency. With regard to equity, Smith suggested, for example, that public services should always be paid for by those who use them (including roads and bridges). He also defended the principle of direct payment on the ground of efficiency in arguing that it is only in this way that we can avoid the building of roads through deserts for the sake of some private interest, or a situation where a great bridge is ‘thrown over a river at a place where nobody passes, or merely to embellish the view from the windows of a neighbouring palace: things which sometimes happen, in countries where works of this kind are carried on by any other revenue than that which they themselves are capable of affording’ (V.i.d.6). At the same time Smith insisted that all public services should be provided by such bodies as found it in their interest to do so effectively, and that they should be organized in such a way as to take account of the self–interested nature of man. Smith stated his basic belief in remarking that ‘Publick services are never better performed than when their reward comes only in consequence of their being performed, and is proportioned to the diligence employed in performing them’ (V.i.b.20). He tirelessly emphasized this point, especially in reference to university teaching, while reminding his readers that the principle held good in all situations and in all trades.
Of course, Smith did recognise the limitations of this principle and the fact that it would not always be possible to fund or to maintain public services without recourse to general taxation. But here again the main features of the analytical system are relevant in that they affect the way in which taxation should, where possible, be handled. Thus Smith pointed out on welfare grounds that taxation should be imposed according to the famous canons of equality, certainty, convenience, and economy, and insisted that they should not be levied in ways which infringed the liberty of the subject—for example, through the ‘odious visits’ and examinations of the tax–gatherer (V.ii.b.3–7). Similarly he argued that ideally taxes ought not to interfere with the allocative mechanism (as for example, taxes on necessities) or constitute important disincentives to the individual effort on which the working of the whole system has been seen to depend (such as taxes on profits). In short, Smith’s recommendations with regard to the functions of government are designed to ensure the freedom of the individual to pursue his own (socially beneficial) ends and merely require that the state should provide such services as facilitate the working of the system, while conforming to the constraints of human nature and the market mechanism. Looked at from this point of view, Smith’s discussion of the role of the state is very much a part of his general model and confirms his view that the task of political economy, considered as a part of the science of the statesman or legislator, is ‘to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves’ (IV.Intro.1).
But Smith went much further than this in discussing the role of the state, and in ways which remind us of his essentially practical concerns, and of the importance of other branches of his general system such as the theory of history and the TMS.
To begin with, it will already be evident that one thread which runs through the WN involves criticism of those contemporary institutions which impeded the realization in its entirety of the system of natural liberty. Broadly speaking, these impediments can be reduced to four main categories each one of which Smith wished to see removed. First, there is the problem (already raised in terms of the historical analysis) that ‘Laws frequently continue in force long after the circumstances, which first gave occasion to them, and which could alone render them reasonable, are no more’ (III.ii.4). Secondly, Smith drew attention to certain institutions which had their origins in the past but which still commanded active support; institutions such as guilds and corporations, which could still regulate the government of trades. All such arrangements were, in Smith’s view impolitic because they impeded the working of the allocative mechanism and unjust because they were a ‘violation of this most sacred property’ which ‘every man has in his own labour’ (I.x.c.12). In a very similar way Smith commented on the problems presented by the poor law and the laws of settlement and summarized his appeal to government in these terms: ‘break down the exclusive privileges of corporations, and repeal the statute of apprenticeship, both which are real encroachments upon natural liberty, and add to these the repeal of the law of settlements . . .’ (IV.ii.42). Thirdly, Smith criticised the continuing use of positions of privilege, such as monopoly powers, which did not necessarily have any particular link with the past. Here again the basic theme remains, that such institutions are impolitic and unjust: unjust because they are positions of privilege and impolitic because they again affect the working of the allocative mechanism, being besides, ‘a great enemy to good management’ (I.xi.b.5).
Finally, we have the main theme of Book IV which we have already had occasion to mention; that is Smith’s call for a reform of national policy in so far as that was represented by the mercantile system.
All this amounts to a very considerable programme of reform, although, quite characteristically, Smith recognized that reality would fall a long way short of perfection, and that it could do so without damage to that fundamental drive to better our condition or to the capacity of that drive to overcome ‘a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations’ (IV.v.b.43). Smith recognized the existence of many practical difficulties; that people are attached to old forms and institutions for example, quite as much as to old families and kings, and also that sectional economic pressures would always find some means of influencing the legislature in their favour, precisely because of those same economic forces which helped to explain the historical dominance of the House of Commons in England.19 For such reasons he concluded that ‘To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it’ (IV.ii.43).
If points such as these contribute to qualify the rather ‘optimistic’ thesis with which Smith is generally associated, the impression is further confirmed by those passages in the WN (occurring mainly in Book V) which bear more directly on the analysis of the TMS. In the former work, it will be remembered that welfare is typically defined in material terms; in terms of the level of real income, i.e. the extent to which the individual can command the produce (or labour) of others. On the other hand, in the philosophical work welfare was defined more in terms of the quality of life attainable, where ‘quality’ refers to a level of moral experience greater than that involved in the ‘mercenary exchange of good offices according to an agreed valuation’. There is of course no inconsistency between these two positions, since the two major books, while analytically linked, in fact refer to different areas of human experience. But at the same time Smith made a number of points in the WN which establish an important link between the philosophical and economic aspects of his study of man in society, while constituting a reminder that welfare should not be considered solely in economic terms. In this connection Smith drew attention to the fact that the worker in a ‘large manufactory’ was liable to the temptations of bad company with consequent effects on moral standards (I.viii.48). In the same vein he also mentioned the problems presented by large cities where, unlike the rich man who is noticed by the public and who therefore has an incentive to attend to his own conduct, the poor man is ‘sunk in obscurity and darkness. His conduct is observed and attended to by nobody, and he is therefore very likely to neglect it himself, and to abandon himself to every sort of low profligacy and vice.’ (V.i.g.12.)
To this extent, the importance of the spectator is undermined, and so too may be those faculties and propensities on which moral experience has been seen to depend (a separate point). For Smith drew attention to the ‘fact’ that the division of labour which had contributed to economic growth through the subdivision and simplification of productive processes, had at the same time confined the activities of the worker to a few simple operations which gave no stimulus to the exercise of his mind, thus widening the gulf between the philosopher and the ordinary man or his employer. Smith believed that the worker could lose the habit of mental exertion, thus gradually becoming as ‘stupid and ignorant as it is possible for a human creature to become’ and he went on, in a famous passage, to remark:
The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life.
As Smith duly noted, this general trend could produce the apparently paradoxical result that while the inhabitants of the fourth economic stage enjoyed far greater material benefits than those available to the hunter or savage, yet the latter would be more likely to exercise his mental faculties and to this extent be ‘better off’ (V.i.f.51). Smith recognized that the occupations of the savage were unlikely to produce an ‘improved and refined understanding’, but his main point was that in the modern state this refinement can only be attained by the few who are able to reflect at large on a wide range of problems, including the social. As Smith put it, in a passage which once again reminds us of the importance of the Astronomy and of the problems of stratification in society:
The contemplation of so great a variety of objects necessarily exercises their minds in endless comparisons and combinations, and renders their understandings, in an extraordinary degree, both acute and comprehensive. Unless those few, however, happen to be placed in some very particular situations, their great abilities, though honourable to themselves, may contribute very little to the good government or happiness of their society. Notwithstanding the great abilities of those few, all the nobler parts of the human character may be, in a great measure, obliterated and extinguished in the great body of the people.
