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A history of economic doctrines from the time of the physiocrats to the present day

LIBRARY

THE UNIVERSITY OF CALIFORNIA

SANTA BARBARA

PRESENTED BY

ELIZABETH HARDISON

A HISTORY OF

ECONOMIC DOCTRINES

A iHISTORY OF

ECONOMIC DOCTRINES

FROM THE TIME OF THE PHYSIOCRATS TO THE PRESENT DAY

BY CHARLES GIDE

PROFESSOR OF SOCIAL ECONOMICS IN THE FACULTY OF LAW UNIVERSITY OF PARIS

AND

CHARLES RIST

PROFESSOR OF POLITICAL ECONOMY IN THE

FACULTY OF LAW IN THE UNIVERSITY OF

MONTPELLIER

AUTHORISED TRANSLATION FROM THE SECOND REVISED AND AUGMENTED EDITION OP 1913

UNDER THE DIRECTION OF THE LATE

PROFESSOR WILLIAM SMART BY

R. RICHARDS B.A.

LECTURER IN THE UNIVERSITY COLLEGE OF NORTH WALES

D. C. HEATH AND COMPANY

BOSTON NEW YORK CHICAGO

DALLAS ATLANTA LONDON SAN FRANCISCO

rights reserved

Printed in Great Britain at THE BALLANTYNE PRESS by

SPOTTUWOODE. BALLANTYNE & Co. LTD.

Colchester, London & Eton

PREFATORY NOTE

GIBE'S Principles of Political Economy, of which there are several translations, is probably better known to English students than any similar work of foreign origin on the subject, and many readers of that book will welcome an opportunity of perusing this volume which Professor Gide has produced in collaboration with Professor Rist.

The remarkable dearth of literature of this kind in English may be pleaded in further extenuation of the attempt to present the work in an English garb, and readers of the Preface will be able to contrast the position in this country with the very different condition of things prevailing across the Channel. The contrast might even be carried a stage farther, and it would be interesting to speculate upon the historical causes which have made Germany supreme in the field of economic research and history, which influenced France in her choice of the history of theory, and which decreed that England should on the whole remain faithful to the tradition of the " pure doctrine." Can it be that something like a " territorial division of labour" applies in matters intellectual as well as economic ?

Be that as it may, we can hardly pretend to be satisfied with the position of our country in this matter of doctrinal history. Of the nine names mentioned in the Preface, only two are English, namely, Ashley and Ingram; and it is no disparagement to Ashley's illu- minating study of mediaeval England to say that the main interest of his work is not doctrinal, and that Cunningham's name might with equal appropriateness have been included in the list.

Omitting both Ashley and Cunningham, whose labours have been largely confined to the realm of economic history, we are thus left with Ingram's short but learned work as the sole contribution of English scholarship to the history of economic thought.

English readers may possibly be puzzled by the omission of any references, except a stray quotation or two, to Cannan's History of the Theories of Production and Distribution. But the microscopic care with which the earlier theories are examined and elucidated in that work have resulted in its being regarded as a most valuable contribution to economic theory itself, and under the circumstances

vi PREFATORY NOTE

the absence of any reference to it in the Preface is not altogether surprising.

Our apparent indifference to the development which theory has undergone in the course of the last 150 years is all the more difficult to explain when we recall the fact that England has always been the classic home of theory, both orthodox and socialist, and our backwardness in this respect contrasts very unfavourably with the progress made in the kindred study of economic history during the last twenty-five years under the inspiration of writers like Ashley, Cunningham, Maitland, Round, and Seebohm.

Most critics are by this time agreed that Ingram's work, lucid and learned though it is, is somewhat marred by being written too exclusively from the standpoint of a Positivist philosopher who thought he saw in the rapid rise of the Historical school an indis- putable proof of the soundness of the Comtean principles and a presage of their ultimate triumph.

Complete impartiality in the writing of history, even were it attainable, may not be altogether desirable, and the present authors have hastened to disclaim any such qualification. Notwithstanding this, some of their readers will possibly feel that certain French Schools, both ancient and modern, have been dealt with at dispro- portionate length, and that scarcely enough attention has been paid to certain English and American writers. But it will surely do us little harm occasionally " to see ourselves as others see us."

The chief interest of the present volume will probably be found to consist in the attempt made to give us something like a true per- spective of certain modern theories by connecting them with their historical antecedents ; and we can imagine its later pages being scanned with a great deal of justifiable curiosity. After all, the verdict of history upon the achievements of Smith, the measure of his indebtedness to his immediate predecessors, and the extent to which the " car of economic progress " was accelerated or retarded in its movements at the hands of Ricardo and his contemporaries is fairly well established by this time. On one point only do the present writers seem to challenge that verdict, namely, in their designation of Ricardo and Malthus as Pessimists.

It is otherwise with the more modern writers, however. Their work has not the distinctness of that of the earlier writers, partly because we are not sufficiently removed from it as yet, and partly because some of it is obscured by the haze of party strife. But it may help us to a better understanding of their relative positions to learn, for example, that the Historical school, which set out on its

PREFATORY NOTE vii

career of conquest with a considerable flourish of trumpets, has not yet succeeded in giving us a new science of Political Economy ; that the Marxian doctrine is already antiquated, in the opinion of certain members of that school ; that the Socialism of the Fabian Society is merely a recrudescence of Ricardian economics, and that Anarchism is nothing but a violent form of Liberalism.

I cannot hope to have succeeded in retaining in this translation the freshness and vivacity of the original. But I have endeavoured to make the rendering as accurate as possible ; and with this object in view considerable trouble has been taken to verify the quotations.

As the title-page implies, the work was originally begun at the suggestion of the late Professor Smart of Glasgow, and to-day more than ever I am conscious of what I owe to his kindly criticism and genial encouragement.

The passage of the book through the press has been watched with assiduous care by Mr. C. C. Wjjod, who is also responsible for the Index at the end of the volume. I can scarcely express the measure of my indebtedness to him. To my friends Mr. W. H. Porter, M.A., and Mr. J. G. Williams, M.A., both of Bangor, I am also indebted for reading some of the proofs.

R. RICHARDS

PREFACE

IN the economic curricula of French universities much greater stress is laid upon the history of economic theory than is the case anywhere else. Attached to the Faculty of Law in each of these universities is a separate chair specially devoted to this subject ; at the examination for the doctor's degree a special paper is set in the history of theory, and if necessary further proof of competence is demanded from the student before his final admission to the degree. At the Sorbonne, where there is only one chair in economics, that chair is exclusively devoted to the history of doctrines, and the same

-Jf-. -Jt»

is true of the chair recently founded at the Ecole des Hautes Etudes.

Such prominence given to the history of theory must seem excessive, especially when it is remembered that in economic history, as distinct from the history of economics, there is not a single chair in the whole of France. Those who believe that the French people are somewhat prone to ideology will not fail to see in this fact a somewhat unfortunate manifestation of that tendency. Elsewhere the positions are reversed, the premier place being given to the study of facts rather than ideas. Extreme partisans of the historical method, especially the advocates of historical materialism, regard doctrines and systems as nothing better than a pale reflection of facts. It is a part of their belief that facts are the only things that matter, and that the history of the evolution of property or the rise of the wage system may prove quite as instructive as the history of the controversies concerning the nature of the right of property or the wages-fund theory.

Such views as we have just expressed, however, are not altogether devoid of exaggeration, though of a kind directly opposite to that which we would naturally impute to them. The influence exerted by the economic environment, whence even the most abstract economist gets material for reflection and the exercise of his logical acumen, is indisputable. The problems which the theorist has to solve are suggested by the rise of certain phenomena which at one moment cut a very prominent figure and at another disappear altogether. Such problems must vary in different places and at different times. The peculiar economic condition in which England found herself at the beginning of the nineteenth century had a great

ix

x PREFACE

deal to do in directing Ricardo1s thought to the study of the problems of rent and note issue. But for the advent of machinery, with the subsequent increase in industrial activity and the parallel growth of a proletarian class, followed by the recurrence of economic crises, we may be certain that neither the doctrine of Sismondi nor that of Karl Marx would ever have seen the light of day. It is equally safe to assume that the attention which economists have recently bestowed upon the theory of monopoly is not altogether unconnected with the contemporary development of the trust movement.

But, while recognising all this, it is important that we should remember that facts alone are not sufficient to explain the origin of any doctrines, even those of social politics, and still less those of a purely scientific character. Ideas even are not independent of time and place. Similar conditions in the same epoch of history have not infrequently given rise to heterogeneous and even antago- nistic theories — J. B. Say's and Sismondi's, for example, Bastiat's and Proudhon's, Schulze-Delitzsch's and Marx's, Francis Walker's and those of Henry George. With what combination of historical circumstances are we to connect Cournofs foundation of the Mathematical school in France, or how are we to account for the simultaneous discovery in three or four countries of the theory of final utility ?

Although anxious not to seem to make any extravagant claims for the superiority of the history of theory, we are not ashamed of repeating our regrets for the comparative neglect of economic history, and we are equally confident in claiming for our subject the right to be regarded as a distinct branch of the science.1 We shall accordingly omit all reference to the history of economic facts and institutions except in so far as such reference seems indispensable to an understanding of either the appearance or disappearance of such and such a doctrine or to the better appreciation of the special prominence which a theory may have held at one moment, although it is quite unintelligible to us to-day. Sometimes even the facts are connected with the doctrines, not as causes, but as results, for, notwithstanding the scepticism of Cournot, who was wont to declare that the influence exerted by economists upon the course of events was about equal to the influence exerted by grammarians upon the development of language, it is impossible not to see a connection between the commercial treaties of 1860, say, and the teachings of

1 See an article by M. Deschamps in the Reforms sociale of October 1, 1902, on the value of this kind of teaching.

PREFACE xi

the Manchester school, or between labour legislation and the doctrine of State Socialism.

To write a history of economic doctrines which should not exceed the limits of a single volume was to attempt an almost impossible task, and the authors cannot pretend that they have accomplished such a difficult feat. Even a very summary exposition of such doctrines as could not possibly be neglected involved the omission of others of hardly less importance.

But in the first place it was possible to pass over the pioneers by taking the latter part of the eighteenth century as the starting-point. There is no doubt that the beginnings of economic science lie in a remoter past, but the great currents of economic thought known as the " schools " only began with the appearance of those two typical doctrines, individualism and socialism, in the earlier half of the nine- teenth century.1 Moreover, the omission is easily made good, for it so happens that the earlier periods are those most fully dealt with in such works as have already appeared on the subject. For the period of antiquity we have the writings of Espinas 2 and Souchon ; the mediaeval and post-mediaeval periods, right up to the eighteenth century, are treated of in the works of Dubois and Rambaud ; while, in addition to these, we have the writings of Ashley, Ingram, Hector Denis, Brants, and Cossa, to mention only a few. Modern theories, as contrasted with those of the earlier periods, have received comparatively little attention.

Not only have we been obliged to confine our attention to certain periods, but we have also had to restrict ourselves to certain countries. We would claim the indulgence of those of our readers who feel that French doctrines have been considered at dispropor- tionate length, reminding them that we had French students chiefly in view when writing. Each author is at liberty to do the same for his own particular country, and it is better so, for readers generally desire to learn more about those things of which they already know something. But, despite the prominence given to France, England and Germany were bound to receive considerable attention, although in the case of the latter country we had to

1 In an article on the teaching of the history of economic doctrines (Revue de V Enseignement, March 15, 1900) M. Deschamps declares that it is unpardon- able that we should be unable to make better use of the marvellous economic teachings of which both ancient and mediaeval history are full, but he adds that " as far as the history of the science is concerned there is no need to go farther back than the Physiocrats."

2 In the new edition of M. Espinas's work an entire volume is devoted to the study of economic doctrines in ancient and mediaeval times.

xii PREFACE

make considerable omissions. With regard to the other countries, which we were too often obliged to pass by in silence or to mention only very casually in connection with some theory or other, we are most anxious not to appear indifferent to the eminent services rendered by them, and especially Italy and the United States, to the cause of economic science, both in the past and in the present.

But, notwithstanding such restrictions, the field was still too wide, and we were obliged to focus attention on the minimum number of names and ideas, with a view to placing them in a better light. Our ambition has been, not to write as full or detailed a history as we possibly could, but merely to draw a series of pictures portraying the more prominent features of some of the more distinct epochs in the history of economic doctrines.

Such choice must necessarily be somewhat arbitrary, for it is not always an easy matter to fix upon the best representative of each doctrine. Especially is this the case in a science like economics, where the writers, unknown to one another, not infrequently repeat the same ideas, and it becomes a matter of some difficulty to decide the claim to priority. But although it may be difficult to hit upon the exact moment at which a certain idea first made its appearance, it is comparatively easy to determine when such an idea attracted general attention or took its place in the hierarchy of accepted or scarcely disputed truths. This has been our criterion. With regard to those whose names do not figure in our list, although quite worthy of a place in the front rank, we cannot believe that they will suffer much through this temporary eclipse, especially in view of the partiality of the age for the pioneers. That we are not unduly optimistic in this matter may be inferred from the numerous attempts recently made to discover the poetce minores of the science, and to make amends for the scant justice done them by the more biased historians of the past.

Not only was selection necessary in the case of authors, but a similar procedure had to be applied to the doctrines. It must be realised, however, that a selection of this character does not warrant the conclusion that the doctrines dealt with are in any way superior to those which are not included, either from the standpoint of moral value, of social utility, or of abstract truth, for we are not of the number who think with J. B. Say that the history of error can serve no useful purpose.1 We would rather associate ourselves

1 " "What useful purpose can be served by the study of absurd opinions and doctrines that have long ago been exploded, and deserved to be ? It is mere useless pedantry to attempt to revive them. The more perfect a science becomes

PREFACE xiii

with Condillac when he remarks : " It is essential that everyone who wishes to make some progress in the search for truth should know something of the mistakes committed by people like himself who thought they were extending the boundaries of knowledge.1' The study of error would be thoroughly well justified even though the result were simply a healthy determination to avoid it in future. It would be even more so if Herbert Spencer's version of the saying of Shakespeare, that there is no species of error without some germ of truth in it, should prove correct. One cannot, moreover, be said to possess a knowledge of any doctrine or to understand it until one knows something of its history, and of the pitfalls that lay in the path of those who first formulated it. A truth received as if it has fallen from the sky, without any knowledge of the efforts whereby it has been acquired, is like an ingot of gold got without toil — of little profit.

Moreover, it is to be remembered that this book is intended primarily for students, and that it may be useful to show them in what respects certain doctrines are open to criticism, either from the point of view of logic or of observation. We have attempted to confine such criticism within the strictest limits, partly because we did not wish the volume to become too bulky, and partly because we felt that what is important for our readers are not our own opinions, but the opinions of the masters of the science with which we deal. Wherever possible these have been given tlje opportunity of speaking for themselves, and for this reason we have not been afraid to multiply quotations.

