Adam Smith, greatest of discoverers in the science of Political
Economy, was born at Kirkcaldy, Scotland, on June 5, 1723, after
the death of his father, who had been Comptroller of Customs at
that port. He was educated at Kirkcaldy Grammar School, then at
Glasgow University, and finally at Balliol College, Oxford, where
he studied for seven years. From 1748 he resided in Edinburgh,
where he made a close friendship with David Hume, and gave a course
of lectures on literature; in 1751 he became professor of Logic in
Glasgow University, and in the following year professor of Moral
Philosophy. A philosophical treatise entitled "A Theory of Moral
Sentiments," published in 1759, has no longer any interest; but it
was during his thirteen years' residence in Glasgow that Smith
arrived at the principles formulated in his immortal "Inquiry into
the Nature and Causes of the Wealth of Nations." He left Glasgow in
1763 to become the tutor of the youthful Duke of Buccleuch, with
whom he lived at Toulouse, Geneva and Paris, studying the politics
and economics of France on the eve of the Revolution. In 1766 Adam
Smith retired to Kirkcaldy, with an annuity from the Buccleuch
family; devoted himself to his life's work; and in 1776 published
the "Wealth of Nations," which at once achieved a permanent
reputation. The author was appointed, in 1778, Commissioner of
Customs for Scotland, and died on July 17, 1790. Adam Smith was a
man of vast learning and of great simplicity and kindliness of
character. His reasonings have had vast influence not only on the
science of Economics but also on practical politics; his powerful
defence of free trade, and his indictment of the East India Company
have especially modified the history of his country.
_I.--Labour and Its Produce_
The division of labour has been the chief cause of improvement in the
productiveness of labour. For instance, the making of a single pin
involves eighteen separate operations, which are entrusted to eighteen
separate workmen; and the result is, that whereas one man working alone
could only make perhaps twenty pins in a day, several men working
together, on the principle of division of labour, can make several
thousands of pins per man in one day. Division of labour, in a highly
developed state of society, is carried into almost every practical art;
and its great benefits depend upon the increase of dexterity in each
workman, upon the saving of time otherwise lost in passing from one kind
of work to another, and finally, upon the use of many labour-saving
machines, which is made possible by the division of labour.
This division of labour, from which so many advantages are derived, is
not originally the effect of any human wisdom which foresees and intends
the opulence to which it gives rise; it is rather the gradual result of
the propensity, in human nature, to barter and exchange one thing for
another. The power of exchanging their respective produce makes it
possible for one man to produce only bread, and for another to produce
only clothing. The extent to which the division of labour can be carried
is therefore limited by the extent of the market. There are some sorts
of industry, even of the lowest kind, which can be carried on nowhere
but in a great town; a porter, for example, cannot find employment and
subsistence in a village. In the highlands of Scotland every farmer must
be butcher, baker, and brewer for his own family.
As water-carriage opens a more extensive market to every kind of
industry than is afforded by land-carriage, it is on the sea coast and
on the banks of navigable rivers, that industry begins to subdivide and
improve itself, and it is riot till long afterwards that these
improvements extend to the inland parts. It was thus that the earliest
civilised nations were grouped round the coasts of the Mediterranean
Sea; and the extent and easiness of its inland navigation was probably
the chief cause of the early improvement of Egypt.
As soon as the division of labour is well established, every man
becomes in some measure a merchant, and the society becomes a commercial
society; and the continual process of exchange leads inevitably to the
origin of money. In the absence of money or a general medium of
exchange, society would be restricted to the cumbersome method of
barter. Every man therefore would early endeavour to keep by him,
besides the produce of his own industry, a certain quantity of some
commodity such as other people will be likely to take in exchange for
the produce of their particular industries. Cattle, for example, have
been widely used for this purpose in primitive societies, and Homer
speaks of a suit of armour costing a hundred oxen.
But the durability of metals, as well as the facility with which they
can be subdivided, has led to their employment, in all countries, as the
means of exchange; and in order to obviate the necessity of weighing
portions of the metals at every purchase, as well as to prevent fraud,
it has been found necessary to affix a public stamp upon certain
quantities of the metals commonly used to purchase goods. The value of
commodities thus comes to be expressed in terms of coinage.
But labour is the real measure of the exchangeable value of all
commodities; the value of any commodity to the person who possesses it
is equal to the quantity of labour which it enables him to purchase or
to command. What is bought with money or with goods is purchased by
labour as much as what we acquire by the toil of our own body. "Labour
alone, never varying in its own value, is alone the ultimate and real
standard by which the value of all commodities can at all times and in
all places be estimated and compared. It is their real price; money is
their nominal price only. Equal quantities of labour will at distant
times be purchased more nearly with equal quantities of corn, the
subsistence of the labourer, than with equal quantities of gold, or of
any other commodity."
