Front Page Titles (by Subject) Chapter XXXI: THE SYSTEM OF VALUES OF EXCHANGE (FALSELY TERMED BY THE SCHOOL, THE 'INDUSTRIAL' SYSTEM)—ADAM SMITH. - The National System of Political Economy
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Chapter XXXI: THE SYSTEM OF VALUES OF EXCHANGE (FALSELY TERMED BY THE SCHOOL, THE 'INDUSTRIAL' SYSTEM)—ADAM SMITH. - Friedrich List, The National System of Political Economy 
The National System of Political Economy by Friedrich List, trans. Sampson S. Lloyd, with an Introduction by J. Shield Nicholson (London: Longmans, Green and Co., 1909).
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THE SYSTEM OF VALUES OF EXCHANGE (FALSELY TERMED BY THE SCHOOL, THE 'INDUSTRIAL' SYSTEM)—ADAM SMITH.
ADAM SMITH'S doctrine is, in respect to national and international conditions, merely a continuation of the physiocratic system. Like the latter, it ignores the very nature of nationalities, seeks almost entirely to exclude politics and the power of the State, presupposes the existence of a state of perpetual peace and of universal union, underrates the value of a national manufacturing power, and the means of obtaining it, and demands absolute freedom of trade.
Adam Smith fell into these fundamental errors in exactly the same way as the physiocrats had done before him, namely, by regarding absolute freedom in international trade as an axiom assent to which is demanded by common sense, and by not investigating to the bottom how far history supports this idea.
Dugald Stewart (Adam Smith's able biographer) informs us that Smith, at a date twenty-one years before his work was published in 1776 (viz. in 1755), claimed priority in conceiving the idea of universal freedom of trade, at a literary party at which he was present, in the following words:
'Man is usually made use of by statesmen and makers of projects, as the material for a sort of political handiwork. The project makers, in their operations on human affairs, disturb Nature, whereas people ought simply to leave her to herself to act freely, in order that she may accomplish her objects. In order to raise a State from the lowest depth of barbarism to the highest degree of wealth, all that is requisite is peace, moderate taxation, and good administration of justice; everything else will follow of its own accord in the natural course of things. All governments which act in a contrary spirit to this natural course, which seek to divert capital into other channels, or to restrict the progress of the community in its spontaneous course, act contrary to nature, and, in order to maintain their position, become oppressive and tyrannical.'
Adam Smith set out from this fundamental idea, and to prove it and to illustrate it was the sole object of all his later works. He was confirmed in this idea by Quesnay, Turgot, and the other coryphæi of the physiocratic school, whose acquaintance he had made in a visit to France in the year 1765.
Smith evidently considered the idea of freedom of trade as an intellectual discovery which would constitute the foundation of his literary fame. How natural, therefore, it was that he should endeavour in his work to put aside and to refute everything that stood in the way of that idea; that he should consider himself as the professed advocate of absolute freedom of trade, and that he thought and wrote in that spirit.
How could it be expected, that with such preconceived opinions, Smith should judge of men and of things, of history and statistics, of political measures and of their authors, in any other light than as they confirmed or contradicted his fundamental principle?
In the passage above quoted from Dugald Stewart, Adam Smith's whole system is comprised as in a nutshell. The power of the State can and ought to do nothing, except to allow justice to be administered, to impose as little taxation as possible. Statesmen who attempt to found a manufacturing power, to promote navigation, to extend foreign trade, to protect it by naval power, and to found or to acquire colonies, are in his opinion project makers who only hinder the progress of the community. For him no nation exists, but merely a community, i.e. a number of individuals dwelling together. These individuals know best for themselves what branches of occupation are most to their advantage, and they can best select for themselves the means which promote their prosperity.