A special effort has been made to bring into prominence such doctrines — whether true or false — as have contributed to the formation of ideas generally accepted at the present time, or such as are connected with these in the line of direct descent. In other words, the book is an attempt to give an answer to the following questions : Who is responsible for formulating those principles that constitute the framework — whether provisionary or definitive it is not for us to determine — of economics as at present taught ? At what period were these principles first enunciated, and what were the circumstances which accounted for their enunciation just at that period ? Thus we have thought it not altogether out of place to pay some attention to those ideas which, although only on the shorter becomes its history. Al ember t truly remarks that the more light we have on any subject the less need is there to occupy ourselves with the false or doubtful opinions to which it may have given rise. Our duty with regard to errors is not to revive them, but simply to forget them." (Traitt pratique, vol. ii, p. 540.)

xiv PREFACE

the borderland of economics, have exercised considerable influence either upon theory itself, upon legislation, or upon economic thought in general. We refer to such movements as Christian Socialism, Solidarism, and Anarchism. Had we considered it advisable to retain the official title by which this kind of work is generally known, we should have had to describe it as A History of the Origin and Evolution of Contemporary Economic Doctrines.

The plan of a history of this kind was a matter that called for some amount of deliberation. It was felt that, being a history, fairly close correspondence with the chronological order was required, which meant either taking a note of every individual doctrine, or breaking up the work into as many distinct histories as there are separate schools. The former procedure would necessitate giving a review of a great number of doctrines in a single chapter, which could only have the effect of leaving a very confused impression upon the reader's mind. The alternative proposal is open to the objection that, instead of giving us a general outline, it merely treats us to a series of mono- graphs, which prevents our realising the nature of that fundamental unity that in all periods of history binds every doctrine together, similar and dissimilar alike. We have attempted to avoid the in- conveniences and to gain something of the advantages offered by these alternative methods by grouping the doctrines into families according to their descent, and presenting them in their chronological order. This does not mean that we have classified them according to the date of their earliest appearance ; it simply means that we have taken account of such doctrines as have reached a certain degree of maturity. There is always some culminating-point in the history of every doctrine, and in deciding to devote a separate chapter to some special doctrine we have always had such a climacteric in mind. Nor have we scrupled to abandon the chronological order when the exigencies of the exposition seemed to demand it.

The first epoch comprises the end of the eighteenth and the beginning of the nineteenth centuries. It deals mainly with the founders of Classical political economy, with the Physiocrats, Smith and Say, and with Malthus and Ricardo, the two writers whose gloomy forebodings were to cloud the glory of the " natural order."

The second epoch covers the first half of the nineteenth century. The " adversaries " include all those writers who either challenged or in some way disputed the principles which had been laid down by their predecessors. To these writers five chapters are devoted, dealing respectively with Sismondi, Saint-Simon, the Associative Socialists, List, and Proudhon.

PREFACE xv

A third epoch deals with the middle of the nineteenth century and the triumph of the Liberal school, which had hitherto with- stood every attack, though not without making some concessions. It so happened that the fundamental doctrines of this school were definitely formulated about the same time, though in a very different fashion, of course, in the Principles of Stuart Mill in England and the Harmonies of Bastiat in France.

The second half of the nineteenth century constitutes a fourth period. Those who dissented from the Liberalism of the previous epoch are responsible for the schisms that began to manifest them- selves in four different directions at this time. The Historical school advocates the employment of the inductive method, and the State Socialists press the claims of a new social policy. Marxism is an attack upon the scientific basis of the science, and Christian Socialism a challenge to its ethical implications.

A fifth epoch comprises the end of the nineteenth century and the beginning of the twentieth. The heading " Recent Doctrines " includes several theories that are already well known to us, but which seem transfigured — or disfigured, as some would prefer to put it — in their new surroundings. The Hedonistic doctrine and the theory of rent represent a kind of revision of the Classical theories. Solidarism is an attempt to bridge the gap that exists between individualism and socialism, whilst Anarchism can only be described as a kind of impassioned Liberalism.

This order of succession must not be taken to imply that each antecedent doctrine has either been eliminated by some subsequent doctrine or else incorporated in it. The rise of the Historical school in the middle of the nineteenth century, for example, happened' to be contemporaneous with the triumph of the Liberal school and the revival of Optimism. In a similar fashion the new Liberalism of the Austrian school was coincident with the advent of State intervention and the rise of Collectivism.

We cannot, however, help noticing a certain rhythmical sequence in this evolutionary process. Thus we find the Classical doctrine, as it is called, outlined in the earliest draft of the science, but dis- appearing under the stress of more or less socialistic doctrines, to reappear in a new guise later on. There is no necessity for regarding this as a mere ebb and flow such as distinguishes the fortunes of political parties under a parliamentary regime. Such alternation in the history of a doctrine has its explanation not so much in the character of the doctrine itself as in the favour of public opinion, which varies with the fickleness of the winds of heaven.

xvi PREFACE

But doctrines and systems have a vitality of their own which is altogether independent of the vagaries of fashion. It were better to regard their history, like all histories of ideas, as a kind of struggle for existence. At one moment conflicting doctrines seem to dwell in harmony side by side, content to divide the empire of knowledge between them. Another moment witnesses them rushing at each other with tumultuous energy. It may happen that in the course of the struggle some of the doctrines are worsted and disappear altogether. But more often than not their conflicting interests are reconciled and the enmity is lost in the unity of a higher synthesis. And so it may happen that a doctrine which everybody thought was quite dead may rise with greater vigour than ever.

The bibliography of the subject is colossal. In addition to the general histories, which are already plentiful, the chapters devoted to the subject in every treatise on political economy, and the numerous articles which have appeared in various reviews, there is scarcely an author, however obscure, who is not the subject of a biography. To have attempted to enumerate all these works would merely have meant increasing the bulk of the book without being able to pretend that our list was exhaustive. It is scarcely necessary to add that this meant that we had to con- fine ourselves to the work done by the " heroes " of this volume. Their commentators and critics only came in for our attention when Ave had to borrow either an expression or an idea directly from them or when we felt it necessary that the reader should fill up the gaps left by our exposition. This accounts for the number of names which had to be relegated to the foot-notes. But such deliberate excision must not prevent our recognising at the outset the debt that we owe to the many writers who have traversed the ground before us. They have facilitated our task and have a perfect right to regard themselves as our collaborators. We feel certain that they will find that their labours have not been ignored or forgotten.

Although this book, so far as the general task of preparation and revision is concerned, must be regarded as the result of a collective effort on the part of the two authors whose names are subjoined, the actual work of composition was undertaken by each writer separately. The Contents will sufficiently indicate the nature of this division of labour.

The authors refuse to believe that collaboration in the pro- duction of a scientific history of ideas need imply absolute agree- ment on every question that comes up for consideration. Especially

PREFACE xvii

is this the case with the doctrines of political and social economy outlined herein ; each of the authors has retained the fullest right of independent judgment on all these matters. Consequently any undue reserve or any extravagant enthusiasm shown for some of these doctrines must be taken as an expression of the personal predilection of the signatory of the particular article.

CHARLES GIDE CHARLES RIST

E.D

CONTENTS

BOOK I: THE FOUNDERS

PAQI

CHAPTER I : THE PHYSIOCRATS (M. GIDE) 1

I

L THE NATURAL OKDJEB 5

IE. THE NET PRODUCT 12

HI. THE CIRCULATION OF WEALTH 18

n

I. TRADE 27

II. THE FUNCTIONS or THE STATE 33

III. TAXATION 38

IV. RESUME OF THE PHY8IOCRATIO DOCTRINE. CRITICS AND DlSSENTERS 45

CHAPTER H : ADAM SMITH (M. RIST) 60

L DIVISION OF LABOUR 56

n. THE " NATURALISM " AND " OPTIMISM " OF SMITH 68

HI. ECONOMIO LIBERTY AND INTERNATIONAL TRADE 93

IV. THE INFLUENCE OF SMITH'S THOUGHT AND ITS DIFFUSION. J. B.

SAT 102

CHAPTER III : THE PESSIMISTS (M. GIDE) 118

L MALTHUS 120

THE LAW OF POFULATIOH 121

EL RICARDO 138

1. THE LAW OF RENT 141

2. OF WAGES AND PROFITS 157

3. THE BALANCE OF TRADE THEORY AND THE QUANTITY THEORY

OF MONEY 163

4. PAPER MONEY, m ISSTTE AND REGULATION 165

XII

xx CONTENTS

BOOK II : THE ANTAGONISTS

CHAPTER I : SISMONDI AND THE ORIGINS OF THE CRITICAL SCHOOL (M. RIST)

L THE AIM AND METHOD OF POLITICAL ECONOMY II. SISMONDI'S CBITICISM OF OVER-PRODUCTION AND COMPETITION

III. THE DIVORCE OF LAND FROM LABOUB AS THE CAUSE OF PAUPERISM

AND OF CRISES

IV. SISMONDI'S REFORM PROJECTS. His INFLUENCE UPON THE HISTORY

OF DOCTRINES

CHAPTER II : SAINT-SIMON, THE SAINT-SIMONIANS,

AND THE BEGINNINGS OF COLLECTIVISM (M. RIST) 198

I. SAINT-SIMON AND INDUSTRIALISM 202

II. THB SAINT-SIMONIANS AND THEIR CRITICISM OF PRIVATE PROPERTY 211

III. THE IMPORTANCE OF SAINT-SIMONISM IN THE HISTORY OF DOCTRINES 225

CHAPTER III : THE ASSOCIATIVE SOCIALISTS

I. ROBERT OWEN (M. GIDE)

1. THE CREATION OF THE MILIEU

2. THE ABOLITION OF PROFIT II. CHARLES FOURIER (M. GIDE)

1. THE PHALANSTERE

2. INTEGRAL CO-OPERATION

3. BACK TO THE LAND

4. ATTRACTIVE LABOUR

III. Louis BLANC (M. RIST)

CHAPTER IV : FRIEDRICH LIST AND THE NATIONAL

SYSTEM OF POLITICAL ECONOMY (M. RIST) 264

I. LIST'S IDEAS IN RELATION TO THE ECONOMIC CONDITIONS IN GERMANY 266 II. SOURCES OF LIST'S INSPIRATION. His INFLUENCE UPON SUBSEQUENT

PROTECTIONIST DOCTRINES 277

III. LIST'S REAL OMQINALITY 287

CONTENTS xxi

PAGB

' CHAPTER V : PROUDHON AND THE SOCIALISM OF

1848 (M. RiST) 290

L CRITICISM OP PEIVATU PROPERTY AND SOCIALISM 291

II. THB REVOLUTION or 1848 AND THB DISCREDIT or SOCIALISM 300

III. THB EXCHANGE BANK THEORY 307

IV. PROUDHOJJ '« IKFLUJBNC.E ATTEB 1848 320

BOOK III: LIBERALISM

CHAPTER I : THE OPTIMISTS (M. GIDE) 322

I. THB THEORY or SERVICE- VALUE 332

II. THE LAW or FREE UTILITY AND RENT 335

III. THE RELATION OF PROFITS TO WAGES 340

IV. THE SUBORDINATION OF PRODUCER TO CONSUMES 342 V. THE LAW OF SOLIDARITT 844

CHAPTER II : THE APOGEE AND DECLINE OF THE CLASSICAL SCHOOL. JOHN STUART MILL (M.

GIDE) 34S

L THE FUNDAMENTAL LAWS 354

n. MILL'S INDIVIDUALIST-SOCIALIST PROGRAMME 366

LTL MILL'S SUCCESSORS 274

BOOK IV : THE DISSENTERS

CHAPTER I : THE HISTORICAL SCHOOL AND THE

CONFLICT OF METHODS (M. RIST) 878

I. THB ORIGIN AND DEVELOPMENT OF THE HISTORICAL SCHOOL 381

II. THE CRITICAL IDEAS OF THE HISTORICAL SCHOOL 388

III. THE POSITIVB IDEAS OF THB HISTORICAL SCHOOL 398

rxii CONTENTS

CHAPTER II : STATE SOCIALISM (M. RIST) 407

L THE ECONOMISTS' CRITICISM OF LAISSEZ-FAIRE 410

IL THE SOCIALISTIC ORIGIN OP STATE SOCIALISM. RODBERTUS AND

LASS ALLS 414

1. RODBEBTTTS 415

2. LASSALLB 432 in. STATB SOCIALISM — PROPERLY, so CALLED 436

CHAPTER III : MARXISM (M. GIDE) 449

L KABL MARX 449

1. SURPLUS LABOUR AND SURPLUS VALUE 460

2. THE LAW OF CONCENTRATION OR APPROPRIATION 469 II. TOT MARXIAN SCHOOL 466

III. THE MARXIAN CRISIS AND THE NEO-MARXIANS 473

1. THE NEO -MARXIAN REFORMISTS 473

2. THE NEO-MARXIAN SYNDICALISTS 479

CHAPTER IV: DOCTRINES THAT OWE THEIR IN- SPIRATION TO CHRISTIANITY (M. GIDE) 483

L LE PLAT'S SCHOOL 486

II. SOCIAL CATHOLICISM 496

III. SOCIAL PROTESTANTISM 503

IV. THE MYSTICS 510

BOOK V : RECENT DOCTRINES

CHAPTER I : THE HEDONISTS (M. GIDE) 517

1. THE PSEUDO-RENAISSANCE OF THH CLASSICAL SCHOOL 517

II. THE PSYCHOLOGICAL SCHOOL 621

III. THE MATHEMATICAL SCHOOL 528

IV. CRITICISM OF THE HEDONISTIC DOCTRINES 537

CONTENTS xxiii

PAOB

CHAPTER II : THE THEORY OF RENT AND ITS

APPLICATIONS (M. RIST) 645

I. THE THEORETICAL EXTENSION OF THE CONCEPT RENT 646 IL UNEARNED INCREMENT AND THE PROPOSAL TO CONFISCATE RENT

BY MEANS or TAXATION 668

EEL SYSTEMS or LAND NATIONALISATION 670

IV. SOCIALIST EXTENSIONS OF THE DOCTRINE OF RENT 679

CHAPTER III : THE SOLIDARISTS (M. GIDE) 687

I. THE CAUSES OF THE DEVELOPMENT or SOLIDARISM It. THE SOLIDARIST THESIS

HL THE PRACTICAL APPLICATION OF SOLJDABIST DOCTRINES IV. CRITICISM

CHAPTER IV : THE ANARCHISTS (M. RIST) 614

I. STIRNER'S PHILOSOPHICAL ANARCHISM AND THE CULT OF THE

INDIVIDUAL 616

EL SOCIAL AND POLITICAL ANARCHISM AND THE CRITICISM OF AUTHORITY 619

HI. MUTUAL AID AND THE ANARCHIST CONCEPTION OF SOCIETY 629

IV. REVOLUTION 637

CONCLUSION (MM. GIDE AND RIST) 643

INDEX 649

BOOK I : THE FOUNDERS

CHAPTER I: THE PHYSIOCRATS

POLITICAL ECONOMY as the name of a special science is the invention of one Antoine de Montchr£tien, who first employed the term about the beginning of the seventeenth century. Not until the middle of the eighteenth century, however, does the connotation of the word in any way approach to modern usage. A perusal of the article on Political Economy which appeared in the Grande Encyclopedic of 1755 will help us to appreciate the difference. That article was contributed by no less a person than Jean Jacques Rousseau, but its medley of politics and economics seems utterly strange to us. Nowadays it is customary to regard the adjective " political " as unnecessary, and an attempt is made to dispense with it by employing the terms "economic science" or "social economics," but this article clearly proves that it was not always devoid of significance. It also reveals the interesting fact that the science has always been chiefly concerned with the business side of the State, especially with the material welfare of the citizens — " with the fowl in the pot," as Henry IV put it. Even Smith never succeeded in getting quite beyond this point of view, for he declares that " the object of the political economy of every nation is to increase the riches and the power of that country." 1

But the counsels given and the recipes offered for attaining the desired end were as diverse as they were uncertain. One school, known as the Mercantilist, believed that a State, like an individual, must secure the maximum of silver and gold before it could become wealthy. Happy indeed was a country like Spain that Jiad dis- covered a Peru, or Holland, which, in default of mines, could procure gold from the foreigner in exchange for its spices. Foreign trade really seemed a quite inexhaustible mine. Other writers, who were socialists in fact though not in name — for that term is of later inven- tion— thought that happiness could only be found in a more equal distribution of wealth, in the abolition or limitation of the rights of private property, or in the creation of a new society on the basis of a new social contract — in short, in the foundation of the Utopian commonwealth.