Smith’s belief that the ‘labouring poor, that is, the great body of the people’ (V.i.f.50) might suffer a kind of ‘mental mutilation’ led him directly to the discussion of education. To some extent he argued that market forces had proved themselves capable of the effective provision of this service, especially with regard to the education of women (V.i.f.47), and he also noted that it was the absence of such pressures which had enabled the ancient universities to become ‘the sanctuaries in which exploded systems and obsolete prejudices’ had found support and protection (V.i.f.34). Yet at the same time, he did not believe that the public could rely on the market, not least because the lower orders could scarce afford to maintain their children even in infancy, and he went on to note, with regard to the children of the relatively poor, that ‘As soon as they are able to work, they must apply to some trade by which they can earn their subsistence’ (V.i.f.53). Smith therefore advocated the provision of parish schools on the Scottish model wherein the young could be taught to read and to acquire the rudiments of geometry and mechanics—provided of course that their masters were ‘partly, but not wholly paid by the publick’ (V.i.f.55). Smith even went so far as to suggest that the public should impose ‘upon almost the whole body of the people the necessity of acquiring those most essential parts of education, by obliging every man to undergo an examination or probation in them before he can obtain the freedom in any corporation, or be allowed to set up any trade’ (V.i.f.57). Smith also advocated that the better off, despite their superior (economic) advantages in acquiring education, should be required to attain a rather higher standard of knowledge ‘by instituting some sort of probation, even in the higher and more difficult sciences, to be undergone by every person before he was permitted to exercise any liberal profession, or before he could be received as a candidate for any honourable office of trust or profit’ (V.i.g.14).
Such policies were defended on the ground of benefit to the individual, but also for more practical reasons. The labourer armed with a knowledge of the rudiments of geometry and mechanics was likely to be better placed to perform his tasks effectively and to continue to see how they could be improved. Similarly, Smith suggested that an educated people would be better placed to see through the interested claims of faction and sedition, while in addition an ‘instructed and intelligent people . . . are always more decent and orderly than an ignorant and stupid one’. Such a people, he continued (in a strain which reminds us of the importance of the earlier discussion of political obligation) are also more likely to obtain the respect of their ‘lawful superiors’ and to reciprocate that respect. He concluded:
In free countries, where the safety of government depends very much upon the favourable judgment which the people may form of its conduct, it must surely be of the highest importance that they should not be disposed to judge rashly or capriciously concerning it.
In this way Smith granted the state an important cultural purpose and at the same time introduced a significant qualification to the optimistic thesis with which he is often associated—both with regard to the efficacy of market forces and the benefits of economic growth.
The Institutional Relevance of the WN
The attractions of Smith’s system, and of an analysis which stretched even beyond the WN to encompass his other works, was quickly recognized by contemporaries. A stream of tributes found their way to Smith. Hugh Blair, the erstwhile Minister of the High Kirk of Edinburgh and later Professor of Rhetoric and Belles Lettres at the University wrote:
I am Convinced that since Montesquieu’s Esprit des Lois, Europe has not received any Publication which tends so much to Enlarge & Rectify the ideas of mankind.
Your Arrangement is excellent. One chapter paves the way for another; and your System gradually erects itself. Nothing was ever better suited than your Style is to the Subject; clear & distinct to the last degree, full without being too much so, and as tercly as the Subject could admit. Dry as some of the Subjects are, It carried me along.20
William Robertson was more to the point: ‘You have formed into a regular and consistent system one of the most intricate and important parts of political science.’21 In similar vein Joseph Black commended Smith for providing ‘. . . a comprehensive System composed with such just & liberal Sentiments’.22 Lastly, some eighteen months later Edward Gibbon described the WN as ‘the most profound and systematic treatise on the great objects of trade and revenue which had ever been published in any age or in any Country.’23
Unstinted admiration of Smith’s system was accompanied by a fear, not always clearly expressed, that the work might not prove to have an immediate appeal, a fear based on an appreciation that the WN is not a simple but a difficult and involved book. With some feeling Hugh Blair pled for an index and a ‘Syllabus of the whole’, because, ‘You travel thro’ a great Variety of Subjects. One has frequently occasion to reflect & look back.’ (Letter 151.) David Hume looked forward to a day which he, within months of his death, was not to see, when the book would be popular, but he was less sanguine about its immediate prospects:
. . . the Reading of it necessarily requires so much Attention, and the Public is disposed to give so little, that I shall still doubt for some time of its being at first very popular: But it has Depth and Solidity and Acuteness, and it is so much illustrated by curious Facts, that it must at last take the public Attention.24
A week later Hume offered a comparison with Gibbon’s Decline and Fall to William Strahan, the publisher of both, a comparison not altogether in favour of the WN: ‘Dr Smith’s Performance is another excellent Work that has come from your Press this Winter; but I have ventured to tell him, that it requires too much thought to be as popular as Mr Gibbon’s.’25 Even on publication, there were signs that Hume was unduly pessimistic. In his reply Strahan, while concurring with Hume’s comparison, admitted that the sales of the WN ‘though not near so rapid, has been more than I could have expected from a work that requires much thought and reflection’.26 Adam Ferguson’s more optimistic predictions were nearer the mark: ‘You are not to expect the run of a novel, nor even of a true history; but you may venture to assure your booksellers of a steady and continual sale, as long as people wish for information on these subjects.’27
In the event the fears of lack of immediate success were ill–founded. The first edition of the WN, published on 9 March 1776, was sold out in six months. On 13 November 1776 Smith wrote to William Strahan acknowledging payment of a sum of £300, the balance of money due to him for the first edition, and proposed that the second edition ‘be printed at your [Strahan’s] expense, and that we should divide the profits’.28 Strahan agreed and the second edition appeared early in 1778. Only minor amendments, though many of them, distinguished it from the first; but the third edition, published late in 1784, had such substantial additions that they were also published separately for the benefit of those who had purchased the earlier editions, under the title Additions and Corrections to the First and Second Editions of Dr Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations. The most notable changes were the introduction of Book IV, chapter viii (Conclusion of the Mercentile System); Book V, chapter i.e. (Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce); passages on drawbacks (IV.iv.3–11), on the corn bounty (IV.v.8–9), on the herring bounty (IV.v.28–37) and the Appendix; and, particularly significant in view of Hugh Blair’s early plea, the first index. The fourth edition of 1786 and the fifth of 1789, the last in Smith’s lifetime, had only minor alterations. The English editions were not the only ones to appear in Smith’s lifetime; by 1790 the book had been, or was being published in French, German, Danish and Italian.