Several elements enter into the price of commodities. In a nation of
hunters, if it costs twice the labour to kill a beaver which it costs to
kill a deer, one beaver will be worth two deer. But if the one kind of
labour be more severe than the other, some allowance will naturally be
made for this superior hardship; and thirdly, if one kind of labour
requires an uncommon degree of dexterity and ingenuity, it will command
a higher value than that which would be due to the time employed in it.
So far, the whole produce of labour belongs to the labourer.
But as soon as stock has accumulated in the hands of particular persons,
some of them will employ it in setting to work industrious workmen, whom
they will supply with materials and subsistence, in order to make a
profit by the sale of their work. The profits of stock are not to be
regarded as the wages of a particular sort of labour, the labour of
inspection and direction; for they are regulated altogether by the value
of the stock employed, and are greater or smaller in proportion to the
extent of this stock.
There is in every society or neighbourhood an ordinary or average rate
both of wages and profit in every different employment of labour and
stock; and this rate is regulated partly by the general circumstances of
the society, its richness or poverty, and partly by the peculiar nature
of each employment. There is also in every society or neighbourhood an
ordinary or average rate of rent, which is regulated too by the general
circumstances of the society or neighbourhood in which the land is
situated, and partly by the natural or improved fertility of the land.
What we may call the natural price of any commodity depends upon these
natural rates of wages, profit and rent, at the place where it is
produced. But its market price may be above, below, or identical with
its natural price, and depends upon the proportion between the supply
and the demand.
_II.--Nature, Accumulation, and Employment of Stock_
When the stock which a man possesses is no more than sufficient to
maintain him for a few days or weeks, he seldom thinks of deriving any
revenue from it; but when he possesses enough to maintain him for months
or years, he endeavours to derive a revenue from the greater part of it.
The part of his stock from which he expects to derive revenue is called
his capital.
There are two ways in which capital may be employed so as to yield a
profit to its employer. First, it may be employed in raising,
manufacturing, or purchasing goods, and selling them again with a
profit; this is circulating capital. Secondly, it may be employed in the
improvement of land, or in the purchase of machines and instruments; and
this capital, which yields a profit from objects which do not change
masters, is called fixed capital.
The general stock of any country or society is the same as that of all
its inhabitants or members, and is therefore divided into the same three
portions, each of which has a different function. The first is the
portion which is reserved for immediate consumption, and so affords no
revenue or profit. The second is the fixed capital, which consists of
(_a_) all useful machines and instruments of trade which
facilitate and abridge labour;
(_b_) all profitable buildings, which procure a revenue,
not only to their owner, but also to the person
who rents them, such as shops, warehouses,
farmhouses, factories, &c.;
(_c_) the improvements of land, and all that has been
laid out in clearing, draining, enclosing, manuring,
and reducing it into the condition most proper for
culture; and
(_d_) the acquired and useful abilities of all the inhabitants
or members of the society, for the acquisition
of such talents, by the maintenance of the
learner during his education or apprenticeship,
costs a real expense, which is a capital fixed in
his person.
The third and last of the three portions into which the general stock of
the society naturally divides itself is the circulating capital, which
affords a revenue only by changing masters. It includes
(_a_) all the money by means of which all the other three
are circulated and distributed to their proper consumers;
(_b_) all the stock of provisions which are in the possession
of the butcher, farmer, corn-merchant, &c.,
and from the sale of which they expect to derive
a profit;
(_c_) all the materials, whether altogether rude, or more
or less manufactured, for clothes, furniture and
building, which are not yet made up into any of
these shapes, but remain in the hands of the growers,
manufacturers and merchants; and
(_d_) all the work which is made up and completed, but
is not yet disposed of to the proper consumers.
The substitution of paper in the place of gold and silver money replaces
a very expensive instrument of commerce by one much less costly, and
sometimes equally convenient. Circulation comes to be carried on by a
new wheel, which it costs less both to erect and to maintain than the
old one. The effect of the issue of large quantities of bank-notes in
any country is to send abroad the gold, which is no longer needed at
home, in order that it may seek profitable employment. It is not sent
abroad for nothing, but is exchanged for foreign goods of various kinds
in such a way as to add to the revenue and profits of the country from
which it is sent; unless, indeed, it is spent abroad on such goods as
are likely to be consumed by idle people who produce nothing.