1 Wealth of Nation*, vol. i, p. 351. E.D. 1 A'

2 THE PHYSIOCRATS

It was at this juncture that Quesnay appeared. Quesnay wai a doctor by profession, who now, when on the verge of old age, had turned his attention to the study of " rural economy " — the problem of the land and the means of subsistence.1 Boldly declaring that the solution of the problem had always lain ready to hand, needing neither inventing nor discovering, he further maintained that all social relations into which men enter, far from being haphazard, are, on the contrary, admirably regulated and controlled. To those who took the trouble to think, the laws governing human asso- ciations seemed almost self-evident, and the difficulties they involved no greater than the difficulties presented by the laws of geometry. So admirable were these laws in every respect that once they were thoroughly known they were certain to command allegiance. Dupont de Nemours cannot be said to have exaggerated when, in referring to this doctrine, he spoke of it as " very novel indeed." f

It is not too much to say that this marks the beginning of a new science — the science of Political Economy. The age of forerunners is past. Quesnay and his disciples must be considered the real founders of the science. It is true that their direct descendants, the French economists, very inconsiderately allowed the title to pass to Adam Smith, but foreign economists have again restored it to France, to remain in all probability definitely hers. But, as is the case with most sciences, there is not very much to mark the date of its birth or to determine the stock from which it sprang ; all that we can confidently say is that the Physiocrats were certainly the first to grasp the conception of a unified science of society. In other words, they were the first to realise that all social facts are linked together in the bonds of inevitable laws, which individuals and Governments would obey if they were once made known to them. It may, of course, be pointed out that such a providential conception of economic laws has little in common with the ordinary naturalistic or deterministic standpoint of the science, and that several of the generalisations are simply the product of their own imaginations. It must also be ad- mitted that Smith had far greater powers of observation, as well as a superior gift of lucid exposition, and altogether made a more notable contribution to the science. Still, it was the Physiocrats who con- structed the way along which Smith and the writers of the hundred

1 Quesnay*8 first economic articles, written for the Grande Encyclopldie, were on Let Grains and Let Fermiers.

1 Professor Hector Denis, speaking of the Physiocratio doctrine, remarks that its imperfections are easily demonstrated, bat that we seldom recognise its incomparable greatness.

THE PHYSIOCRATS 8

years which follow have all marched. Moreover, we know that but for the death of Quesnay in 1774 — two years before the publication of the Wealth of Nations — Smith would have dedicated his master- piece to him.

The Physiocrats must also be credited with the foundation of the earliest " school " of economists in the fullest sense of the term. The entrance of this small group of men into the arena of history is a most touching and significant spectacle. So complete was the unanimity of doctrine among them that their very names and even their personal characteristics are for ever enshrouded by the anonymity of a collective name.1

Their publications follow each other pretty closely for a period of twenty years, from 1756 to 1778. 2

1 " The genuine economists are easily depicted. In Dr. Quesnay they have a common master ; a common doctrine in the Philosophic rurale and the Analyse iconomique. Their classical literature is summed up in the generic term Physiocracy. In the Tableau iconomique they possess a formula with technical terms as precise as old Chinese characters." This definition of the Physiocrats, given by one of themselves, the Abbe" Baudeau (Ephimiridea, April 1776) — writing, we may be sure, in no malicious spirit — shows us that the school possessed not a little of the dogmatism of the Chinee.

1 The first not only in chronological order but the chief recognised by all was Dr. Quesnay (1694-1774), the physician of Louis XV and of Mme. de Pompadour. He had already published numerous works on medicine, especially the Essai physique sur VEconomie animate. (1736) before turning his attention to economic questions, and more especially to problems of ' rural economy." His first contributions, the essays on Let drains and Les Fermiera. which appeared in the Grande Encydopedie in 1756 and 1757, were followed by his famous Tableau ieonomique in 1758, when he was sixty -four years of age, and in 1760 by his Maximes generates du Gouvemement iconomique eFun Royaume agricole, which is merely a development of the preceding work.

His writings were not numerous, but his influence, like that of Socrates, disseminated as it was by bis disciples, became very considerable.

The best edition of his works is that published by Professor Oncken of Berne, (Euvres economiques et philosophiquea de F. Quesnay (Paris and Frankfort, 1888). Our quotations from the founders are taken from Collections des Principaux Economistes, published by Daire.

The Marquis de Mirabeau, father of the great orator of the Revolution, a man of a fiery temperament like his son, published at about the same date as the production of the Tableau his L'Ami des Hommes. This book, which created a great sensation, does not strictly belong to Physiocratic literature, for it ignores the fundamental doctrine of the school. La Thiorie de VImp6t (1760) and La Philosophic rurale (1763), on the other hand, owe their inspiration to Physiocracy.

Mercier de la Riviere, a parliamentary advocate, published L'Ordrc natural et easentiel des Sociitia politiques in 1767. Dupont de Nemours refers to this as a "sublime work," and though it does not, perhaps, deserve that epithet it contains, nevertheless, the code of the Physiocratio doctrine.

Dupont de Nemours, as he is called after his native town published about

4 THE PHYSIOCRATS

Turgot was the only literary person among them, but like his confreres he was devoid of wit, though the age was noted for its humorists. On the whole they were a sad and solemn sect, and their curious habit of insisting upon logical consistency — as

the same time, 1768, when he was only twenty-nine, a book entitled Physiocratie, on Constitution essentiette du Gouvernement U plus avantageux au Genre humain. To him we owe the term from which the school took its name — Physiocracy, which signifies " the rule of nature." But the designation " Physiocrats " was unfortunate and was almost immediately abandoned for " Economistes." Quesnay and his disciples were the first " Economistes." It was only much later, when the name " Economist " became generic and useless as a distinc- tive mark for a special school, that writers made a practice of reverting to the older term " Physiocrat."

An enthusiastic disciple of Quesnay, Dupont's rSle was chiefly that of a propagandist of Physiocratic doctrines, and he made little original contribution to the science. At an early date, moreover, the great political events in which he took an active part proved a distraction. He survived all his colleagues, and was the only one of them who lived long enough to witness the Revolution, in which he played a prominent part. He successively became a deputy in the Tiers Etat, a president of the Constituent Assembly, and later on, under the Directoire, President du Conseil des Anciens. He even assisted in the restoration of the Empire, and political economy was first honoured at the hands of the Institut when he became a member of that body.

In 1777 Le Trosne, an advocate at the Court of Orleans, published a book entitled De I'Interet social, par rapport a la Valuer, a la Circulation, a V Industrie et au Commerce, which is perhaps the best or at least the most strictly economic of all. Mention must also be made of the Abbe Baudeau, who has no less than eighty volumes to his credit, chiefly dealing with the corn trade, but whose principal work is L1 Introduction a la Philosophic iconomique (1771) ; and of the Abb6 Roubaud, afterwards Margrave of Baden, who had the advantage of oeing not merely a writer but a prince, and who carried out some Physiocratic experiments in some of the villages of his small principality.

We have not yet mentioned the most illustrious member of the school, both in respect of his talent and his position, namely, Turgot (1727-81). His name is generally coupled with that of the Physiocrats, and this classification is sufficiently justified by the similarity of their ideas. Still, as we shall see, in many respects he stands by himself, and bears a close resemblance to Adam Smith. Moreover, he commenced writing before the Physiocrats. His essay on paper money dates from 1748, when he was only twenty -one years of age, but his most important work, Reflexions sur la Formation et la Distribution des Richesses, belongs to 1766. As the Intendant of Limoges and again as a minister of Louis XVI he possessed the necessary authority to enable him to realise his ideas of economic liberty, which he did by his famous edicts abolishing taxes upon corn passing from one province to another, and by the abolition of the rights of wardenship and privilege.

Unlike the other Physiocrats, who swore only by Dr. Quesnay, Turgot owed a great deal to a prominent business man, Vincent de Gournay, who at a later date became the Intendant of Commerce. Gournay died in 1759, at the early age of forty -seven. Of Gournay we know next to nothing beyond what Turgot says of him in his eulogy (See Schelle, Vincent de Gournay, 1897).

Bibliography. Books dealing with the Physiocratic system, both in French

THE NATURAL ORDER 5

if they were the sole depositaries of eternal truth — must often have been very tiresome. They soon fell an easy prey to the caustic sarcasm of Voltaire.1 But despite all this they enjoyed a great reputation among their more eminent contemporaries. Statesmen, ambassadors, and a whole galaxy of royal personages, including the Margrave of Baden, who attempted to apply their doctrines in his own realm, the Grand Duke Leopold of Tuscany, the Emperor Joseph II of Austria, Catherine, the famous Empress of Russia, Stanislaus, King of Poland, and Gustavus III of Sweden, were numbered among their auditors. Lastly, and most un- expectedly of all, they were well received by the Court ladies at Versailles. In a word, Physiocracy became the rage. All this may seem strange to us, but there are several considerations which may well be kept in view. The society of the period, raffint and licentious as it was, took the same delight in the "rural economy " of the Phy- siocrats as it did in the pastorals of Trianon or Watteau. Perhaps it gleaned some comfort from the thought of an unchangeable " natural order," just when the political and social edifice was giving way beneath its feet. It may be that its curiosity was roused by that terse saying which Quesnay wrote at the head of the Tableau economique : " Pauvres paysans, pauvre royaume ! Pauvre royaume, pauvre roi ! " or that it felt in those words the sough of a new breeze, not very threatening as yet, but a forerunner of the coming storm.

An examination of the doctrine, or the essential principles as they called them, must precede a consideration of the system or the pro- posed application of those principles.

I : THE NATURAL ORDER

THE essence of the Physiocratic system lay in their conception of the " natural order." L'Ordre naturel et essential des Societes politiques is the title of Mercier de la Riviere's book, and Dupont de Nemours defined Physiocracy as " the science of the natural order."

What are we to understand by these terms ?

It is hardly necessary to say that the term ** natural order " is meant to emphasise the contrast between it and the artificial social and other languages, are fairly numerous. A very detailed account of these may be found in M. Weulersse's work, Le Mouvement phyaiocratique en France de 1756 a 1770, published in 1910, which also contains a very complete exposition of the Physiocratic doctrine. In English there is a succinct account of the system inHiggs' Physiocrats (1897).

1 Especially in the celebrated pamphlet, L'Homme aux Quarante Ecus.

6 THE PHYSIOCRATS

order voluntarily created upon the basis of a social contract.1 But a purely negative definition is open to many different interpretations.

In the first place, this " natural order " may be conceived as a state of nature in opposition to a civilised state regarded as an artificial creation. To discover what such a " natural order " really was like man must have recourse to his origins.

Quotations from the Physiocrats in support of this view might easily be cited.2 This interpretation has the further distinction of

1 J. J. Rousseau, the author of the Contrat Social (1762), was a con- temporary of the Physiocrats, but he never became a member of the school. Mirabeau's attempt to win his allegiance proved a failure. The " natural order " and the " social contract " seem incompatible, for the natural and spon- taneous can never be the subject of contract. One might even be tempted to think that Rousseau's celebrated theory was formulated in opposition to Physiocracy, unless we remembered that the social contract theory is much older than Rousseau's work. Traces of the same idea may be found in many writings, especially those inspired by Calvinism. To Rousseau the social question seemed to be a kind of mathematical problem, and any proposed solution must satisfy certain complicated conditions, which are formulated thus : " To find a form of association which protects with the whole common force the person and property of each associate, and in virtue of which everyone, while uniting himself to all, obeys only himself and remains as free as before." Nothing could well be further from the Physiocratic view. Their belief was that there was nothing to find and nothing to create. The " natural order " was self-evident.

It is true that Rousseau was an equally enthusiastic believer in a natural order, in the voice of nature, and in the native kindness of mankind. " The eternal laws of nature and order have a real existence. For the wise they serve as positive laws, and they are engraved on the innermost tablets of the heart by both conscience and reason." (Smile, Book V.) The language is identical with that of the Physiocrats. But there is this great difference. Rousseau thought that the state of nature had been denaturalised by social and especially by political institutions, including, of course, private property ; and his chief desire was to give back to the people the equivalent of what they had lost. The " social contract " is just an attempt to secure this. The Physiocrats, on the other hand, regarded the institution of private property as the perfect bloom of the " natural order." Its beauty has perhaps suffered at the hands of turbulent Governments, but let Governments be removed and the " natural order " will at once resume its usual course.

There is also this other prime difference. The Physiocrats regarded interest and duty as one and the same thing, for by following his own interest the individual is also furthering the good of everybody else. To Rousseau they seemed antago- nistic : the former must be overcome by the latter. " Personal interest is always in inverse ratio to duty, and becomes greater the narrower the association, and the less sacred." (Contrat Social, ii, chap. 3.) In other words, family ties and co-operative associations are stronger than patriotism.