The WN did not suffer the fate which befell the previous great treatise on economics, Sir James Steuart’s Principles of Political Oeconomy, published only nine years earlier in 1767. Its success, judged even merely by its level of sales and the five editions in Smith’s lifetime, hardly accorded with some of the fears for the book’s popularity which tinged the otherwise unbounded admiration of Smith’s friends. In welcoming the WN the members of Smith’s intellectual circle faced a dilemma. They were attracted by the WN as the crown of Smith’s system, but they feared that great achievement would not, perhaps even could not, be generally and immediately appreciated. There was, however, another side to the WN, a more pragmatic, down to earth side, which gave the work a practical relevance in the eyes of many to whom the intellectual system was perhaps a mystery or merely irrelevant. Smith’s friends did not always recognize that his ‘proper attention to facts’, even to Hume’s ‘curious facts’, was to prove an immediate source of attraction. Having gained attention in this way, Smith then commanded respect because the practical conclusions which followed from the chief elements of his system were evidently related to the economic problems of the middle of the eighteenth century. These practical conclusions may be demonstrated by casting leading elements in Smith’s system in the form of a series of practical prescriptions for economic growth. When the prescriptions are compared with the historical situation in Britain in the mid–eighteenth century, their immediate relevance is apparent. The various categories of Smith’s system had thus an institutional content or background derived from the experience of his day, which many admired and followed even when the system and its categories remained difficult for them to understand.
The division of labour remained central to this institutional analysis. Even when Smith recognized the theoretical possibility of the operation of other factors—an increased labour force or mechanization—the division of labour remained in practice the fundamental cause of economic growth. The emphasis is clear in Book II where, as has already been pointed out (p. 30), economic dynamics begins to overshadow economic statics, specifically in II.iii.32:
The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed. The number of its productive labourers, it is evident, can never be much increased, but in consequence of an increase of capital, or of the funds destined for maintaining them. The productive powers of the same number of labourers cannot be increased, but in consequence either of some addition and improvement to those machines and instruments which facilitate and abridge labour; or of a more proper division and distribution of employment. In either case an additional capital is almost always required. It is by means of an additional capital only that the undertaker of any work can either provide his workmen with better machinery, or make a more proper distribution of employment among them.
Given that the division of labour remained the key to economic growth its full effectiveness was limited by an inadequate expansion of the market and by an inadequate supply of capital. An inadequate supply of capital also limited the effectiveness of those other influences—increased quantity of labour and mechanization—which Smith recognized as theoretical, if not practical causes of economic expansion. The distinction between productive and unproductive labour had led to the conclusion that growth of capital depended on the most extensive use of funds in the employment of productive labour. Smith then developed his system to determine those fields where productive labour was most effectively employed and the conclusions, derived in this way from his analytical framework, had highly institutional implications, for they indicated the areas where growth was to be welcomed and encouraged. That was guidance for the practical man.29 Three propositions from II.v make the order of preference clear:
No equal capital puts into motion a greater quantity of productive labour than that of the farmer.
After agriculture, the capital employed in manufactures puts into motion the greatest quantity of productive labour, and adds the greatest value to the annual produce. That which is employed in the trade of exportation, has the least effect of any of the three.
The capital, therefore, employed in the home–trade of any country will generally give encouragement and support to a greater quantity of productive labour in that country, and increase the value of its annual produce more than an equal capital employed in the foreign trade of consumption: and the capital employed in this latter trade has in both these respects a still greater advantage over an equal capital employed in the carrying trade.
Such were the practical conclusions to which the theory led and, since the desirable allocation was to be achieved through ‘the uniform, constant, and uninterrupted effort of every man to better his condition’, the implication was obvious: government intervention had to be restrained, especially when it was possible to demonstrate, as in Book IV, that intervention was usually exercised on behalf of those vested interests which perverted the natural course of opulence. Well might Hugh Blair exclaim:
You have done great Service to the World by overturning all that interested Sophistry of Merchants, with which they had Confounded the whole Subject of Commerce. Your work ought to be, and I am persuaded will in some degree become, the Commercial Code of Nations.
Even a cursory survey of the major economic characteristics of Britain in the eighteenth century confirms the contemporary relevance of Smith’s emphases. He advocated for example the desirability of encouraging agriculture because of the superior productivity of capital invested in it. To the practical man, whether he appreciated the full logic of Smith’s analysis or not, the advocacy struck a responsive chord, since the main source of economic advance in Britain in the mid–eighteenth century lay in agriculture. Of that no one was unaware. Poor harvests and high prices benefited no one, obviously not industrial workers, and not the majority of farmers. Only a few specialist grain growers expected to reap the profits of scarcity and any potential gain was frequently eroded by the prohibitions on the use of grain for purposes other than the making of bread in times of scarcity and, more dramatically, by the activities of bread rioters. Hence a modern historian has described the period as one when ‘the coming of dearth was sufficient in itself to halt, or reverse, an upward movement of activity’.30 This restraint on increasing wealth was at last being tackled in the eighteenth century. Contemporaries, as well as later historians, disputed the significance and effectiveness of the specific agricultural improvements which brought the change to fruition, but, even when the method was disputed, the end was plain. The age–old spectre of famine was removed for the first time, and secure economic advance was possible. That was a dramatic change from the experience of many other countries.
A similar sympathetic response followed Smith’s evaluation of the form and function of trade. Agriculture and commerce were the twin props of the economy in the eyes of many contemporaries and Smith’s extensive treatment of the latter reflected its domination of economic thought and practice. More strikingly still, the pattern of foreign trade in the eighteenth century was changing and so drew attention to the relevance of Smith’s attempt to assess the comparative contributions to economic growth of the different forms of trade. The relevance of the analysis is evident in the changes in the pattern of both commodities and markets.
Woollen exports had long been the traditional staple, particularly to European markets, which at the beginning of the eighteenth century took over 90 per cent of the woollen goods exported. Thereafter, though Spain and Portugal were taking more, other European countries were taking less; the future lay less with Europe than in the past. Later in the eighteenth century cotton assumed the role of leading export which wool had once held, but it was dependent on non–European markets. Between the two phases of domination by two different textile industries the buoyant trading sector lay in re–exports, which had not been of great significance until the second half of the seventeenth century, but by the beginning of the eighteenth century re–exports were equal to half the level of domestic exports. Sugar, tobacco, Indian calicos were the leading commodities, and their buoyancy reflected an economy which gained from a commerce based more on Britain’s trading links than on the sale of domestic production overseas, an economy in which it was impossible to deny the paramount position, for good or ill, of overseas trade, and especially of the carrying trade. Nowhere in Britain was that situation more evident than in the economic structure of Glasgow in the third quarter of the eighteenth century. The foreign trade of Scotland had been turning from the continent of Europe to the New World even before the parliamentary union of 1707 confirmed the move, and the protection afforded by the Navigation Acts provided a firm and unfettered basis for Glasgow’s success as an entrepot in the tobacco trade. Hence to read the practical discussion in Book IV of the WN, whether to accept or to reject its conclusions, was to read an account highly relevant to the contemporary economic scene. The Book discusses the stuff of which contemporary economic policy was made.
Though the problems of agriculture and of commerce were the economic issues which dominated the mind of the practical man of the eighteenth century, industrial production was increasing, and, when Smith wrote, its increase was bringing to an end a period of stability in the relative contributions to the national product of agriculture, manufacturing and commerce. Smith’s emphasis on the growth, but not on the existing domination, of manufacturing industry, and particularly his exposition of the division of labour as the prime agent of change, accorded with contemporary experience. The increased industrial output was associated with a decline in the relative importance of the woollen industry and a marked growth in the relative contribution of metal manufactures, reflecting increased division of labour in small units and not the emergence of the larger and more modern units of industrial organisation which are associated with substantial capital formation and with joint–stock enterprise. The day of large–scale capital formation and extensive joint–stock enterprise came years after Smith. Though the problems of the industrial sector did not loom large in the minds of many contemporaries, when they did, they assumed the forms which Smith enunciated. The increasing capital intensity of production, and of its concentration, which was to begin with the appearance of the cotton industry, were yet to be, and the absence of any significant analysis of that sector in the WN should be cited less as a matter of regret and criticism and more as an indication of Smith’s awareness of those aspects of the contemporary industrial scene which were of concern at the time he wrote.