_III.--The Progress of Opulence in Different Nations_
The greatest commerce of every civilised society is that carried on
between the inhabitants of the town and those of the country. It
consists in the exchange of rude for manufactured produce, either
immediately, or by the intervention of money, or of some sort of paper
which represents money. The country supplies the town with the means of
subsistence, and the materials for manufacture. The town repays this
supply by sending back a part of the manufactured produce to the
inhabitants of the country. The town, in which there neither is nor can
be any reproduction of substances, may very properly be said to gain its
whole subsistence from the country. And in how great a degree the
country is benefited by the commerce of the town may be seen from a
comparison of the cultivation of the lands in the neighbourhood of any
considerable town with that of those which He at some distance from it.
As subsistence is, in the nature of things, prior to conveniency and
luxury, so the rural industries which procure the former must be prior
to the urban industries which minister to the latter. The greater part
of the capital of every growing society is therefore first directed to
agriculture, afterwards to manufactures, and last of all to foreign
commerce. But this natural order of things has, in all the modern states
of Europe, been in many respects entirely inverted. The foreign commerce
of some of their cities has given rise to their finer manufactures, and
manufactures and foreign commerce together have given birth to the
principal improvements of agriculture. The manners and customs which the
nature of their original government introduced, and which remained after
that government was greatly altered, necessarily forced them into this
unnatural and retrograde order.
In the ancient state of Europe, after the fall of the Roman Empire,
agriculture was greatly discouraged by several causes. The rapine and
violence which the barbarians exercised against the ancient inhabitants
interrupted the commerce between the towns and the country; the towns
were deserted and the country was left uncultivated. The western
provinces of Europe sank into the lowest state of poverty, and the land,
which was mostly uncultivated, was engrossed by a few great proprietors.
These lands might in the natural course of events have been soon divided
again, and broken into small parcels by succession or by alienation; but
the law of primogeniture hindered their division by succession, and the
introduction of entails prevented their being divided by alienation.
These hindrances to the division and consequently to the cultivation of
the land were due to the fact that land was considered as the means not
of subsistence merely, but of power and protection. In those disorderly
times, every great landlord was a sort of petty prince.
Unfortunately these laws of primogeniture and entail have continued long
after the circumstances which gave rise to them have disappeared.
Unfortunately, because it seldom happens that a great landlord is a
great improver. To improve land with profit requires an exact attention
to small savings and small gains, of which a man born to a great fortune
is seldom capable. And if little improvement was to be expected from the
great proprietors, still less was to be hoped for from those who
occupied the land under them. In the ancient state of Europe, the
occupiers of land were all tenants at will, and practically slaves. To
these succeeded a kind of farmers known at present in France by the name
of "metayers," whose produce was divided equally between the proprietor
and the farmer, after setting aside what was judged necessary for
keeping up the stock, which still belonged to the landlord. To these, in
turn, succeeded, though by very slow degrees, farmers properly so
called, who cultivated the land with their own stock, paying a fixed
rent to the landlord, and enjoying a certain degree of security of
tenure. And every improvement in the position of the actual cultivation
of the soil is attended by a corresponding improvement of the land and
of its cultivation.
After the fall of the Roman empire the inhabitants of cities and towns
were not more favoured than those of the country. The towns were
inhabited chiefly by tradesmen and mechanics, who were in those days of
servile, or nearly servile condition. Yet the townsmen arrived at
liberty and independence much earlier than the country population; their
towns became "free burghs," and were erected into commonalities or
corporations, with the privilege of having magistrates and a town
council of their own, of making by-laws for their own government and of
building walls for their own defence. Order and good government, and the
liberty and security of individuals, were thus established in cities at
a time when the occupiers of land in the country were exposed to every
sort of violence.
The increase and riches of commercial and manufacturing towns
thenceforward contributed to the improvement and cultivation of the
countries to which they belonged, in three different ways. First, by
affording a great and ready market for the rude produce of the country.
Secondly, the wealth acquired by the inhabitants of cities was employed
in purchasing uncultivated lands and in bringing them under cultivation;
for merchants are ambitious of becoming country gentlemen, and when they
do so, are generally the best of all improvers. And lastly, commerce and
manufactures gradually introduced order and good government, and with
them the liberty and security of individuals, among the inhabitants of
the country.