* " There is a natural society whose existence is prior to every other human association. . . . These self-evident principles, which might form the founda- tion of a perfect constitution, are also self -revealing. They are evident not only to the well-informed student, but also to the simple savage as he issues from the lap

THE NATURAL ORDER 7

being in accord with the spirit of the age. The worship of the " noble savage " was a feature of the end of the eighteenth century. It pervades the literature of the period, and the cult which began with the tales of Voltaire, Diderot, and Marmontel reappears in the anarchist writers of to-day. As an interpretation of the Physiocratic position, however, it must be unhesitatingly rejected, for no one bore less resemblance to a savage than a Physiocrat. They all of them lived highly respectable lives as magistrates, intendants. priests, and royal physicians, and were completely captivated by ideas of orderli- ness, authority, sovereignty, and property — none of them conceptions compatible with a savage state. " Property, security, and liberty constitutes the whole of the social order." 1 They never acquiesced in the view that mankind suffered loss in passing from the state of nature into the social state ; neither did they hold to Rousseau's belief that there was greater freedom in the natural state, although its dangers were such that men were willing to sacrifice something in order to be rid of them, but that nevertheless in entering upon the new state something had been lost which could never be recovered.* All this was a mere illusion in the opinion of the Physiocrats. Nothing was lost, everything was to be gained, by passing from a state of nature into the civilised state.

In the second place, the term " natural order " might be taken to mean that human societies are subject to natural laws such as govern the physical world or exercise sway over animal or organic life. From this standpoint the Physiocrats must be regarded as the forerunners of the organic sociologists. Such interpretation seems highly probable because Dr. Quesnay through his study of " animal economy " (the title of one of his works) and the circulation of the

of nature." (Dupont, vol. i, p. 341.) Some Physiocrats even seem inclined to the belief that this " natural order " has actually existed in the past and that men lost it through their own remissness. Dupont de Nemours mournfully asks : " How have the people fallen from that state of felicity in which they lived in those far off , happy days ? How is it that they failed to appreciate the natural order ? " But even when interpreted in this fashion it had no resemblance to a savage state. It must rather be identified with the Golden Age of the ancients or the Eden of Holy Scripture. It is a lost Paradise which we must seek to regain.

The view is not peculiar to the Physiocrats, but it is interesting to note how unfamiliar they were with the modern idea of evolutionary progress.

1 Mercier de la Riviere, vol; ii, p. 615. " Natural right is indeterminate in a state of nature [note the paradox]. The right only appears when justice and labour have been established." (Quesnay, p. 43.)

1 " By entering society and making conventions for their mutual advantage men increase the scope of natural right without incurring any restriction of theii liberties, for this is just the state of things that enlightened reason would have chosen." (Quesnay, pp. 43, 44.)

8 THE PHYSIOCRATS

blood was already familiar with these ideas. Social and animal economy, both, might well have appeared to him in much the same light as branches of physiology. From physiology to Physiocracy was not a very great step. At any rate, the Physiocrats succeeded in giving prominence to the idea of the interdependence of all social classes and of their final dependence upon nature. And this we might almost say was a change tantamount to a transformation from a moral to a natural science.1

Even this explanation seems to us insufficient. Dupont, in the words which we have quoted in the footnote below, seems to imply that the laws of the beehive and the ant-hill are imposed by common consent and for mutual benefit. Animal society, so it seemed to him, was founded upon social contract. But such a conception of " law " is very far removed from the one usually adopted by the natural sciences, by physicians and biologists, say. And, as a matter of fact, the Physiocrats were anything but determinists. They neither believed that the " natural order " imposed itself like gravi- tation nor imagined that it could ever be realised in human society as it is in the hive or the ant-hill. They saw that the latter were well-ordered communities, while human society at its present stage is disordered, because man is free whereas the animal is not.

What are we to make of this " natural order " then ? The " natural order," so the Physiocrats maintained, is the order which God has ordained for the happiness of mankind. It is the provi* dential order. * To understand it is our first duty — to bring our lives into conformity with it is our next.

1 Pursuing this same idea, Dupont writes as follows : " It is thirteen years since a man of exceptional genius, well versed in profound disquisition, and already known for his success in an art where complete mastery only comes with careful observation and complete submission to the laws of nature, predicted that natural laws extended far beyond the bounds hitherto assigned to them. If nature gives to the bee, the ant, or the beaver the power of submitting by common consent and for their own interest to a good, stable, and equable form of govern- ment, it can hardly refuse man the power of raising himself to the enjoyment of the same advantages. Convinced of the importance of this view, and of the important consequences that might follow from it, he applied his whole intel- lectual strength to an investigation of the physical laws which govern society." Elsewhere he adds : " The natural order is merely the physical constitution which God Himself has given the universe." (Introduction to Quesnay's works, p. 21.)

Hector Denis in his Histoire des Doctrines expresses the belief that the most characteristic feature of the Physiocratic system is the emphasis laid upon a naturalistic conception of society. He illustrates this by means of diagrams showing the identity of the circulation of wealth and the circulation of the blood.

1 " Its laws are irrevocable, pertaining as they do to the essence of matter »nd the soul of humanity. They are just the expression of the will of God. . . .

THE NATURAL ORDER 9

But can a knowledge of the " order " ever be acquired by men ? To this they reply that the distinctive mark of this " order " is its obviousness. This word occurs on almost every page they wrote.1 Still, the self-evident must in some way be apprehended. The most brilliant light can be seen only by the eye. By what organ can this be sensed ? By instinct, by conscience, or by reason ? Will a divine voice by means of a supernatural revelation show us the way of truth, or will it be Nature's hand that shall lead us in the blessed path ? The Physiocrats seem to have ignored this question, for every one of them indifferently gives his own answer, regardless of the fact that it may contradict another's. Mercier de la Riviere recalls the saying of St. John concerning the " Light which lighteth every man that cometh into the world." This may be taken to be an internal light set by God in the heart of every man to enable him to choose Ms path. Quesnay, so Dupont affirms, " must have seen that man had only to examine himself to find within him an in- articulate conception of these laws. In other words, introspection clearly shows that men are unwittingly guided by an *' inherent " knowledge of Physiocracy." 2 But, after all, it seems that this intuitive perception is insufficient to reveal the full glory of the order. For Quesnay declared that a knowledge of its laws must be enforced upon -men, and this afforded a raison d'etre for an educational system which was to be under the direct control of the Government.

To sum up, we may say that the " natural order " was that order which seemed obviously the best, not to any individual whomsoever, but to rational, cultured, liberal-minded men like the Physiocrats. It was not the product of the observation of external facts ; it was the revelation of a principle within. And this is one reason why the Physiocrats showed such respect for property and authority. It seemed to them that these formed the very basis of the " natural order."

It was just because the " natural order " was ** supernatural," and so raised above the contingencies of everyday life, that it seemed to them to be endowed with all the grandeur of the geo-

All our interests, all our wishes, are focused at one point, making for harmony and universal happiness. We must regard this as the work of a kind Providence, which desires that the earth should be peopled by happy human beings." (Mercier de la Riviere, vol. i, p. 390 ; vol. ii, p. 638.)

1 " There is a natural judge of all ordinances, even of the sovereign's. This judge, which recognises no exceptions, is just the evidence of their conformity with or opposition to natural laws." (Dupont, vol. i, p. 746.)

1 Dupont, introduction to Quesnay'e works, vol. i, pp. 19 and 2S(,

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metrical order, with its double attributes of universality and immu- tability. It remained the same for all times, and for all men. Its fiat was " unique, eternal, invariable, and universal." Divine in its origin, it was universal in its scope, and its praises were sung in litanies that might rival the Ave Maria.1 Speaking of its uni- versality. Turgot writes as follows : " Whoever is unable to overlook the accidental separation of political states one from another, or to forget their diverse institutions, will never treat a question of political economy satisfactorily." * Referring to its immutability, he adds : " It is not enough to know what is or what has been ; we must also know what ought to be. The rights of man are not founded upon history : they are rooted in his nature."

It looked as if this dogmatic optimism would dominate the whole Classical school, especially the French writers, and that natural law would usurp the functions of Providence. To-day it is every- where discredited, but when it first loomed above the horizon its splendour dazzled all eyes. Hence the many laudatory remarks, which to us seem hyperbolical, if not actually ridiculous.3 But it was no small thing to found a new science, to set up a new aim and a fresh ideal, to lay down the framework which others were to fill in.

It was the practical results, however, that revealed the full powers of the " natural order." It so happened that the mass of regulations which constituted the old regime fell to the ground before its onslaughts almost immediately, and it all came about in this fashion.

Knowledge of the " natural order " was not sufficient. Daily life must also conform to the knowledge. Nothing could be easier than this, for " if the order really were the most advantageous " 4 every man could be trusted to find out for himself the best way of attaining it without coercion of any kind.6

This psychological balance which every individual was supposed to carry within himself, and which, as the basis of the Neo-Classical school, is known as the Hedonistic principle, is admirably described by Quesnay.6 " To secure the greatest amount of pleasure with

1 Baudeau, vol. i, p. 820. * Letter to Mdlle. Lespinasse (1770).

* See some remarks on the Tableau economique on p. 18. 4 Baudeau, Ephemerides du Citoyen.

6 " The laws of the natural order do not in any way restrain the liberty of mankind, for the great advantage which they possess is that they make for greater liberty." (Quesnay, Droit Naturel, p. 55.) And Mercier de la Riviere says (vol. ii, p. 617): "The institution of private property and of liberty would secure perfect order without the help of any other law."

• Dialogues sur les Artisans.

THE NATURAL ORDER 11

the least possible outlay should be the aim of all economic effort." And this was what the " order " aimed at. " When every one does this the natural order, instead of being endangered, will be all the better assured." It is of the very essence of that order that the particular interest of the individual can never be separated from the common interest of all, but this happens only under a free system. *' The movements of society are spontaneous and not artificial, and the desire for joy which manifests itself in all its activities unwit- tingly drives it towards the realisation of the ideal type of State."1 This is laissez-faire pure and simple.2

These famous formulae have been so often repeated and criticised since that they appear somewhat trite to-day. But it is certain that they were not so at the time. It is easy to laugh at their social philosophy, to mock at its naivete and simplicity, and to show that such supposed harmony of interests between men does not exist, that the interests of individuals do not always coincide with those of the community, and that the private citizen is not always the best judge even of his own interests. It was perhaps necessary that the science should be born of such extreme optimism. No science can be constructed without some amount of faith in a pre-established order.

Moreover, laissez-faire does not of necessity mean that nothing will be done. It is not a doctrine of passivity or fatalism. There will be ample scope for individual effort, for it simply means leaving an open field and securing fair play for everyone, free from all fear lest his own interests should injure other people's or in any way prejudice those of the State. It is true that there will not be much work for the Government, but the task of that body will by no means be a light one, especially if it intends carrying out the Physio- cratic programme. This included upholding the rights of private property and individual liberty by removing all artificial barriers, and punishing all those who threatened the existence of any of these

1 Mercier de la Riviere, vol. ii, p. 617.

1 The origin of the famous formula is uncertain. Several of the Physio- crats, especially Mirabeau and Mercier de la Riviere, assign it to Vincent de Gournay, but Turgot, the friend and biographer of Vincent de Gournay, attributes it, under a slightly different form, laissez-nous faire, to Le Gendre, a merchant who was a contemporary of Colbert. Oncken thinks that the credit must go to the Marquis d'Argenson, who employed the term in his Memoires as early as the year 1736. The formula itself is quite commonplace. It only became important when it was adopted as the motto of a famous school of thinkers, so that this kind of research has no great interest. For a discussion of this trivial question, see the work of M. Schelle, Vincent de Gournay (1897), and especiaJl.v Oncken's Die Maxime. Laissez-faire ei Laissez-passer (Berne, 1886).

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rights ; while, most important of all, there was the duty of giving instruction in the laws of the " natural order."

II: THE NET PRODUCT

EVERY social fact had a place within the ** natural order " of the Physiocrats. Such a wide generalisation would have entitled them to be regarded as the founders of sociology rather than of eco- nomics. But there was included one purely economic phenomenon which attracted their attention at an early stage, and so completely captivated their imaginations as to lead them on a false quest. This was the predominant position which land occupied as an agent of production — the most erroneous and at the same time the most characteristic doctrine in the whole Physiocratic system.

Every productive undertaking of necessity involves certain outgoings — a certain loss. In other words, some amount of wealth is destroyed in the production of new wealth — an amount that ought to be subtracted from the amount of new wealth produced. This difference, measuring as it does the excess of the one over the other, constitutes the net increase of wealth, known since the time of the Physiocrats as the " net product."

The Physiocrats believed that this "net product" was confined to one class of production only, namely, agriculture. Here alone, so it seemed to them, the wealth produced was greater than the wealth consumed. Barring accidents, the labourer reaped more than he consumed, even if we included in his consumption his main- tenance throughout a whole year, and not merely during the seasons of harvest and tilth. It was because agricultural production had this unique and marvellous power of yielding a " net product " that economy was possible and civilisation a fact.1 It was not true of any other class of production, either of commerce or of transport, where it was very evident that man's labour produced nothing, but merely replaced or transferred the products already produced. Neither was it true of manufacture, where the artisan simply com- bined or otherwise modified the raw material. 2

It is true that such transfer or accretion of matter may increase

1 " The prosperity of mankind is bound up with a maximum net product." (Dupont de Nemours, Origine d'une Science nouvette, p. 346.)

1 " Labour applied anywhere except to land is absolutely sterile, for man is not a creator." (Le Trosne, p. 942.)

" This physical truth that the earth is the source of all commodities is so very evident that none of us can doubt it." (Le Trosne, Inter£t social,)

" The produce of the soil may be divided into two parts . . . what

THE NET PRODUCT 13

the value of the product, but only in proportion to the amount of wealth which had to be consumed in order to produce it ; because the price of manual labour is always equal to the cost of the neces- saries consumed by the worker. All that we have in this case, how- ever, is a collection of superimposed values with some raw material thrown into the bargain. But, as Mercier de la Riviere put it, " addition is not multiplication." x

Consequently, industry was voted sterile. This implied no contempt for industry and commerce. " Far from being useless, these are the arts that supply the luxuries as well as the necessaries of life, and upon these mankind is dependent both for its preservation and for its well-being." 2 They are unproductive in the sense that they produce no " extra " wealth.

It may be pointed out, on the other hand, that the " gains," both in industry and commerce, are far in excess of those of agriculture. All this was immaterial to the Physiocrats, for " they were gained, not produced." 8 Such gains simply represented wealth transferred

remains over is free and disposable, a pure gift given to the cultivator in addition to the return for his outlay and the wages of his labour." (Turgot, Reflexions.)