The WN succeeded not only because its institutional emphasis made it thus so evidently, as Blair wrote, ‘a publication for the present time’ but also because it contained a stirring message. Its plea for liberty accorded with the intellectual presuppositions of the eighteenth century. The plea for liberty in the WN is a vital factor explaining the different reception accorded to Steuart and Smith within a decade of each other. Steuart may have suffered from additional handicaps. Apart from his personal handicap of Jacobitism, his work appealed less powerfully to the intellects of the eighteenth century, and above all Steuart’s support for government intervention placed him in a different camp from Smith, and in one which was not popular among the increasingly influential elements in contemporary society.31
Smith provided a system with categories and elements which remain valid as parts of his analytical framework, but their institutional content, so pertinent to economic conditions in Britain in the eighteenth century, that it helped ensure the success of the WN, limits the acceptability and applicability of the system in other places and at other times. Whatever the intellectual attractiveness of Smith’s writing on the continent of Europe, it was frequently institutionally irrelevant there when it was first published. For example, in contrast with Britain, ancient mercantilist and agrarian restrictions were acceptable on the continent. In Germany local monopolistic guilds still dominated economic life, and the advocacy of the new degree of economic freedom requisite for new forms of economic enterprise was not acceptable. Palyi suggests that the surprising aspect of the WN’s reception in Germany was not that it was not readily received, but ‘that the resistance against the WN did not last longer than some twenty years and did not take a more active form’.32 In France, again as Palyi points out, the situation was confused because of the influence of the physiocrats. Smith gave sufficient recognition to the physiocratic point of view to lend some support to its claims, and that support was especially helpful since the acceptability of their doctrines was waning, partly because of the antagonism the physiocrats had engendered from the new and rising industrial groups, whose dislike of physiocracy grew from the support it provided to the large landowners. That confusion influenced the reception accorded to the WN.
Attempts to apply the WN to societies more advanced than Britain on the eve of the industrial revolution encounter similar, or even greater problems. The difficulty of doing so is demonstrated by contrasting Smith’s emphasis on the division of labour as the central cause of economic growth and his neglect of other factors, such as increases in the supply of labour, particularly through the growth of population, and improvements in the productivity of labour through mechanization. Smith recognized that an increase in the labour force led to an increase in output, but he did not envisage unemployed labour resources being brought into use, and any increase in the supply of labour was likely to be a long–run consequence of an expansion of the national product.
The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth. The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it.
Increasing population, whether a cause of economic growth, or as something to fear, was not highlighted. That may seem surprising. Others, among them Sir James Steuart, feared over–population, but it was possible to be as optimistic about the future in the mid–eighteenth century as at any time. The spectre of famine and of some diseases had been removed; the sharp rise in population and the problems of its concentration were yet to be. Hence it was easy to conceive the problem of economic growth as one of utilizing the labour force in ways which would most effectively meet the opportunities offered by the expansion of the market, either by improvements in the division of labour or by mechanization. Of the two possibilities Smith, with his analysis firmly rooted in the institutional structure of his day, stressed the former. Mechanization was recognized—as in his discussion of the steam engine—but it was conceived as a process accompanying the division of labour.
The owner of the stock which employs a great number of labourers, necessarily endeavours, for his own advantage, to make such a proper division and distribution of employment, that they may be enabled to produce the greatest quantity of work possible. For the same reason, he endeavours to supply them with the best machinery which either he or they can think of.
In consequence of better machinery, of greater dexterity, and of a more proper division and distribution of work, all of which are the natural effects of improvement, a much smaller quantity of labour becomes requisite for executing any particular piece of work. . .
Not only are the division of labour and mechanization closely interwoven, but invention itself was in Smith’s opinion ‘originally owing to the division of labour’ (I.i.8).33 Innovation is no more central to the analysis. Projectors pass through the pages of the WN, frequently to be dismissed as detrimental rather than helpful to economic growth. In spite of his stress on psychological propensities in other parts of his work, Smith did not extend his analysis in a serious way to evaluate the qualities which determined the ability to innovate successfully.
The dominance of the division of labour, and the comparative neglect of other categories in the analysis, notably mechanization, is, of course, a reflection of the institutional relevance of the WN to the British economy in the mid–eighteenth century. The penalty paid was the opening of a penetrating line of criticism for those who wished to stress Smith’s comparative neglect of the other and ultimately more powerful agent of economic growth. Into that context can be placed the criticism of Lauderdale, who, though not distinguishing between capital and entrepreneurship, was anxious to remedy Smith’s alleged failure to make adequate allowance for differences in knowledge and ability in different countries. Rae suggested even more forcefully that invention held the key to explaining the greater productivity of capital in some societies than in others. Smith’s admirer, J. B. Say, developed the idea of entrepreneurship as a very special form of labour. Later Schumpeter placed the entrepreneur and his innovating ability at the heart of an explanation of economic growth. Lauderdale, Rae, Say, Schumpeter belong to later generations, which, unlike Smith’s, had witnessed the effect of mechanization on industrial output. Smith was writing even before the large–scale application of mechanization to cotton–spinning. Hence, just as the WN did not seem so relevant to societies other than Britain in the later eighteenth century, so the institutional content of the WN was not applicable to the industrial state which Britain was beginning to be.
Nevertheless, discussion of Smith’s institutional relevance can become almost pointless if it tries to prove either that Smith anticipated modern industrialization, or if it spends much time proving that he did not. Any evaluation must start from the obvious fact that Smith’s thought was formulated in the third quarter of the eighteenth century, and that many of his ideas had been formulated as early as the 1760s. To search the WN for examples of the institutional structure which was to emerge later in a more advanced industrial economy is to search for qualities which it cannot possess except fortuitously. The attraction of the WN was not that it was a tourist’s guide to the subsequent course of industrialization, but that it had a command of the institutional structure of the time, sufficiently convincing to demonstrate its contemporary relevance.
The institutional features of the WN which date it also helped towards its immediate success. The modern reader may recognize the systematic analysis as the great intellectual achievement of the treatise and qualify the validity of Smith’s views on public policy, or even adopt the extreme interpretation of dismissing them as totally irrelevant. No contemporary could have entertained such a view; obviously misleading or erroneous comments on the public policy of the age, or, worse still, irrelevant comments, would have detracted from the intellectual achievement in their eyes. The acceptance of the WN by contemporaries rested on its apparent relevance to the affairs of everyday life as much as on its systematic analysis. It became the authority to quote as much in public discussion as in parliamentary debate. But that was not all. Smith’s relevance to his day and age insured such immediate acceptance for the WN that, even when its popularity as a guide to policy was waning, and was ultimately rejected, the work was so well established, and so generally established, that it was never neglected, and the systematic analysis was then recognized for the massive intellectual achievement which it is.