This entire nullification of nationality and of State power, this exaltation of individualism to the position of author of all effective power, could be made plausible only by making the main object of investigation to be not the power which effects, but the thing effected, namely, material wealth, or rather the value in exchange which the thing effected possesses. Materialism must come to the aid of individualism, in order to conceal what an enormous amount of power accrues to individuals from nationality, from national unity, and from the national confederation of the productive powers. A bare theory of values must be made to pass current as national economy, because individuals alone produce values, and the State, incapable of creating values, must limit its operations to calling into activity, protecting, and promoting the productive powers of individuals. In this combination, the quintessence of political economy may be stated as follows, viz.: Wealth consists in the possession of objects of exchangeable value; objects of exchangeable value are produced by the labour of individuals in combination with the powers of nature and with capital. By the division of labour, the productiveness of the labour is increased; capital is accumulated by savings, by production exceeding consumption. The greater the total amount of capital, so much the greater is the division of labour, and hence the capacity to produce. Private interest is the most effectual stimulus to labour and to economy. Therefore the highest wisdom of statecraft consists in placing no obstacle in the way of private industry, and in caring only for the good administration of justice. And hence also it is folly to induce the subjects of a State, by means of State legislative measures, to produce for themselves anything which they can buy cheaper from abroad. A system so consistent as this is, which sets forth the elements of wealth, which so clearly explains the process of its production, and apparently so completely exposes the errors of the previous schools, could not fail, in default of any other, to meet with acceptance. The mistake has been simply, that this system at bottom is nothing else than a system of the private economy of all the individual persons in a country, or of the individuals of the whole human race, as that economy would develop and shape itself, under a state of things in which there were no distinct nations, nationalities, or national interests—no distinctive political constitutions or degrees of civilisation—no wars or national animosities; that it is nothing more than a theory of values; a mere shopkeeper's or individual merchant's theory—not a scientific doctrine, showing how the productive powers of an entire nation can be called into existence, increased, maintained, and preserved—for the special benefit of its civilisation, welfare, might, continuance, and independence.
This system regards everything from the shopkeeper's point of view. The value of anything is wealth, according to it, so its sole object is to gain values. The establishment of powers of production, it leaves to chance, to nature, or to the providence of God (whichever you please), only the State must have nothing at all to do with it, nor must politics venture to meddle with the business of accumulating exchangeable values. It is resolved to buy wherever it can find the cheapest articles—that the home manufactories are ruined by their importation, matters not to it. If foreign nations give a bounty on the export of their manufactured goods, so much the better; it can buy them so much the cheaper. In its view no class is productive save those who actually produce things valuable in exchange. It well recognises how the division of labour promotes the success of a business in detail, but it has no perception of the effect of the division of labour as affecting a whole nation. It knows that only by individual economy can it increase its capital, and that only in proportion to the increase in its capital can it extend its individual trades; but it sets no value on the increase of the productive power, which results from the establishment of native manufactories, or on the foreign trade and national power which arise out of that increase. What may become of the entire nation in the future, is to it a matter of perfect indifference, so long as private individuals can gain wealth. It takes notice merely of the rent yielded by land, but pays no regard to the value of landed property; it does not perceive that the greatest part of the wealth of a nation consists in the value of its land and its fixed property. For the influence of foreign trade on the value and price of landed property, and for the fluctuations and calamities thence arising, it cares not a straw. In short, this system is the strictest and most consistent 'mercantile system,' and it is incomprehensible how that term could have been applied to the system of Colbert, the main tendency of which is towards an 'industrial system'—i.e. a system which has solely in view the founding of a national industry—a national commerce—without regarding the temporary gains or losses of values in exchange.
Notwithstanding, we would by no means deny the great merits of Adam Smith. He was the first who successfully applied the analytical method to political economy. By means of that method and an unusual degree of sagacity, he threw light on the most important branches of the science, which were previously almost wholly obscure. Before Adam Smith only a practice existed; his works rendered it possible to constitute a science of political economy, and he has contributed a greater amount of materials for that object than all his predecessors or successors.
But that very peculiarity of his mind by which, in analysing the various constituent parts of political economy, he rendered such important service, was the cause why he did not take a comprehensive view of the community in its entirety; that he was unable to combine individual interests in one harmonious whole; that he would not consider the nation in preference to mere individuals; that out of mere anxiety for the freedom of action of the individual producers, he lost sight of the interests of the entire nation. He who so clearly perceived the benefits of the division of labour in a single manufactory, did not perceive that the same principle is applicable with equal force to entire provinces and nations.
With this opinion, that which Dugald Stewart says of him exactly agrees. Smith could judge individual traits of character with extraordinary acuteness; but if an opinion was needed as to the entire character of a man or of a book, one could not be sufficiently astonished at the narrowness and obliquity of his views. Nay, he was incapable of forming a correct estimate of the character of those with whom he had lived for many years in the most intimate friendship. 'The portrait,' says his biographer, 'was ever full of life and expression, and had a strong resemblance to the original if one compared it with the original from a certain point of view; but it never gave a true and perfect representation according to all its dimensions and circumstances.'