" Raw material is transformed into beautiful and useful objects through the diligence of the artisan, but before his task begins it is necessary that others should supply the raw material and provide the necessary sustenance. When their part is completed others should recompense them and pay them for their trouble. The cultivators, on the other hand, produce their own raw material, whether for use or for consumption, as well as everything that is consumed by others. This is just where the difference between a productive and a sterile class comes in." (Baudeau, Correspondence avec M. Graslin.)

1 " A weaver buys food and clothing, giving 150 francs for them, together with a quantity of flax, for which he gives 50 francs. The cloth will be sold for 200 francs, a sum that will cover all expenditure." (Mercier de la Riviere, vol. ii, p. 598.) " Industry merely superimposes value, but does not create any which did not previously exist." (Ibid.)

1 Baudeau, Sphem. ix (1770). One feels that the Physiocrats go too far when they say that " the merchant who sells goods may occasionally prove as useful as the philanthropist who gives them, because want puts a price upon the service of the one just as it does upon the charity of the other." (Du Marchand de Grains, in the Journal de F Agriculture, du Commerce, et dee Finances, December 1773, quoted in a thesis on the corn trade by M. Curmond, 1900.) We must insist upon the fact that " unproductive " or " sterile " did not by any means signify " use- less." They saw clearly enough that the labour of the weaver who makes linen out of flax or cloth out of wool is at any rate as useful as that of the cultivator who produced the wool and the flax, or rather that the latter's toil would be perfectly useless without the industry of the former. They also realised that although we may say that agricultural labour is more useful than that of the weaver or the mason, especially when the land is used for raising corn, one cannot say RB much when that same land is employed in producing roses, or mulberry treta for rearing silkworms. • Le Trosne, p. 946.

14 THE PHYSIOCRATS

from the agricultural to the industrial classes.1 The agricultural classes furnished the artisans not only with raw material, but also with the necessaries of life. The artisans were simply the domestic servants, or, to use Turgot's phrase, the hirelings of the agricul- turists.2 Strictly speaking, the latter could keep the whole net product to themselves, but finding it more convenient they entrust the making of their clothes, the erection of their houses, and the production of their implements to the artisans, giving them a portion of the net product as remuneration.8 It is possible, of course, that, like many servants in fine houses, the latter manage to make a very good living at their masters' expense.

The " sterile classes " in Physiocratic parlance simply signifies those who draw their incomes second-hand. The Physiocrats had the good sense to try to give an explanation of this unfortunate term, which threatened to discredit their system altogether, and which it seemed unfair to apply to a whole class that had done more than any other towards enriching the nation.

It is a debatable point whether the Physiocrats attributed this virtue of furnishing a net product solely to agriculture or whether they intended it to apply to extractive industries, such as mining and fishing. They seem to apply it in a general way to mines, but the references are rare and not infrequently contradictory. We can understand their hesitating, for, on the one hand, mines undoubtedly give us new wealth in the form of raw materials, just as the land or sea does ; on the other hand, the fruits of the earth and the treasures of the deep are not so easily exhausted as mines. Turgot put it excellently when he said, " The land produces fruit annually, but a mine produces no fruit. The mine itself is the garnered fruit," and he concludes that mines, like industrial undertakings, give no net product, that if any one had any claim to that product it would be the owner of the soil, but that in any case the surplus would be almost insignificant.4

1 " It seems necessary as well as simple and natural to distinguish the men who pay others and draw their wealth directly from nature, from the paid men, who can only obtain it as a reward for useful and agreeable services which they have rendered to the former class." (Dupont, vol. i, p. 142.)

1 It is rather strange that Turgot should have added this qualification, because he was more favourable to industry and less devoted to agriculture than the rest of the Physiocrats.

* " I must have a man to make my clothes, just as I must have a doctor whose advice I may ask concerning my health, or a lawyer concerning my affairs, or a servant to work instead of me." (Le Trosne, p. 949.)

* On this point see M. Pervinquiere, Contribution d V Etude, de la Productivity dans la Pkysiocratie. The indifference of the Physiocrats to mines shows a want of

THE NET PRODUCT 15

This essential difference which the Physiocrats sought to establish between agricultural and industrial production was at bottom theological. The fruits of the earth are given by God, while the products of the arts are wrought by man, who is powerless to create. l The reply is obvious. God would still be creator if He decreed to give us our clothes instead of our daily bread. And, although man cannot create matter, but simply transform it, it is important to remember that the cultivation of the soil, like the fashioning of iron or wood, is merely a process of transformation. They failed to grasp the truth which Lavoisier was to demonstrate so clearly, namely, that in nature nothing is ever created and nothing lost. A grain of corn sown in a field obtains the materials for the ear from the soil and atmosphere, transmuting them to suit its own purpose, just as the baker, out of that same corn, combined with water, salt, and yeast, will make bread.

But they were sufficiently clear-sighted to see that all natural products, including even corn, were influenced by the varying condition of the markets, and that if prices fell very low the net product disappeared altogether. In view of such facts can it still be said that the earth produces real value or that its produce differs in any essential respects from the products of industry ?

The Physiocrats possibly thought that the bon prix — i.e. the price which yielded a surplus over and above cost of production — was a normal effect of the "natural order." Whenever the price fell to the level of the cost of production it was a sure sign that the "order** had been destroyed. Under these circumstances there was nothing remarkable in the disappearance of the net product. This is doubtless the significance of Quesnay's enigmatic saying : " Abundance and cheapness are not wealth, scarcity and dearness are misery, abundance and dearness are opulence." *

But if the bon prix simply measures the difference between the value of the product and its cost of production, then it is not

scientific spirit, for even from their own point of view the question was one of prime importance. No commodity could be produced without raw material, and wealth is simply a collection of commodities. Raw material is furnished by the mine as well as by the soil. In the history of mankind iron has played as im- portant a part as corn. Agriculture itself is an extractive industry, where the miner — the agriculturist — uses plants instead of drills, and in both cases the product is exhaustible.

1 Le Trosne, p. 942.

" Land owes its fertility to tha might of the Creator, and out of His blessing flow its inexhaustible riches. This power is already there, and man simply makes use of it." (Le Trosne, InterSi social, ohap. 1, § 2.) § Quesnay, p. 325.

16 THE PHYSIOCRATS

more common in agriculture than in other modes of production. Nor does it extend over a longer period in the one case than in the other, provided competition be operative in both cases ; on the con- trary, it will become manifest in the one case as easily as in the other, especially if there be any scarcity. It remains to be seen then whether monopoly values are more prevalent in agricultural production than in industrial. In a very general way, seeing that there is only a limited quantity of land, we may answer in the affirmative, and admit a certain degree of validity in the Physio- cratic theory. But the establishment of protective rights and the occurrence of agricultural crises clearly prove that competition also has some influence upon the amount of that revenue.

The net product was just an illusion. The essence of production is not the creation of matter, but simply the accretion of value. But it is not difficult to appreciate the nature of the illusion if we recall the circumstances, and try to visualise the kind of society with which the Physiocrats were acquainted. One section of the community, consisting solely of nobility and clergy, lived upon the rents which the land yielded. Their luxurious lives would have been impossible if the earth did not yield something over and above the amount consumed by the peasant. It is curious that the Physio- crats, while they regarded the artisans as nothing better than servants who depended for their very existence upon the agricul- turists, failed to recognise the equally complete dependence of the worthless proprietor upon his tenants. If there had existed instead a class of business men living in ease and luxury, and drawing their dividends, it is quite possible that the Physiocrats would have concluded that there was a net product in industrial enterprise.

So deeply rooted was this idea of nature, or God operating through nature, as the only source of value that we find traces of it even in Adam Smith. Not until we come to Ricardo do we have a definite contradiction of it. With Ricardo, rent, the income derived from land, instead of being regarded as a blessing of nature — the Alma Parens — which was bound to grow as the "natural order" extended its sway, is simply looked upon as the inevitable result of the limited extent and growing sterility of the land. No longer is it a free gift of God to men, but a pre-imposed tax which the consumer has to pay the proprietor. No longer is it the net product ; henceforth it is known as rent.

As to the epithet " sterile," which was applied to every kind of work other than agriculture, we shall find that it has been superseded.

THE NET PRODUCT 17

and that the attribute " productive " has been successively applied to every class of work — first to industry, then to commerce, and finally to the liberal professions. Even if it were true that industrial under- takings only yield the equivalent of the value consumed, that is not enough to justify the epithet " sterile," unless, as Adam Smith wittily remarks, we are by analogy to consider every marriage sterile which does not result in the birth of more than two children. To invoke the distinction between addition and multiplication is useless, because arithmetic teaches us that multiplication is simply an abridged method of adding.

It seems very curious that that kind of wealth which appeared to the Physiocrats to be the most legitimate and the most superior kind should be just the one that owed nothing to labour, and which later on, under the name of rent, seems the most difficult to justify.

But we must not conclude that the Physiocratic theory of the net product possessed no scientific value.

It was a challenge to the economic doctrines of the time, especially Mercantilism. The Mercantilists thought that the only way to increase wealth was to exploit neighbours and colonists, but they failed to see that commerce and agriculture afforded equally satis- factory methods. Nor must we forget the Physiocrats' influence upon practical politics. Sully, the French minister, betrays evidence of their influence when he remarks that the only two sources of national wealth are land and labour. Let us also remember that, despite some glaring mistakes, agriculture has never lost the pre-eminence which they gave it, and that the recent revival of agricultural Protection is directly traceable to their influence. They were always staunch Free Traders themselves, but we can hardly blame them for not being sufficiently sanguine to expect such whole- hearted acceptance of their views as to anticipate some of the more curious developments of their doctrines. It is almost certain that if they were living to-day they would not be found supporting the Protectionist movement. At least this is the opinion of M. Oncken, the economist, who has made the most thorough study of their ideas.1

Although the Physiocratic distinction between agriculture and industry was largely imaginary, it is nevertheless true that agriculture does possess certain special features, such as the power of engendering the forces of life, whether vegetable or animal. This mysterious

1 Gtschichte, der National Oekonojnie, Part I, Die Zeit vor Adam Smith. M. Meline's book, Le Retour a la Terre, though Protectionist in tone, is wholly imbued with the Physiocratic spirit.

18 THE PHYSIOCRATS

force, which under the term " nature " was only very dimly under- stood by the Physiocrats, and still is too often confused with the physico-chemical forces, does really possess some characteristics which help us to differentiate between agriculture and industry. At some moments agriculture seems inferior because its returns are limited by the exigencies of time and place ; but more often superior because agriculture alone can produce the necessaries of life. This is no insignificant fact ; but we are trenching on the difficult problems connected with the name of Malthus.

Ill : THE CIRCULATION OF WEALTH

THE Physiocrats were the first to attempt a synthesis of distribution. They were anxious to know — and it was surely a praiseworthy ambition — how wealth passed from one class in society to another, why it always followed the same routes, whose meanderings they were successful in unravelling, and how this continual circulation, as Turgot said, " constituted the very life of the body politic, just as the circulation of the blood did of the physical."

A scholar like Quesnay, the author of the work on animal economy1 and a diligent student of Harvey's new discovery, was precisely the man to carry the biological idea over into the realm of sociology. He made use of the idea in his Tableau Sconomique, which is simply a graphic representation of the way in which the circulation of wealth takes place. The appearance of this table caused an enthusiasm among his contemporaries that is almost incredible,8

1 Essai physique sur I'Economie animate (1747).

1 " There have been since the world began three great inventions which have principally given stability to political societies, independent of many other in- ventions which have enriched and advanced them. The first is the invention of writing, which alone gives human nature the power of transmitting without alteration its laws, its contracts, its annals, and its discoveries. The second is the invention of money, which binds together all the relations between civilised societies. The third is the Economical Table, the result of the other two, which completes them both by perfecting their object ; the great discovery of our age, but of which our posterity will reap the benefit." (Mirabeau, quoted in Wealth of Nations, Book IV, chap. 9.) Baudeau is no less enthusiastic. " These figures," he writes, " are borrowed with the consent and upon the advice of the great master whose genius first begat the sublime idea of this Tableau. The Tableau gives us such a clear idea of the premier position of the science that all Europe is bound to accept its teaching, to the eternal glory of the invention and the everlasting happiness of mankind." (P. 867.)

The first edition of the Tableau, of which only a few copies were printed, is missing altogether, but a proof of that edition, corrected by Quesnay himself, was recently discovered in the Bibliotl:eque Nationale in Paris by Professor

THE CIRCULATION OF WEALTH 19

although Professor Hector Denis declares that he is almost ready to share in Mirabeau's admiration.1

We know by this time that this circulation is much more com- plicated than the Physiocrats believed, but it is still worth while to give an outline of their conception.2

Quesnay distinguishes three social classes :

1. A productive class consisting entirely of agriculturists — perhaps also of fishermen and miners.

2. A proprietary class, including not only landed proprietors, but also any who have the slightest title to sovereignty of any kind — a survival of feudalism, where the two ideas of sovereignty and property are always linked together.

8. A sterile class, consisting of merchants and manufacturers, together with domestic servants and members of the liberal professions.

The first class, being the only productive class, must supply all that flow of wealth whose course we are now to follow. Let us sup- pose, then — the figures are Quesnay's and seem sufficiently near the facts — that the value of the total wealth produced equals 5 milliard francs. Of this 5 milliards 2 milliards are necessary for the upkeep of the members of this class and its oxen during harvest and sowing. This portion does not circulate. It simply remains where it was produced. The produce representing the remaining 3 milliards is sold.

Stephen Bauer, of the University of Bale. A facsimile was published by the British Economic Association in 1894.

1 " The discovery of the circulation of wealth in economic societies occupies in the history of the science the same position as is occupied by the discovery of the circulation of the blood in the history of biology."

* Quesnay's table consists of a number of columns placed in juxtaposition with a number of zigzag lines which cross from one column to another. If he had been living now he would almost certainly have used the graphic method, which would have simplified matters very considerably, and it is somewhat strange that no one has attempted this with his Tableau. Hector Denis has compared his tables with those of the anatomist and traced a parallel between the links of the economical world and the plexus of veins and arteries in the human body.

His explanation of the Tableau by means of mathematical tables gives him a claim to be considered a pioneer of the Mathematical school. Full justice has been done to him in this respect. An article by Bauer in the Quarterly Journal of Economics, 1890, recognises his claim, and there is another by Oncken in the Economic Journal for June 1896, entitled The Physiocrats as Founders of the Mathematical School. His contemporary Le Trosne is even more emphatic on the point : " Economic science, being a study of measurable objects, is an exact science, and its conclusions may be mathematically tested. What the science lacked was a convenient formula which might be applied to test its general conclusions. Such a formula we now have in the Tableau iconomique." (De I'Ordre social, viii, p. 218.)