Smith’s use of History
If Smith achieved the unusual distinction of being a prophet with honour in his own country, he did so partly because his work was firmly rooted in a historical situation. The WN may, therefore, be used as a historical source, in at least two distinctive senses. Since Smith frequently wrote as a historian—sometimes deliberately, sometimes otherwise—he may be judged accordingly by the common criteria of historical scholarship. In addition, Smith’s account of events in the later eighteenth century may be assessed for its reliability as the report of a contemporary observer. In neither case is an account of Smith’s writing a straightforward and uncomplicated matter. Just as anyone using Smith to illuminate later economic thought must make full allowance for the limitations of his institutional background on the general applicability of his theories, so those who use the WN as a historical source in whatever sense must make even greater allowances. In the former case the deficiencies are inevitable, as Smith could not have envisaged changes which were yet to be; in the latter case the omissions may even be deliberate and so misleading, especially if they are not obvious. As always, Smith’s desire to devise a major intellectual system determined the use he made of historical and factual material. No one of his intellectual eminence would distort the facts, even if only because refutation would thus have been infinitely easier, but, even when facts were not distorted, they may still have been used in such a subordinate and supporting role to the dominating systematic model that their use for any other purpose needs qualification.
If parts of the WN are to be judged as straightforward pieces of historical writing, it is necessary to distinguish the different ways in which Smith wrote as a historian. When he wrote as an orthodox historian, he tried to assemble the best documentary and factual evidence for his case; when he wrote as a philosopher of history, he tried to distil an ideal interpretation of an historical process ostensibly from the facts he had accumulated.
Smith, as any orthodox historian, may be assessed by a review of his sources and his use of them. Their variety is striking, whether the impression be derived from those quoted in the WN itself, from the resources in Smith’s personal library, or from the accounts of the Library at Glasgow when he controlled its expenditure. The break with the tradition of Christian authority is obvious; even historical parts of the Bible and its apparent relevance to the discussion of a nomadic life are virtually ignored, with only the most incidental of references to the Old Testament. By contrast, the classical tradition dominates and supplies many illustrations of early times. Given the inevitable paucity of source material for an account of an earlier age, and yet given the necessity of formulating such an account as part of an essential background to the dynamic historical evolution which he was seeking, Smith—in common with others who adopted his approach—was forced to use another group of source materials: the travellers’ tales and accounts of contemporary societies which were at a much earlier and much more primitive stage of social evolution. Travellers’ tales bulk large in what is generally regarded as Smith’s historical writing, taking pride of place even over the classical references. To a more orthodox historian the extensive use of travellers’ tales is even more suspect than the use of classical writers, whose work can at least be subjected to a more critical appraisal of their reliability. Travellers’ tales, especially in an age when they were frequently rare, even unique, accounts of far off places, could not easily be confirmed or refuted, and so the travellers tended to highlight the unusual and the bizarre. A warning of Francis Hutcheson could well be taken to heart:
The Entertainment therefore in these ingenious Studys consists chiefly in exciting Horror, and making Men stare . . . What is most surprizing in these Studys, is the wondrous Credulity of some Gentlemen of great Pretentions in other Matters to Caution of Assent, for these marvellous Memoirs of Monks, Friars, Sea–Captains, Pirates; and for the Historys, Annals, Chronologys, received by oral Tradition, or Hieroglyphicks.34
Smith was not more culpable than many of his contemporaries in his use of such material. He was certainly less guilty than some others of falling into the trap against which Hutcheson warned, for he did not accept all his sources uncritically. Trade statistics were held perceptively and authoritatively to be unreliable:
Heavy duties being imposed upon almost all goods imported, our merchant importers smuggle as much, and make entry of as little as they can. Our merchant exporters, on the contrary, make entry of more than they export; sometimes out of vanity, and to pass for great dealers in goods which pay no duty; and sometimes to gain a bounty or a drawback. Our exports, in consequence of these different frauds, appear upon the customhouse books greatly to overbalance our imports; to the unspeakable comfort of those politicians who measure the national prosperity by what they call the balance of trade.
Hence it is not surprising that Smith, though ready to endorse Gregory King’s skill in political arithmetic (I.viii.34), and willing to quote the calculations of Charles Smith on the corn trade (I.xi.g.18), had to admit that he himself had ‘no great faith in political arithmetick’ (IV.v.b.30). Quantitative sources were not the only ones treated with some reserve.
After all the wonderful tales which have been published concerning the splendid state of those countries [Mexico and Peru] in antient times, whoever reads, with any degree of sober judgment, the history of their first discovery and conquest, will evidently discern that, in arts, agriculture, and commerce, their inhabitants were much more ignorant than the Tartars of the Ukraine are at present.
Yet sometimes Smith’s use of a source is less critical than it should be, especially when the source confirms an argument he is developing from other and more general, often speculative sources, so that the orthodox historian thus becomes the supporter of the philosophic historian. Instances range from the trivial to the substantial. At the most trivial level Smith’s faults represent merely different standards of transcription between the eighteenth century and the present day. At times he seems to quote from memory, as when his quotations are not quite verbatim, or when he attributes a view to a source which it does not quite support, as for example, in his use of the works of Juan and Ulloa and of Frézier to support his condemnation of the mining of precious metals in the New World (I.xi.c.26–8). More serious still, in his use of statutes Smith falls into the error, not unique among historians, of failing to distinguish between the intention of the statute and the manner and extent of its implementation. The error is surprising in Smith’s case, because his experience at least after his appointment as Commissioner of Customs in 1778, enabled him to observe the gulf which could be fixed between intention and implementation in the case of some statutes, as in various attempts to suppress smuggling, and even more important because he himself sometimes provided the material for drawing such a distinction, as in his discussion of the laws relating to apprenticeship. A more serious example is his discussion of the settlement provisions of the poor law. In both cases Smith objected because of interference with the liberty he considered essential for the effective allocation of resources (above, 37).
After castigating the generally restrictive effect of the Statute of Apprentices Smith proceeded to recognize the limitations on its application: to market towns and not in the country (I.x.c.8); to those trades which were established when the Act was passed and not to those which appeared subsequently, excluding—on Smith’s own admission—‘the manufactures of Manchester, Birmingham and Wolverhampton’, or at least ‘many of them’ (I.x.c.9); and finally, not to soldiers and sea–men who, ‘when discharged from the king’s service, are at liberty to exercise any trade, within any town or place of Great Britain or Ireland’ (IV.ii.42).
Smith’s failure to make adequate allowance for the qualifications to the law of settlement is more serious. Smith objected to the legal restraints imposed on the right to obtain a settlement in a parish, with its entitlement to poor relief, as part of his general objection to artificial restraints on the free mobility of labour. He made his objection forcefully:
There is scarce a poor man in England of forty years of age . . . who has not in some part of his life felt himself most cruelly oppressed by this ill–contrived law of settlements.
The reasons had been as sweepingly advanced in the previous paragraph:
. . . in England, where it is often more difficult for a poor man to pass the artificial boundary of a parish, than an arm of the sea or a ridge of high mountains, natural boundaries which sometimes separate very distinctly different rates of wages in other countries.