_IV.--The Mercantile System_
From the mistaken theory that wealth consists in money, or in gold and
silver, there has arisen an erroneous and harmful system of political
economy and of legislation in the supposed interests of manufacture, of
commerce, and of the wealth of nations. A rich country is supposed to be
a country abounding in money; and all the nations of Europe have
consequently studied, though to little purpose, every possible means of
accumulating gold and silver in their respective countries. For example,
they have at times forbidden, or hindered by heavy duties, the export of
these metals. But all these attempts are vain; for on the one hand, when
the quantity of gold and silver imported into any country exceeds the
effectual demand, no vigilance can prevent their exportation; and on the
other hand, if gold and silver should fall short in a country, there are
more expedients for supplying their place than that of any other
commodity. The real inconvenience which is commonly called "scarcity of
money" is not a shortness in the medium of exchange, but is a weakening
and diminution of credit, due to over-trading. Money is part of the
national capital, but only a small part and always the most unprofitable
part of it.
The principle of the "commercial system" or "mercantile system" is, that
wealth consists in money, or in gold and silver. It is an utterly untrue
principle. But once it had been established in general belief that
wealth consists in gold and silver, and that these metals can be brought
into a country which has no mines only by the "balance of trade," that
is to say, by exporting to a greater value than it imports, it
necessarily became the great object of political economy to diminish as
much as possible the importation of foreign goods for home consumption,
and to increase as much as possible the exportation of the produce of
domestic industry. Its two great engines for enriching the country,
therefore, were restraints upon importation and encouragements to
exportation.
The restraints upon importation were of two kinds: first, restraints
upon the importation of such foreign goods for home consumption as could
be produced at home, from whatever country they were imported; and
secondly, restraints upon the importation of goods of almost all kinds
from those particular countries with which the balance of trade was
supposed to be disadvantageous. These different restraints consisted
sometimes in high duties, and sometimes in absolute prohibitions.
Exportation was encouraged sometimes by drawbacks, sometimes by
bounties, sometimes by advantageous treaties of commerce with sovereign
states, and sometimes by the establishment of colonies in distant
countries. The above two restraints, and these four encouragements to
exportation, constitute the six principal means by which the commercial
or mercantile system proposes to increase the quantity of gold and
silver in any country by turning the balance of trade in its favour.
The entire system, in all its developments, is a fallacious and an evil
one. It is not difficult to determine who have been the contrivers of
this whole mercantile system: not the consumers, whose interest has been
entirely neglected; but the producers, and especially the merchants and
manufacturers, whose interest has been so carefully attended to. It
remains to be said, also, that the "agricultural system," which
represents the produce of land as the sole source of the revenue and
wealth of every country, and as therefore justifying a special
protection of it, is as fallacious and as harmful as the other.
_V.--The Revenue of the Sovereign or Commonwealth_
The first duty of the sovereign, that of protecting the society from the
violence and invasion of other independent societies, can be performed
only by means of a military force. This may be effected either by
obliging all the citizens of the military age, or a certain number of
them, to join in some measure the trade of a soldier to whatever other
trade or profession they may happen to carry on; or by maintaining a
certain number of citizens in the constant practice of military
exercises, thus rendering the trade of a soldier a particular trade,
separate from all others. In the former case a militia is formed, in the
latter a standing army; and of the two, the second is by far the more
powerful, as it is also the more expensive.
The second duty of the sovereign, that of protecting, as far as
possible, every member of the society from the injustice or oppression
of every other member of it, or the duty of establishing an exact
administration of justice, requires an increasing expenditure
corresponding to the advance and development of the society.
Public works and public institutions are a third cause of expenditure on
the part of sovereign or commonwealth; and have two principal
objects--that of facilitating the commerce of the society and that of
promoting the instruction of the people. Roads, bridges, canals, are
examples of the former; schools, universities, established Churches are
examples of the latter. And among other expenses of the sovereign or
commonwealth we must include the expenses of supporting the dignity of
the sovereign.
The funds or sources of revenue which peculiarly belong to the sovereign
or commonwealth consist either in stock or in land; but being quite
insufficient to meet the public expenditure they are supplemented by
taxation. Every tax is finally paid from rent, profit or wages, or from
all of them indifferently; and the chief principle to be observed in
taxation is, that the subjects of the State ought to contribute towards
the support of the government, as nearly as possible, in proportion to
their respective abilities--that is, in proportion to the revenue which
they respectively enjoy under the protection of the State. The tax which
each individual is bound to pay ought to be certain and not arbitrary;
every tax ought to be levied at the time or in the manner in which it is
most likely to be convenient for the contributor to pay it; and finally,
every tax ought to be so contrived as to take out and to keep out of the
pockets of the people as little as possible over and above what it
brings into the public treasury of the State.