20 THE PHYSIOCRATS

But agricultural products alone do not suffice for the upkeep of Class 1. Manufactured goods, clothes, and boots also are required, and these are got from the industrial classes, for which a milliard francs is given.

There remain just 2 milliards, which go to the landowners and the Government in rents and taxes. By and by we shall see how they attempted to justify this apparent parasitism.

Let us pass on to consider the propertied class, It manages to live upon the 2 milliards which it receives by way of rents, and it lives well. Its food it must obtain from the agricultural class (unless, of course, the rents are paid in kind), and for this it possibly pays a milliard francs. It also requires manufactured goods, which it must get from the sterile class, and for which it pays another milliard francs. This completes their account.

As to the sterile class, it produces nothing, and so, unlike the preceding class, it can only get its necessaries second-hand from the productive class. These may be got in two ways : a milliard from the agricultural class in payment for manufactured goods and another milliard from the landed proprietors. The latter milliard being one of the two which the landed proprietors got from the agri- culturists, has in this way described the complete circle.

The 2 milliards obtained as salaries by the sterile class are employed in buying the necessaries of life and the raw material of industry. And since it is only the productive class that can procure these necessaries and raw materials, this 2 milliards passes into the hands of the agriculturists. The 2 milliards, in short, return to their starting-point. Adding the milliard already paid by the landed proprietors to the 2 milliards' worth of products unsold, the total of 5 milliards is replaced in the hands of the pro- ductive class, and so the process goes on indefinitely.1

This resumt gives but a very imperfect idea of the vast com- plexities and difficulties involved in tracing the growth of revenues — an evolution which the Physiocrats followed with the enthu- siasm of children. They imagined that it was all very real.2 The

1 Turgot, although he is not speaking of the Tableau itself in this case, sums it up admirably in the following : " "What the labourers get from the land in addition to what is sufficient to supply their own needs constitutes the only wages fund [note the phrase], which all the other members of society can draw upon in return for their labour. The other members of society, when they buy the commodities which the labourer has produced, simply give him the btire equivalent of what it has cost the labourer to produce them." (Turgot, vol. i, p. 10.) For a more detailed account see Baudeau, Explication du Tableau iconomique.

a " This movement of commerce from one class to another, and the conditions which give riee to it, are not mere hypotheses. A little reflection will show that they are faithfully copied from nature." (Quesnay, p. 60.)

THE CIRCULATION OF WEALTH 21

rediscovery of their millions intoxicated them, but, like many of the mathematical economists of to-day, they forgot that at the end of their calculations they only had what they had assumed at the beginning. It is very evident that the table proves nothing as to the essential point in their system, namely, whether there really exist a productive and a sterile class.1

The most interesting thing in the Physiocratic scheme of distri- bution is not the particular demonstration which they gave of it, but the emphasis which they laid upon the fact of the circulation of wealth taking place in accordance with certain laws, and the way in which the revenue of each class was determined by this circulation. The singular position which the proprietors hold in this tripartite division of society is one of the most curious features of the system.

Anyone examining the table in a non-Physiocratic fashion, but simply viewing it in the modern spirit, must at once feel surprised and disappointed to find that the class which enjoys two-fifths of the national revenue does nothing in return for it. We should not have been surprised if such glaring parasitism had given to the work of the Physiocrats a distinctly socialistic tone. But they were quite impervious to all such ideas. They never appreciated the weakness of the landowners' position, and they always treated them with the greatest reverence. The epithet " sterile " is applied, not to them, but to manufacturers and artisans I Property is the foundation-stone of the " natural order." The proprietors have been entrusted with the task of supplying the staff of life, and are endued with a kind of priestly sacredness. It is from their hands that all of us receive the elements of nutrition. It is a ** divine " institution — the word is there.2 Such idolatry needs some explanation.

One might have expected — even from their own point of view — that the premier position would have been given to the class which they termed productive, i.e. to the cultivators of the soil, who were

1 They imagined that it was actually so. " On the one hand, we see the pro- ductive class living on a series of payments, which are given in return for its labour, and always bearing a close relation to the outlay upon its upkeep. On the other, there is nothing but consumption and annihilation of goods, but no production." (Quesnay, p. 60.)

1 " It is impossible not to recognise the right of property as a divine institution, for it has been ordained that this should be the indirect means of perpetuating the work of creation." (La Rivi4re, p. 618.) "The order of society presupposes the existence of a third class in society, namely, the proprietors who make pre- paration for the work of cultivation and who dispense the net product. " ( Quesnay, p. 181.)

22 THE PHYSIOCRATS

mostly farmers and mltayers. The land was not of their making, it is true. They had simply received it from the proprietors. This latter class takes precedence because God has willed that it should be the first dispenser of all wealth.1

There is no need to insist on this strange aberration which led them to look for the creator of the land and its products, not amid the cultivators of the soil, but among the idlers.2 Such was the logical conclusion of their argument. We must also remember that the Physiocrats failed to realise the inherent dignity of all true labour simply because it was not the creator of wealth. This applied both to the agricultural labourer and the industrial worker, and though the former alone was considered productive it was because he was working in co-operation with nature. It was nature that produced the wealth and not the worker.

Something must also be attributed to their environment. Knowing only feudal society, with its economic and political activities governed and directed by idle proprietors, they suffered from an illusion as to the necessity for landed property similar to that which led Aristotle to defend the institution of slavery. 8

Although they failed to foresee the criticisms that would be levelled against the institution of private property, they were very assiduous — especially the Abbe Baudeau — in seeking an explanation of its origin and a justification of its existence. The reasons which they advanced are more worthy of quotation than almost any argument that has since been employed by conservative economists.

The most solid argument, in their opinion — at least the one that was most frequently used — is that these proprietors are either the men who cleared and drained the land or else their rightful descendants. They have incurred or they are incurring expenditure in clearing the land, enclosing it and building upon it — what the Physiocrats call the avances fancier es* They never get their revenues through

1 " Immediately below the landed proprietors come the productive classes, whose labour is the only source of their income, but who cannot exercise that labour unless the landlord has already incurred some outlay in the way of ground expenses." (Baudeau, p. 691.)

a The Physiocrats never mention the agricultural workers, and one might almost think that there were none. Their solicitude for the agriculturists does not extend beyond the farmers and mttayers. M. Weulersse has referred to their system, not without some justification, as an essentially capitalistic one.

1 " We may call them the nobility, as well as the propertied class. Nobility in this sense, far from being illusory, is a very useful institution in the history of civilised nations." (Baudeau, p. 670.)

4 " In the third line — they generally occupy the first rank — we have the landed proprietors who prepare the soil, build houses, make plantations and

THE CIRCULATION OF WEALTH 23

some one else as the manufacturers do, and they are anything but parasites. Their portion is optima jure, in virtue of a right prior and superior even to that of the cultivators, for although the cultivators help to make the product, the proprietors help to make the land. The three social classes of the Physiocratic scheme may be likened to three persons who get their water from the same well. It is drawn from the well by members of the productive class in bucket- enclosures at their own expense or who pay for those outlays by buying property already developed. This revenue, they might argue, belongs to us because of the wisdom and forethought we have exercised in preparing the land, in under- taking to keep it in repair, and to improve it still further." (Baudeau, PhilO' sophic iconomique, p. 757. ) " The foremost and most essential agent of production must be that man who makes it possible. But who is this agent but the landed proprietor, whose claims to his prerogatives are based upon the need for his productive services ? " (Mercier de la Riviere, pp. 466-467.)

" It is this expenditure that makes the claim of proprietors real and their existence just and necessary. Until such expenditure is incurred the right of property is merely an exclusive right to make the soil capable of bearing fruit." (Baudeau, p. 851.) In other words, so long as the proprietor has not incurred some expenditure the right of property is simply reduced to occupation.

The Physiocrats distinguished three kinds of avarices :

1. The annual expenditure (avarices annuelles) incurred in connection with the actual work of cultivation, which recurs every year, such as the cost of seed and manure, cost of maintaining labourers, etc. The annual harvest ought to repay all this, which to-day would be called circulating capital.

2. The " original " outlay (avarices primitives) involved in buying cattle and implements which render service for a number of years, and for which the pro- prietor does not expect to be recompensed in a single year. The return is spread out over a number of years. Here we have the distinction between fixed and circulating capital, and the idea of the gradual redemption of the former as against the total repayment of the latter at one single use. It did not escape the Physio- crats' notice that an intelligent increase of the fixed might gradually reduce the annual expenditure. Such ideas were quite novel. But they immediately took their place as definite contributions to the science. They are no longer confined to agriculture, however, but apply equally to all branches of production.

3. The avances foncieres are the expenses which are undertaken with a view to preparing the land for cultivation. (The adjective " primitive " would have been better applied here.)

The first two kinds of expenditure are incumbent upon the agriculturist and entitle him to a remuneration sufficient to cover his expenses.

The third is incumbent upon the proprietor and constitutes his claim to a share of the funds. " Before you can set up a farm where agriculture may be steadily practised year in and year out what must be done ? A block of buildings and a farmhouse must be built, roads made and plantations set, the soil must be prepared, the stones cleared, trees cut down and roots removed ; drains must also be cut and shelters prepared. These are the avances foncieres, the work that is incumbent upon proprietors, and the true basis of their claim to the privileges of proprietorship." (Baudeau, Ephtmtrides, May 1776. A reply to Condillao.)

24 THE PHYSIOCRATS

fuls, which are passed on to the proprietors, but the latter class gives nothing in return for it, for the well is of their making. At a respectable distance comes the sterile class, obliged to buy water in exchange for its labour.1

The Physiocrats failed to notice the contradiction involved in this. If the revenue which the proprietor draws represents the remuneration for his outlay and the return for his expenditure it is no longer a gift of nature, and the net product vanishes, for, by definition, it represented what was left of the gross product after paying all initial expenses — the excess over cost of production. If we accept this explanation of the facts there is no longer any surplus to dispose of. It is as capitalists pure and simple and not as the representatives of God that proprietors obtain their rents.

Must we really believe that although these outlays afford some explanation of the existence of private property they supply no means of measuring or of limiting its extent ? Is there no connection between these outlays and the revenues which landed proprietors draw ?

Or must we distinguish between the two portions of the revenue — the one, indispensable, representing the reimbursement of the original outlay, and in every respect comparable to the revenue of the farmer, and the other, being a true surplus, constituting the net product ? How can they justify the appropriation of the latter ?

There is another argument held in reserve, namely, that based upon social utility. They point out that the cultivation of land would cease and the one source of all wealth would become barren if the pioneer were not allowed to reap the fruits of his labour.

The new argument is a contradiction of the old. In the former case land was appropriated because it had been cultivated. In the present case land must be appropriated before it can be cultivated. In the former labour is treated as the efficient cause, in the latter as the final cause of production.

Finally, the Physiocrats believed that landed proprietorship was simply the direct outcome of " personal property," or of the right of every man to provide for his own sustenance. This right includes the right of personal estate, which in turn involves the right of landed property. These three kinds of property are so closely connected

1 " Without that sense of security which property gives, the land would still be uncultivated." (Quesnay, Mateimes, iv. ) " Everything would be lost if this fount of wealth were not as well assured as the person of the individual." (Dupont, vol. i. p. 26.)

THE CIRCULATION OF WEALTH 25

that in reality they form one unit, and no one of the three can be detached without involving the destruction of the other two.1 They were full of veneration for property of every description — not merely for landed property. " The safety of private property is the real basis of the economic order of society," says Quesnay.2 Mercier de la Riviere writes : " Property may be regarded as a tree of which social institutions are branches growing out of the trunk." 3 We shall encounter this cult of property even during the terrible days of the French Revolution and the Reign of Terror. When all respect for human life was quite lost there still remained this respect for property.

The defence of private property was already well-nigh complete.4 But if they were strong in their defence of the institution they did not fail to impose upon it some onerous duties^which counterbalanced its eminent dignity. Of course, every proprietor should always be guided by reason and be mannerly in his behaviour, and he should never allow mere authority to become the rule of life.5 Their duties are as follows :

1. They must continue without fail to bring lands into culti- vation, i.e. they must continue the avances fonder vs.*

2. They must dispose of the wealth which the nation has pro- duced in such a way as to further the general interest ; this is their task as the stewards of society.7

3. They must aim during their leisure at giving to society all those gratuitous services which they can render, and which society so sorely needs.

4. They must bear the whole burden of taxation.

1 Mercier de la Riviere, vol. i, p. 242.

* Maximes, iv. • Pp. 615, 617.

* It is necessary to make a note here of one of the many differences between Turgot and the Physiocrats. Turgot seems much less firmly convinced of the social utility of landed property and of the legitimacy of the right of property. He thinks that its origin is simply due to occupation. This weakens the Physiocratic case very considerably. " The earth is peopled and cultivation extends. The best lands will in time all be occupied. For the last comers there will only be the unfertile lands rejected by the first. In the end every piece of land will have its owner, and those who possess none will have no other resource than to exchange the labour of their arm for the superfluous corn of the proprietor." (Vol. i, p. 12.) We are here not very far from the Ricardian theory.

8 Baudeau, p. 378.

* " A proprietor who keeps up the avances fonci&res without fail is performing the noblest service that anyone can perform on this earth." (Baudeau. J

7 "The rich have the control of the fund from which the workers are paid, but they are doing a great injustice if they appropriate it." (Quesnay, vol. i, p. 193.)

E.I>. B

26 THE PHYSIOCRATS

5. Above all they must protect their tenants, the agriculturists, and be very careful not to demand more than the net product. The Physiocrats never go the length of advising them to give to their tenants a portion of the net product, but they impress upon them the importance of giving them the equivalent of their annual expenditure and of dealing liberally with them. It does not seem much, but it must have been something in those days. " I say it boldly," writes Baudeau, " cursed be every proprietor, every sovereign and emperor that puts all the burden upon the peasant, and the land, which gives all of us our sustenance. Show them that the lot of the worthy individuals who employ their own funds or who depend upon those of others is to none of us a matter of complete indifference, that whoever hurts or degrades, attacks or robs them is the cruellest enemy of society, and that he who ennobles them, furthers their well-being, comfort, or leisure increases their output of wealth, which after all is the one source of income for every class in society." * Such generous words, which were none too common at the time, release the Physiocrats from the taunt of showing too great a favour to the proprietors. In return for such privileges as they gave them they demanded an amount of social service far beyond anything that was customary at the time.