In addition Smith contrasted conditions in Scotland with those in England, alleging that in England the law of settlement ensured that ‘The scarcity of hands in one parish . . . cannot always be relieved by their super–abundance in another, as it is constantly in Scotland’ (I.x.c.58). Once again Smith himself provided qualifications which should have led to the enunciation of his proposition in more moderate terms. He recognized the major mitigation of the restraints on the mobility of labour which followed the introduction of certificates, whereby a parish accepted liability for a potential pauper, though he promptly cast doubt on the effectiveness of the measure by commenting rather cynically, after quoting from a passage in Richard Burn’s Justice of the Peace, that ‘certificates ought always to be required by the parish where any poor man comes to reside, and that they ought very seldom to be granted by that which he proposes to leave’ (I.x.c.56). Smith also provided a general explanation of differences of wage rates between Scotland and England; one dependent not on their different laws of settlement but on differences between their rates of development and between the levels of subsistence in the two countries (I.viii.33–4).
Other evidence reinforces the doubts Smith raises himself. Removals of potential paupers in England were probably less frequent than he implies, otherwise it is difficult to understand how the new developing areas ever obtained the labour force they required; in Scotland paupers were sometimes forcefully removed, though less frequently than in England. The issue was one of contemporary importance, and could have been investigated by a detailed examination of parochial administration, but of such investigation there is no evidence in the WN, so that in these matters Smith did not have knowledge comparable to that which he had about customs procedure, even before his appointment as a commissioner, and which enabled him to be more critical of evidence in that field. In his discussion of both the laws of apprenticeship and settlement Smith provides evidence which damages his own case against the restrictive legislation, and provides indications that investigations which might have been undertaken to confirm his case or otherwise were not carried out. The general principles, the opposition to restrictions damaging to the free allocation of resources, were held so strongly that there seemed no case to answer.
Criticism of Smith’s use of sources becomes truly damaging only if he read into a source more serious evidence in support of a proposition than he was entitled to do. Even that criticism must not be pushed too far. All historians must choose the facts they judge relevant to their argument, and so their discussion is forced in one direction or another. Hence a significant distinction between the approaches of Smith and of orthodox historians can be drawn only if Smith’s choice of evidence strayed beyond the limits set by human frailty in determining degrees of relevance towards a demonstrable distortion of historical evidence, whether deliberate or not. Then, even if Smith’s use of his sources meets the requirements of the most refined critical apparatus of textual criticism, he would stand condemned by orthodox historians for his unacceptable choice of evidence.
Any such distinction, or even gulf, between the approaches of Smith and of orthodox historians appears only when Smith writes as a speculative or philosophical as well as an orthodox historian, and so a fundamental issue in any appreciation of the WN lies in determining how Smith deals with any tensions which emerge between the two approaches. Each strand of his historical reasoning, the orthodox and the speculative, is a logical entity, and each, if examined and judged by its own standards, is internally consistent. Problems emerge only when attempts are made to integrate the two in order to eliminate the tensions which seem to emerge between them. Smith does not recognize the tensions, he was probably unaware of them, because his grand design of a comprehensive system dominates every other approach. Yet tension between the two approaches appears at central parts of his analysis, most significantly in Book III, where the historical evidence is, of course, embedded at the centre of the exposition, not merely providing a peripheral part of the reasoning. The philosophical historian states unequivocally the course of the ‘natural progress of opulence’:
According to the natural course of things, therefore, the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. This order of things is so very natural, that in every society that had any territory, it has always, I believe, been in some degree observed.
In the next paragraph the orthodox historian upsets ‘the natural progress’:
though this natural order of things must have taken place in some degree in every such society, it has, in all the modern states of Europe, been, in many respects, entirely inverted. The foreign commerce of some of their cities has introduced all their finer manufactures, or such as were fit for distant sale; and manufactures and foreign commerce together, have given birth to the principal improvements of agriculture.
The last sentence of the chapter provides both an explanation and an accusation:
The manners and customs which the nature of their original government introduced, and which remained after that government was greatly altered, necessarily forced them into this unnatural and retrograde order.
The three chapters which follow, to make up the shortest Book in the WN, then proceed to expound an orthodox historical progress of opulence in a way which differs from that outlined in ‘the natural progress’, of how, for example in III.iv, the commerce of the towns contributed to the improvement of the country.
This distinction between the speculative historical progress of opulence and the orthodox historical progress is the prime example of the tensions involved in the use of the WN as a historical source. Yet allegations of tension, of an uneasy relationship and even of contradictions between the two strands of thought, are evident only when Smith is judged by standards, and by a methodology, which he would not have accepted. Smith’s objective was to delineate an ideal account of historical evolution, which did not need to conform to any actual historical situation, so historical evidence, while playing a central part in his thought, was supplementary evidence of secondary importance. If historical facts indicated a divergence from the ideal explanation, then Smith felt obliged to offer explanations of the divergence. He worked from the system to the facts not from the facts to the system, and in that context his protestation that he had ‘no great faith in political arithmetic’ is significant. If the historian or the political arithmetician demonstrated the divergence from the ideal that, for instance, the progress of opulence was from the town to the country and not the reverse, the interesting problem then lay in determining the reasons for the divergence—in the present example it lay in unwise and undesirable intervention from the government. H. T. Buckle, though given to overstating his case, made a vital point, and in a lively style:
Adam Smith . . .very properly rejected [statistical facts] as the basis of his science, and merely used them by way of illustration, when he could select what he liked. The same remark applies to other facts which he drew from the history of trade, and, indeed, from the general history of society. All of these are essentially subsequent to the argument. They make the argument more clear, but not more certain. For, it is no exaggeration to say, that, if all the commercial and historical facts in the Wealth of Nations were false, the book would still remain, and its conclusions would hold equally good, though they would be less attractive.35
Any tension between the speculative, or systematic, and the orthodox strands of Smith’s thought is potentially even more misleading when the systematic thought is contrasted with, or used to illuminate aspects of contemporary policy. Then Smith’s comments on the happenings of his time in the eighteenth century may be so coloured by his speculative approach that his accounts and views may have to be treated with some reserve and not used as reliable source material for historical studies of the period.
It was suggested earlier that the conclusion of greatest practical significance in Smith’s analysis for the eighteenth century lay in his ordering of the productive use of capital, as in II.v.19: first, in agriculture; then in manufactures; last in ‘the trade of exportation’. In the subsequent evaluation of the wholesale trade, the very practical conclusion was stated unequivocally:
. . . the great object of the political oeconomy of every country, is to encrease the riches and power of that country. It ought, therefore, to give no preference nor superior encouragement to the foreign trade of consumption above the home–trade, nor to the carrying trade above either of the other two.
Just as Smith’s orthodox historical work sometimes qualified the use that may be made of his speculative history, so his orthodox empirical studies cast doubt on some of the recommendations on contemporary policy derived directly from his analytical system. Examples can be given at both ends of his proposition concerning the desirable deployment of resources, from his comment on agriculture and on the colonial trade.