II

So far we have considered only the Physiocratic theory. But the Physiocratic influence can be much more clearly traced if we turn to applied economics and examine their treatment of such questions as the regulation of industry, the functions of the State, and the problems of taxation.2

1 Pp. 835, 839. And Mercier de la Riviere writes in terms not less severe ; " He is responsible under pain of annihilation for the products of society, and no part of the produce which goes to support the cultivator should wittingly be employed otherwise." The history of Ireland is an interesting commentary on these words.

But let us always remember that when the Physiocrats speak of the rights of the cultivator they think only of the farmer and metayer and never of the paid agriculturist. They are content to demand merely a decent existence for the latter. Were they put too nmch at ease they would perhaps leave off working. Seo Weulersse, vol. ii, p. 729. He seems a little unjust, and quotes some words of Quesnay, who protests against the belief that " the poor must be kept poor if they are not to become indolent."

1 One is perhaps surprised to find that freedom of work- mother words, the abolition of corporations — is not included in their list, especially since the credit for the downfall of those institutions is usually given to the Physiocrats. Their writings contain only very occasional reference to this topic, beoausa industrial

TRADE 27

I: TRADE

ALL exchange, the Physiocrats thought, was unproductive, for by definition it implies a transfer of equal values. If each party Dnly receives the exact equivalent of what it gives there is no wealth produced. It may happen, however, that the parties to the exchange are of unequal strength, and the one may grow rich at the expense of the other.1 In giving a bottle of wine in exchange for a loaf of bread there is a double displacement of wealth, which evidently affords a fuller satisfaction of wants in both cases, but there is no wealth created, for the objects so exchanged are of equal value. To-day the reasoning would be quite different. The present-day economist would argue as follows : " If I exchange my wine for your bread, that is a proof that my hunger is greater than my thirst, but that you are more thirsty than hungry. Consequently the wine has increased in utility in passing from my hands into yours, and the bread, likewise, in passing from your hands into mine, and this double increase of utility constitutes a real increase of wealth." Such reasoning would have appeared absurd to the Physiocrats, who conceived of wealth as something material, and they could never have understood how the creation of a purely subjective attribute like utility could ever be considered pro- ductive.

We have already had occasion to remark that industry and commerce were considered unproductive. This was a most signi- ficant fact, so far as commerce was concerned, because all the theories that held the field under Mercantilism, notably the doctrine that foreign commerce afforded the only possible means of increasing a country's wealth, immediately assumed a dwindling importance. For the Mercantilists the prototype of the State was a rich merchant of Amsterdam. For the Physiocrats it was John Bull.

labour is regarded as sterile, and reform touching its organisation concerned them but little. They did, however, protest against the rule that confined the right to engage in a trade to those who had received an express privilege from the Crown. They considered that " to an honest soul this was the most odious maxim which the spirit of domination and rapacity ever invented." (Baudeau, in fiphkmi- rides, 1768, vol. iv.) Turgot's famous Edict of January 1776, abolishing the rights of corporations and establishing liberty for all, is, with good reason, attri- buted to Physiocratic influence.

1 " Exchange is a contract of equality, equal value being given in exchange for equal value. Consequently it is not a means of increasing wealth, for one gives as much as the other receives, but it is a means of satisfying wants and of varying enjoyment." (Le Trosne, pp. 903, 904.) But what does this satisfying of wants and variation of enjoyment signify if it d^e* r ot n can increased wealth f

28 THE PHYSIOCRATS

And foreign trade, like domestic, produced no real wealth : the only result was a possible gain, and one man's gain is another man's loss. *' Every commercial nation flatters itself upon its growing wealth as the outcome of foreign trade. This is a truly astonishing phenomenon, for they all believe that they are growing rich and gaining from one another. It must be admitted that this gain, as they call it, is a most remarkable thing, for they all gain and none loses." * A country must, of course, obtain from foreigners the goods which it cannot itself produce in exchange for those it cannot itself consume. Foreign trade is quite indispensable, but Mercier de la Riviere thinks that it is a necessary evil a (he underlines the word). Quesnay contents himself with referring to it merely as & pis aller.3 He thought that the only really useful exchange is one in which agricultural products pass directly from producers to con- sumers, for without this the products would be useless and would simply perish in the producer's hands. But that kind of exchange which consists in buying products in order to resell them — trafficking, or a commercial transaction, as we call it — is sheer waste, for the wealth instead of growing larger becomes less, because a portion of it is absorbed by the traffickers themselves.4 We meet with the same idea in Carey. Mercier de la Rividre ingeniously compares such traders to mirrors, arranged in such a way that they reflect a number of things at the same time, all in different positions. " Like mirrors, too, the traders seem to multiply commodities, but they only deceive the superficial." 6

That may be ; but, admitting a contempt for commerce, what conclusions do they draw from it ? Shall they prohibit it, or regulate it, or shall they just let it take its own course ? Any one of these conclusions would follow from their premises. If commerce be as useless as they tried to make out, the first solution would be the best. But it was the third that they were inclined to adopt, and we must see why.

1 Mercier de la Riviere, p. 545. * P. 54.8.

* " The settlement of international indebtedness by payment of money Is a mere pis aller of foreign trade, adopted by those nations which are unable to give commodities in return for commodities according to custom. And foreign trade itself is a mere pis aller adopted by those nations whose home trade is insufficient to enable them to make the best use of their own productions. It is very strange that anyone should have laid such stress upon a mere pis aller of commerce." (Quesnay's Dialogues, p. 175.)

4 " After all merchants are only traffickers, and the trafficker is just a person who employs his ability in appropriating a part of other people's wealth." (Mercier de la Riviere, p. 551.) "Merchants' gains are not a species of profit." (Quesnay, p, 151.J 6 Ordre Naturel, p. 538.

TRADE 29

It seems quite evident that the Physiocrats would have condemned both the Mercantile and the Colbertian systems. Both of these aimed at securing a favourable balance of trade — an aim which the Physiocrats considered illusory, if not actually immoral. But if they thought all trade was useless it is not easy to understand their enthusiasm for Free Trade. Those economists who nowadays favour Free Trade support it in the belief that it is of immense benefit to every country wherein it is practised, and that the more it is developed the richer will the exchanging countries become. But such was not the Physiocratic doctrine. It is a noteworthy fact that they are to be regarded as the founders of Free Trade, not because of any desire to favour trade as such, but because their attitude towards it was one of disdainful laissez-faire. They were not, perhaps, altogether free from the belief that laissez-faire would lead to the disappearance of commerce altogether. They were Free Traders primarily because they desired the freedom of domestic trade, and we must not lose sight of those extraordinary regulations which completely fettered its movements at this time.1

The " natural order " also implied that each one would be free to buy or sell wherever he chose, within or without the country. It recognised no frontiers,3 for only through " liberty " could the " good price " be secured. The " good price " meant the highest price and not the lowest, dearth and not cheapness. " Free competition with foreign merchants can alone secure the best possible price, and only the highest price will enable us to increase our stock of wealth and to maintain our population by agriculture." 3 This is the language of agriculturists rather than of Free Traders.

1 Enforcing sales in open market and in limited quantities only, keeping corn beyond two years, etc. Corn was to be supplied to consumers in the first place, then to bakers, and finally to merchants, etc.

2 " Let entire freedom of commerce be maintained, for the surest, the exactest, the most profitable regulator both of home and of foreign trade for the nation as well as for the State is perfect freedom of competition." (Quosnay's Maximes, xxv.) " "We must tell them that free trade is in accordance with the order and with the demands of justice, and everything that conforms to the order bears its own reward." (Le Trosne, p. 586.)

s Dialogues, p. 153. The dearth of plenty, as they paradoxically put it, stimulates production, and Boisguillebert, in an equal paradox, remarks that " Low price gives rise to want." In the Maximes, p. 98, Quesnay contents himself by saying that free trade in corn makes the price more equal. " It is clear," he adds, " that, leaving aside the question of foreign debt, equal prices will increase the revenue yielded by the land, which will again result in extended cultivation, which will provide a guarantee against those dearths that decimate population."

Mercier de la Riviere writes in a similar vein. " A good oonstant average

30 THE PHYSIOCRATS

It is the natural result of thinking about agricultural problems, and especially about the question of raising corn ; and since Free Trade at this time gave rise to no fears on the score of importation, free exchange meant free exportation. Oncken points out that the commercial rSgime which the Physiocrats advocated was identical with that in operation in England about this time, where in case of over-abundance exportation was encouraged in order to keep up the price, and in case of dearth importation was permitted in order to ensure a steady supply and to prevent the price rising too much.1

In a word, Free Trade meant for the Physiocrats the total aboli- tion of all those measures which found so much favour with the Mer- cantilists, and which aimed at preventing exportation to places out- side the country and checking the growth of free intercourse within it.2 Narrow as their conception of Free Trade at first was, it was not long in growing out of the straitened circumstances which gave it birth, and it developed gradually into the Free Trade doctrine as we know it, which Walras expressed as follows : " Free competition secures for every one the maximum final utility, or, what comes to the same thing, gives the maximum satisfaction." We no longer admit that international trade is a mere pis aller. But all the argu- ments which have been used in its defence on the Free Trade side were

price ensures abundance, but without freedom we Lave neither a good price noi plenty." (P. 570.)

Turgot in his Lettres sur le Commerce lea Gratis develops the argument at great length and tries to give a mathematical demonstration of it. There was no need for this. It is a commonplace of psychology that a steady price of 20 is preferable to alternative prices of 35 and 5 francs respectively, although the average in both cases is the same.

1 It is worth noting that the nature of American competition was clearly foreseen by Quesnay — one of the most remarkable instances of scientific prevision on record. In bis article on corn in the Encyclopedic he says that he views the fertility of the American colonies with apprehension and dreads the growth of agriculture in the New World, but the fear is provisionally dismissed because the corn is inferior in quality to that of France and is damaged in transit. (See our remarks concerning the Physiocratic connection with modern Protectionist theories.)

1 It must not bo forgotten that the Protectionist system aided the develop- ment of industry and retarded that of agriculture by its policy of encouraging the exportation of manufactured products and its restrictions on the exportation of agricultural products and raw materials with a view to securing cheap labour and a plentiful supply of raw materials for the manufacturing industries. The Protectionists were not concerned to prevent the exportation of corn. Both Colbertism and Mercantilism sacrificed the cultivator by preventing the expor- tation of corn and by allowing of its importation, while doing the exact opposite for manufactured products.

TRADE 31

first formulated by the Physiocrats. We shall refer to a few of them.

The fallacy lurking behind the " balance of trade " theory is exposed with great neatness by Mercier de la Rivi&re. " I wiJl drown the clamour of all your blind and stupid policies. Suppose that I gave you all the money which circulates among the nations with whom you trade. Imagine it all in your possession. What would you do with it ? " He goes on to show how not a single foreign country will any longer be able to buy, and consequently all exportation will cease. The result of this excessive dearness will be that buying from foreign countries will be resorted to, and this will result in the exportation of metallic currency, which will soon readjust matters.1

The contention that import duties are paid by the foreigner is also refuted. Nothing will be sold by the foreigner at a lower price than that which other nations would be willing to give him. An import duty on such goods will increase the real price, which the foreigner will demand, and this import duty will be paid by those who buy the goods.2

There is also a' refutation of the policy known as reciprocity. "A nation levies an import duty upon the goods of another nation, but it forgets that in trying to injure the selling nation it is really checking the possible consumption of its own goods. This indirect effect, of course, is inevitable, but can nothing be done to remedy this by means of reprisals ? England levies a heavy duty on French wines, thereby reducing its debit account with France very con- siderably, but more French wine will not be bought if a tax is also placed upon the goods which England exports to France. Do you think that the prejudice which England has taken against France can be remedied in this way ? "

We have multiplied instances, for during the whole of the hundred years which have since elapsed has anyone deduced better arguments ?

These theories immediately received legal sanction in the edicts of 1763 and 1766 establishing free trade in corn, first within

1 " Upon final analysis do you find that you have gained anything by your policy of always selling to foreigners without ever buying from them ? Have you gained any money by the process ? But you cannot retain it. It has passe d through your hands without being of the least use. The more it increases the more does its value diminish, while the value of other things increases propor- tionally." (Mercier de la Riviere, pp. 580-583.)

1 Turgot, (Euvres, vol. i, p. 181. "If you succeed in keeping back foreign merchants by means of your protective tariffs they will not bring you those goods which you need, thus causing th: se impositions which were designed foi others to retaliate upon your own head." (Quesnay, Dialogues.)

32 THE PHYSIOCRATS

the country and then without, but some very serious restrictions were still retained. Unfortunately Nature proved very ungrateful to her friends. For four or five years she ran riot with a series of bad harvests, for which, as we may well imagine, the Physiocratic regime and its inspirers were held responsible. Despite the protests of the Physiocrats, this liberal act was repealed in 1770. It was re-estab- lished by Turgot in 1774, and again repealed by Necker in 1777 — a variety of fortune that betokens a fickleness of public opinion.

This new piece of legislation, and, indeed, the whole Physiocratic theory, was subjected to severe criticism by an abbot of the name of Galiani. Galiani was a Neapolitan monsignor residing at the French court. At the age of twenty-four he had written a remarkable work in Italian dealing with money, and in 1770, written in splendid French, appeared his Dialogues sur le Commerce des Bles. It was an immediate success, and it won the unqualified approval of Voltaire, who was possibly attracted more by the style than by the profundity of thought. Galiani was not exactly opposed to laissez- faire. " Liberty," he wrote, " stands in no need of defence so long as it is at all possible. Whenever we can we ought to be on the side of liberty." l But he is opposed to general systems and against complete self -surrender into the hands of Nature. "Nature," says he, " is too vast to be concerned about our petty trifles." ' He shares the realistic or historical views of the writers of to-day, and thinks that before applying the principles of political economy some account should be taken of time, place, and circumstances. " The state of which the Physiocrats speak — what is it ? Where is it to be found." 8

Along with Galiani we must mention the great financier Necker, who in a bulky volume entitled La Legislation et le Commerce des Grains (1775) advocates opportunistic views almost identical in character with those of Galiani, and who, as Minister of State (1776-81 and 1788-90), put an end to free trade in corn.

In monetary matters, especially on the question of interest, the Physiocrats were willing to recognize an exception to their principle of non-intervention. Mirabeau thought that whenever a real in- crease of wealth resulted from the use of capital, as in agriculture, the payment of interest was only just. It was simply a sign or symbol of the net product. But in trade matters he thought it

1 Dialogues, pp. 254, 274. ' Ibid., p. 237.

* Ibid., p. 22. He proposed a highly complicated system imposing moderate duties both upon the importation and exportation of corn — a 6 psr cent, ad valorem duty in the one case and a 10 per cent, in the other.