‘In proportion as a greater share of [capital] is employed in agriculture, the greater will be the quantity of productive labour which it puts into motion within the country’. (II.v.19.) It was suggested above (p. 45) that the prospects for economic growth in Britain in the eighteenth century were greatest in agriculture, and Smith provides empirical evidence of the progress already made in that field in his own day and of further possible lines of progress, as, for example, in an accurate and perceptive account of the expansion of the Scottish cattle trade (I.xi.l.2–3). But another part of Smith’s system, and the empirical content he gave to its operation in agriculture, casts doubt on the pre–eminence given to agriculture in economic progress. He asserts from empirical evidence that the division of labour, the great agent of change, is least applicable in agriculture (I.i.4). Once again the different strands of the argument are logically valid, but the relationship between the two is uneasy and unclear, and so too is the use which may be made of the evidence as reflecting economic conditions in the eighteenth century.
Smith’s treatment of the colonial trade is even more significant, because it looms large in the WN and in contemporary discussion. Given his general analysis it is not surprising that Smith condemns the tobacco trade as an example of how undesirable government intervention had turned trade ‘from a direction in which it would have maintained a greater quantity of productive labour, into one, in which it can maintain a much smaller quantity’ and had ‘rendered the whole state of that industry and commerce more precarious and less secure, than if their produce had been accommodated to a greater variety of markets’. (IV.vii.c.46 and 40.) It has already been suggested (p. 46) that Smith’s account of the carrying trade, both of its dependence on current commercial policy and of its effect on the domestic economy, would have been recognized by his contemporaries as a realistic survey of the conditions of the time. The growth of re–exports, and the tobacco trade’s domination, especially in Glasgow, owed much to the Navigation Acts, and the effect on the domestic economy was so limited that it is even possible to suggest that there existed two separate economies, each with its rate and extent of growth determined by different factors. But, once again, the WN itself provides the qualifications to the practical conclusion derived from the systematic analysis.
To begin with, it is not clear that commercial legislation was the critical cause of the growth of the colonial trade in general, and the tobacco trade in particular. ‘There are no colonies of which the progress has been more rapid than that of the English in North America’ (IV.vii.b.15), because ‘Plenty of good land, and liberty to manage their own affairs their own way, seem to be the two great causes of the prosperity of all new colonies’ (IV.vii.b.16). Even the exact influence of the monopoly is unclear: it ‘raises the rate of mercantile profit, and therefore augments somewhat the gains of our merchants’, but it also ‘hinders the sum of profit from rising so high as it otherwise would do’ (IV.vii.c.59). To determine the overall effect of the monopolistic restrictions, Smith is admitting in effect the necessity of a nice calculation of gain and loss. In the long–run even more necessary for that purpose is an evaluation of the use to which any profit is put: a smaller profit in the hands of those who use it in ways deemed appropriate may promote economic growth more rapidly than a larger profit in the hands of those who use it differently. Of that problem Smith was aware:
If the prodigality of some was not compensated by the frugality of others, the conduct of every prodigal, by feeding the idle with the bread of the industrious, tends not only to beggar himself, but to impoverish his country.
Smith’s distinction between the prodigal and the frugal man raises immense difficulties for any attempt to use his systematic analysis as a final commentary on the effect of the colonial trade. The distinction can be highlighted in Smith’s own words in II.iii:
The proportion between capital and revenue . . . seems every where to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails: wherever revenue, idleness.
Capitals are increased by parsimony, and diminished by prodigality and misconduct.
Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store up, the capital would never be the greater.
Hence, whatever the limitations, derived from Smith’s systematic analysis, on the beneficial effects of the carrying trade, the colonial trade might still have made a major contribution to economic growth if the merchants were parsimonious and not prodigal, particularly if they then diverted their capital into agricultural enterprises at home. Smith recognized in general terms what was happening. ‘Merchants are commonly ambitious of becoming country gentlemen, and when they do, they are generally the best of all improvers’ (III.iv.3), certainly better than the great proprietors (III.ii.7). The experience of the eighteenth century confirms this aspect of Smith’s discussion. Parsimony among the merchants, including colonial merchants, and their desire to become landed gentlemen, provided the capital which Smith recognized as essential for the exploitation of the agricultural resources of Scotland itself. The undesirability of concentration on the carrying trade which Smith’s intellectual analysis demonstrated, was evidently much less in practice when a full study is made, and, once again as in the discussion of agriculture, for reasons which are embedded in the WN. The reasons are not stressed, because to do so would have required some qualification to conclusions derived from the central analysis of the desirable distribution of capital and to some of the allegedly harmful effects of the Navigation Acts.
Smith’s historical writing has practical implications in the use of the WN. The historical writing is meaningful only if interpreted as part of the intellectual system which the historical material was used to illustrate and support. Similarly, Smith’s discussion of contemporary problems and events, which can easily be assumed to be an example of unbiased reporting, must also be integrated into his entire system. The belief in the natural progress of opulence, almost in its inevitability, is so strong throughout the WN that, when dealing with a contemporary problem, Smith’s main objective is to isolate those barriers which lay in the path of natural progress as he saw it, and to advocate their speedy removal. Hence on contemporary issues his writing verges on propaganda, he uses evidence in ways which are not wholly convincing to those not committed to his system, and he presses interpretations of contemporary events to more extreme conclusions than may well be warranted.
The defects of Smith’s emphasis must not be stressed unduly, though they may seem to justify the suggestion that he was never noted for his consistency. Paradoxically the inconsistency was often consistent, because it rarely damaged the central analysis and was indeed usually introduced as a means of support for it. Nor can Smith easily be accused of inconsistency in the transfer of his analysis to policy, so long as his practical recommendations were confined to a general advocacy of the desirability of eliminating government intervention from many, if not from all aspects of economic life. The inconsistencies appear only in the detail. These are defects of greater consequence to those who read the WN today than to those who read the WN when it was first published. Then the analysis, both systematic and institutional, was largely applicable in Britain, and was a major cause of the work’s popularity; it was excellent political propaganda and such stretching of empirical evidence as it contained was not such as could discredit the whole. The problem is for those readers of later generations who seek to use the WN as a source book of contemporary comment.
[1 ]History of Economic Analysis (London, 1954), 182.
[2 ]For comment, see R. L. Meek ‘Smith, Turgot and the Four Stages Theory’ in History of Political Economy, iii (1971), and his introduction to Turgot on Progress, Sociology, and Economics (Cambridge, 1973).
[3 ]LJ (B) 149, ed. Cannan 107. The socio–economic analysis appears chiefly in Books III and V of the WN.
[4 ]John Millar, The Origin of the Distinction of Ranks (1771), ed. W. C. Lehmann and included in his John Millar of Glasgow (Cambridge, 1960), 292.
[5 ]It is a remarkable fact that Smith’s systematic course of instruction on economic subjects closely follows the order used by his old teacher, Francis Hutcheson, in his System of Moral Philosophy (published posthumously in 1755). For Hutcheson, like Smith, begins with an account of the division of labour (II.iv) and having explained the sources of increase in ‘skill and dexterity’ proceeded to emphasize the interdependence of men which results from it. Having next examined the importance for exchange of the right to the property of one’s own labour (II.vi) he then considered the determinants of value, using in the course of this discussion a distinction between demand and supply price and defining the latter in terms of labour cost (II.xii). The argument then proceeds to the discussion of money as a means of exchange and the analytical work is completed with an account of ‘the principal contracts of a social life’ such as interest and insurance (II.xiii). While Smith’s own lectures were undoubtedly more complete, with the economic section developed as a single whole, the parallel is nonetheless worthy of note. For comment, see W. R. Scott, Francis Hutcheson (London, 1900).
[6 ]Hume had also drawn attention to the problems of trade regulation and shown a clear grasp of the interdependence of economic phenomena. There is certainly sufficient evidence to give some force to Dugald Stewart’s claim that ‘The Political Discourses of Mr. Hume were evidently of greater use to Mr. Smith, than any other book that had appeared prior to his Lectures’ (Stewart, IV.24).
[7 ]With regard to the separation of returns into wages, profits, and rent Dugald Stewart has stated that ‘It appears from a manuscript of Mr. Smith’s, now in my possession, that the foregoing analysis or division was suggested to him by Mr. Oswald of Dunnikier’ (Works, ix (1856), 6). It is also stated in Works x (1858) that Oswald was ‘well known to have possessed as a Political and man of business, a taste for the more general and philosophical discussions of Political Economy. He lived in habits of great intimacy with Lord Kames and Mr. Hume, and was one of Mr. Smith’s earliest and most confidential friends.’ Memoir Note A
[8 ]Smith’s initial stay in Paris as tutor to the Duke of Buccleuch, was for a period of only ten days, so that his real contact with the French thinkers came during the second visit (December 1765 to October 1766). By this time the School was well established: the Tableau Economique had been perfected in the late 1750s, and was followed in 1763 by the appearance of the Philosophie Rurale, the first text–book of the School and a joint production of Quesnay and Mirabeau.
[9 ]The most comprehensive modern account of the content of Smith’s work is by Samuel Hollander, The Economics of Adam Smith (Toronto, 1973).
[10 ]In the WN, the division of labour was also associated with technical change, arising from: improvements made by workmen as a consequence of their experience; inventions introduced by the makers of machines, (once that has become a separate trade) and, finally, inventions introduced by philosophers ‘whose trade it is, not to do any thing, but to observe every thing’ (I.i.9). Of these, Smith considered that the first was likely to be affected adversely by the consequences of the division of labour once it had attained a certain level of development. See below, 39–40.
[11 ]See R. L. Meek and A. S. Skinner, ‘The Development of Adam Smith’s Ideas on the Division of Labour’, Economic Journal, lxxxiii (1973).
[12 ]For a particularly helpful comment on Smith’s treatment of value from this point of view, see M. Blaug, Economic Theory in Retrospect (London, 1964), 48–52.
[13 ]There are perhaps four features of Smith’s treatment of price which may be of particular interest to the modern reader:
[14 ]While in general Smith seems to have considered that job mobility would be comparatively easy, it is evident that such movement might be difficult in cases where there is a considerable capital invested in learning—thus setting up distortions in the system (which could take time to resolve themselves) even in cases where there was perfect liberty. Smith also drew attention to the problems of status and geographical mobility. Citing as evidence the considerable differentials between London, Edinburgh, and their environs, in respect even of employments of a similar kind, he concluded that ‘man is of all sorts of luggage the most difficult to be transported’ (I.viii.31).
[15 ]It may be useful to give a ‘conjectural’ picture of the ‘circular flow’, by drawing some of the elements of Smith’s argument together.
[16 ]See D. N. Winch, Classical Political Economy and the Colonies (London, 1965), chapter 2.
[17 ]A Letter from Governor Pownall to Adam Smith, L.L.D. F.R.S. (London, 1776), 23: cf. Winch, op. cit., 8–9.
[18 ]It is interesting to observe that the solitary example of the ‘invisible hand’ which occurs in the WN does so in the context of the thesis concerning the natural progress of opulence. It is remarked in IV.ii.9 that:
[19 ]Smith’s concern with sectional economic pressures is to be found throughout the WN; in the discussion of the regulation of wages, for example (I.x.c.61) and in his ascription of undue influence on colonial policy to mercantile groups (IV.vii.b.49). He referred frequently to the ‘clamourous importunity of partial interests’ and in speaking of the growth of monopoly pointed out that government policy ‘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.’ (IV.ii.43.) The point helps to explain Smith’s recurring theme that legislative proposals emanating from members of this class ‘ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention’ (I.xi.p.10).
[20 ]Letter 151 addressed to Smith, dated 3 April 1776.
[21 ]Letter 153, 8 April 1776.
[22 ]Letter 152, April 1776.
[23 ]Letter 187, 26 November 1777.
[24 ]Letter 150, 1 April 1776.
[25 ]J. Y. T. Greig (ed.), The Letters of David Hume (Oxford, 1932), ii.314.
[26 ]Letter from William Strahan to David Hume, dated 12 April 1776 (Hume MSS. Royal Society of Edinburgh).
[27 ]Letter 154, 18 April 1776.
[28 ]Letter 179.
[29 ]Smith’s friends recognized this aspect but were faintly worried by it. Hugh Blair felt that some parts of the book, notably the discussion on the American colonies, might well be left out because they made the book ‘like a publication for the present moment’ (Letter 151), and Hume was aware that it had the attraction of offering ‘curious facts’ (Letter 150). Whatever the estimates of Blair or Hume of the practical aspect of the WN, it was a side which attracted a wider readership. A perceptive reviewer in an otherwise uninformative and brief notice in the Scots Magazine (xxxviii (1776) 205–6) assessed the twin attractions more equally and more fairly:
[30 ]T. S. Ashton, Economic Fluctuations in England, 1700–1800 (Oxford, 1959), 173.
[31 ]Steuart’s general position is perhaps adequately summarized in the statement that ‘In treating every question of political œconomy, I constantly suppose a statesman at the head of government, systematically conducting every part of it, so as to prevent the vicissitudes of manners, and innovations, by their natural and immediate effects or consequences, from hurting any interest within the commonwealth.’ (An Inquiry into the Principles of Political Oeconomy: Being an Essay on the Science of Domestic Policy in Free Nations (London, 1767) i. 120, ed. Skinner (Edinburgh 1966), i.122). Most of the contemporary reviews of Steuart’s work commented on this aspect of it, in a way which throws an interesting light on the kind of reception Smith could expect. The Critical Review, xxiii (1767), commented for example: ‘We have no idea of a statesman having any connection with the affair, and we believe that the superiority which England has at present over all the world, in point of commerce, is owing to her excluding statesmen from the executive part of all commercial concerns.’ (412.)
[32 ]M. Palyi, ‘The Introduction of Adam Smith on the Continent’ in J. M. Clark et al., Adam Smith, 1776–1926 (1928, reprinted New York, 1966), 196.
[33 ]Even in the art of war, where the contribution of the ‘state of the mechanical as well as of some other arts’ is recognized in general, and the invention of fire–arms in particular (V.i.a.43), the division of labour is still the key to success: ‘it is necessary that [the art of war] should become the sole or principal occupation of a particular class of citizens, and the division of labour is as necessary for the improvement of this, as of every other art.’ (V.i.a.14).
[34 ]F. Hutcheson, An Inquiry concerning Moral Good and Evil in An Inquiry into the Original of our Ideas of Beauty and Virtue (London, 4th ed., 1738), 207.
[35 ]H. T. Buckle, History of Civilization in England (London, 1857–61). Reprinted as On Scotland and the Scotch Intellect, ed. H. J. Hanham (Chicago, 1970), 285.