THE FUNCTIONS OF THE STATE 33

best to limit if not to prohibit it altogether. It often proved very harmful, and frequently was nothing better than a tax levied by order of " the corrosive landowners." Quesnay could not justify it except in those cases where it yielded a net product, but he was content simply to suggest a limitation of it. The Physiocrats are at least logical. If capital sunk in industrial and commercial under- takings yields no income it is evident that the interest must be taken from the borrower's pocket, and they condemned it just as they condemned taxing the industrial and commercial classes.

Turgot 1 is the only one of them who frankly justifies taking interest. The reason that he gives is not the usual Physiocratic argument, but rather that the owner of capital may either invest it in the land or undertake some other productive work — capital being the indispensable basis of all enterprise 2 — and that, consequently, the capital will never be given to anyone who will offer less than what might have been made out of it did the owner himself employ it. This argument implies that every undertaking is essentially a pro- ductive one, and indeed one of the traits which distinguishes Turgot from the other Physiocrats is the fact that he did not think that industry and commerce were entirely unproductive.

II : THE FUNCTIONS OF THE STATE

SEEING that the Physiocrats believed that human society was pervaded by the principle of " natural order," which required no adventitious aid from any written law, and since Nature's voice, without any artificial restraint, was sufficient guide for mankind, it might have been expected that the trend of Physiocracy would have been toward the negation of all legislation, of all authority — in a word, toward the subversion of the State.

It is certain that the Physiocrats wished to reduce legislative activity to a minimum, and they expressed the belief — which has often been repeated since by every advocate of laissez-faire — that the most useful work any legislative body can do is to abolish useless laws.8 If any new laws are required they ought simply to be copies of the unwritten laws of Nature. Neither men nor Govern-

1 Turgot was the author of a work on this subject, entitled Memoire sur let Pr&ts d" Argent (1769).

1 Reflexions sur la Formation des Richesses, §§ lix, Ixi, Ixxiv.

1 "Remove all useless, unjust, contradictory, and absurd laws, and there will not be much legislative machinery left after that." (Baudeau, p. 817.) "It is not a question of procuring immense riches, but simply a question of letting people alone, a problem that hardly requires a moment's thought." So wrote Boisguillebert sixty years before.

34 THE PHYSIOCRATS

merits can make laws, for they have not the necessary ability. Every law should be an expression of that Divine wisdom which rules the universe. Hence the true title of lawgiver, not law-maker.1 It is in this connexion that we meet with those anecdotes — some of more than doubtful authenticity it is true — that have gathered round their names. Of these the best known is that which tells of Mercier de la Riviere's visit to St. Petersburg, and his laconic reply to Catherine the Great. He had been invited there to advise the Empress about a new constitution for the country. After dilating upon the great difficulties of the undertaking and the responsibilities it involved, he gave it as his opinion that the best way of achieving her object was just to let things take their course. Whereupon the Empress promptly wished him good-bye.

But it would be a great mistake to think of the Physiocrats as anarchists. What they wanted to see was the minimum of legislation with a maximum of authority. The two things are by no means in- compatible. The liberal policy of limitation and control would have found scant favour with them. Their ideal was neither democratic self-government, as we have it in the Greek republics, nor a parlia- mentary regime such as we find in England. Both were detested.2

1 Quesnay, Maximes, vol. i, p. 390. Mercier de la Riviere writes in much the same style ; " The positive laws that are already in existence are merely expres- sions of such natural rights." (VoL ii, p. 61.) It sounds like a preamble to the Declaration of the Rights of Man.

* " The Physiocrats had the most absolute contempt for political liberty." (Esmein, La Science politique des Physiocrates, address at the opening session of the Congress of Learned Societies, Paris, 1906.)

" The Greek republics never became acquainted with the laws of the order. Those restless, usurping, tyrannical tribes never ceased to drench the plains with human blood, to cover with ruins and to reduce to waste the most fertile and the best situated soil in the then known world." (Baudeau, p. 800.)

" It is evident that a democratic sovereign — i.e. the whole people — cannot itself exercise its authority, and must be content to name representatives. These representatives are merely agents, whose functions are naturally transitory, and such temporary agents cannot always be in complete harmony with every interest within the nation. This is not the kind of administration contemplated by the Physiocrats. The sovereignty of the natural order is neither elective nor aristocratic. Only in the case of hereditary monarchy can all interests, both personal and individual, present and future, be clearly linked with those of the nation, by their copartnership in all the net products of the territory sub- mitted to their care." (Dupont, vol. i, pp. 359-360.)

This sounds very much like a eulogy of the House of Hohenzollern, delivered by William IL

Very curious also are Dupont's criticises of the parliamentary regime. In his letter to J. B. Say (p. 414) he notes " its tendency to corruption and canker," which had not then manifested itself in the United States of America. These letters, though very interesting, hardly belong to a history of economic doctrines.

THE FUNCTIONS OF THE STATE 35

On the other hand, great respect was shown for the social hierarchy? and they were strong in their condemnation of every doctrine that aimed at attacking either the throne or the nobility. What they desired was to have sovereign authority in the guise of a hereditary monarchy. In short, what they really wanted — and they were not frightened by the name — was despotism.1

"The sovereign authority should be one, and supreme above all individual or private enterprise. The object of sovereignty is to secure obedience, to defend every just right, on the one hand, and to secure personal security on the other. A govern- ment that is based upon the idea of a balance of power is use- less."2

This should help us to realise the distance separating the Physio- crats from the Montesquieuian idea of the distribution of the sovereign authority, and from the other idea of local or regional control. There is no mention of representation as a corollary of taxation. This form of guarantee, which marks the beginnings of parliamentary government, could have no real significance for the Physiocrats. Taxation was just a right inherent in the conception of proprietary sovereignty, a territorial revenue, which was in no way dependent upon the people's will.

It seems strange that such should be the opinion of a future President of the Constituent Assembly. How can we explain this apparent contradiction and such love of despotism among the apostles of laissez-faire ?

Despotism, in the eyes of the Physiocrats, had a peculiar signi- ficance of its own. It was the work of freedom, not of bondage. It did not signify the rule of the benevolent despot, prepared to make men happy, even against their own will. It was just the sovereignty of the " natural order " 3 — nothing more. Every reasonable person

1 " It is only when the people are ingenuous that we find real despots, because then the sovereign can do whatever ho wills." (Dupont, p. 384.)

1 Quesnay, Maximes, i. The Physiocrats were in favour of a national assembly, but would give it no legislative power. It was to be just a council of State concerned chiefly with public works and with the apportionment of the burden of taxation. See M. Esmein's memoire on the proposed National Assembly of the Physiocrats (Camples rendus de V Academic des Sciences Morales et Politiques, 1904).

• " The personal despotism will only bo the legal despotism of an obvious and essential order. In legal despotism the obviousness of a law demands obedience before the monarch enjoins it. Euclid is a veritable despot, and the geometrical truths that he enunciates are really despotic laws. The legal and personal despotism of the legislator are one and the same. Together they are irresistible," (Mercier de la Riviere, pp. 460-471.) This despotism is really not

36 THE PHYSIOCRATS

felt himself bound to obey it, and realised that only through such obedience could the truth be possibly known.

It is quite different from the despotism of the ancient maxim, Sicut principi placuit legis habet vigorem.1 They would never have subscribed to the doctrine that the king's word is law, but they were equally energetic in rejecting the claim of the popular will.2 They are as far from modern democracy as they are from monarchical absolutism.

This despotism was incarnate in the person of the sovereign or king. But he is simply an organ for the transmission of those higher laws which are given to him. They would compare him with the leader of an orchestra, his sceptre being the baton that keeps time. The conductor's despotism is greater than the Tsar's, for every musician has to obey the movement of the hand, and that immediately. But this is not tyranny, and whoever strikes a false note in a spirit of revenge is not simply a revolter, but also an idiot.

Sovereignty appealed to the Physiocrats in the guise of heredi- tary monarchy, because of its associations with property under the feudal regime, and since hereditary rights were connected with landed property so must royalty be. The sovereign who best represents the Physiocratic ideal is perhaps the Emperor of China.3 As the Son of Heaven he represents the " natural order," which is also the ** divine order." As an agricultural monarch he solemnly puts his hand to the plough once a year. His people really govern them- selves ; that is, he rules them according to custom and the practice of sacred rites.4

unlike that of Comte, who remarks that there is no question of liberty of con- science in geometry.

1 " On the contrary," says Quesnay in a letter to Mirabeau, " this despotism is a sufficient guarantee against the abuse of power."

1 "That is an abominable absurdity, "says Baudeau, ' for on this reckoning a mere majority vote would be sufficient to justify parricide."

Is it necessary to point out that this is exactly the reverse of the view held by interventionists and socialists of these later times, who think that the mission of the State is to redress the grievances caused by natural laws ?

8 " This single supreme will which exercises supreme power is not, strictly speaking, a human will at all. It is just the voice of nature — the will of God. The Chinese are the only people whose philosophy seems to have got hold of this supreme truth, and they regard their emperor as the eldest son of God." (Baudeau, p. 798.)

* Some writers — for example, Pantaleoni in his introduction to Arthur Labriola's book,Le Dottrine economiche di Quesnay — seem to think that the Physio- cratic criticism proved fatal to feudal society, just as the socialistic criticism of the present time is undermining the bourgeois society. Politically this is true

THE FUNCTIONS OF THE STATE 37

In practice there will be nothing of great importance for the despot to do. " As kings and governors you will find how easy it is to exercise your sacred functions, which simply consist in not interfering with the good that is already being done, and in punish- ing those few persons who occasionally attack private property." l In short, the preservation of the " natural order " and the defending of its basis — private property — against the attacks of the ignorant and the sacrilegious is the first and most important duty of the sovereign. "No order of any kind is possible in society unless the right of possession is guaranteed to the members of that society by the force of a sovereign authority." a

Instruction is the second duty upon which the Physiocrats lay special stress. " Universal education," says Baudeau, " is the first and only social tie." Quesnay is specially anxious for instruction on the "natural order," and the means of becoming acquainted with it. Further, the only guarantee against personal despotism lies in well- diffused instruction and an educated public opinion. If public opinion, as Quesnay said, is to lead, it should be enlightened.

Public works are also mentioned. A wise landlord has good roads on his property, for good roads and canals improve it. These represent a species of avances foncieres, similar to those undertaken by proprietors.

This is by no means all.3 There are a number of duties recognised as belonging to the State, of which every economist of the Liberal school up to Bastiat and M. de Molinari approves.

We will add one other trait. Like the Liberal school, the Physio- crats were whole-hearted " internationalists." In this respect they differ from their prototypes, the Chinese. They believed that all class distinctions and all international barriers ought to be removed in the interest of political development, as well as in that of scientific study.* The peace advocates of to-day would do well to make the acquaintance of their illustrious predecessors.

enough, for the Physiocrats advocated the establishment of a single supreme monarch with undivided authority. Economically it is incorrect, for their conception even of sovereignty and taxation is impregnated with feudal ideas. 1 Dupont, Discours en tete dei (Euvres de Quesnay, vol, i, p. 35.

• Ibid. p. 22.

• Turgot, who is less inclined to favour agriculture, thinks that certain royal privileges must be granted before manufacturers can compete with agriculture ((Euvres, vol. i, p. 360).

4 " One has come to regard the various nations as drawn up against one another in a perpetual state of war. This unfortunate prejudice is almost sacred, and is regarded as a patriotic virtue." (Baudeau, p. 808.)

The three errors usually committed by States, and the three that led to the

38 THE PHYSIOCRATS

III: TAXATION

THE bulk of the Physiocratic system is taken up with the exposition of a theory of taxation, which really forms one of the most charac- teristic portions of their work. Though inextricably bound up with the theory of the net product and with the conception of landed proprietorship, curiously enough, it has survived the rest of their doctrine, and quite recently has been given a new lease of life.

In the table showing the distribution of the national income three participators only are mentioned — the landed proprietor, the farmer, and the artisan. But there is also a fourth. — the Physiocratic sovereign, who is none other than the State itself, and who thoroughly deserves a share. This benevolent despot, whose duties we have just mentioned, cannot be very exacting, for, having little to do, his demands must be moderate. In addition to his double mission of maintaining security and giving instruction, he must also contribute towards increasing the productivity of the land by establishing public works, making roads, etc.1 Money is required for all this, and the Physiocrats argued that taxes ought to be paid liberally,2 and not grudgingly, as is too often the case under a parliamentary rtgime. Where is this money to come from ?

The reply is obvious if we have grasped their system. The only available fund is the net product, which is the only new wealth that is really dispensable — the rest is necessarily absorbed in the repayment of the advances made for the upkeep of the agricultural and industrial classes. Were taxation to absorb a proportion of the revenues that are devoted to production it would gradually drain away the source of all wealth. So long as it only takes the surplus — the true net product, which is a mere tributary of the main stream — no harm will be done to future production.

All this is quite clear. But if taxation is to absorb the net

downfall of Greece, Baudeau thought, were arbitrary use of legislative authority, oppressive taxation, and aggressive patriotism (p. 801).

1 " Before a harvest can be reaped not only must the cultivators incur the usual outlay upon stock, etc., and the proprietors upon clearing the land, but the public authoritymust also incur some expense, which might be designated avarices souveraine&," (Baudeau, p. 758.)

2 '* The Government ought to be less concerned with the task of saving than with the duty of spending upon those operations that are necessary for the prosperity of the realm. This heavy expenditure will cease when the country has become wealthy." (Quesnay, Maximes, xxvi.J

" It is a narrow and churlish English idea which decrees that an annual sum should be annually voted to the Government, and that Parliament should reserve to itself the right of refusing this tax. Such a procedure is a travesty of demo- cracy." (Dupont, in a letter to J. B. Say.)

TAXATION 39

product the question arises as to who is to pay it. It is equally evident that it can only be taken from those who already possess it, namely, from the landed proprietors, who must bear the whole burden of taxation. Just now we were amazed at the privileges which the Physiocrats so light-heartedly granted them : this is the ransom, and it is no light one. The next problem is how to assess this tax.

The Physiocrats were extremely loth to rob the gentry of their incomes, and a number of pages in their writings are devoted to a justification of their claims upon them. Not only were they willing to leave them everything that was necessary to compensate them for.the outlay of capital and labour, but also all that might be required to make the property thoroughly valuable and the position of the land- owner a most enviable one.1 The preference shown for the landowner is just the result of the social importance attributed to him by the Physiocrats. " If some other class were preferable," says Dupont de Nemours, ** people would turn their attention to that." They would no longer spend their capital in clearing or improving the land. But if the possession of land be so desirable, is there not some danger lest everybody should become a landlord and neglect the other walks of life ? The Physiocrats thought not, for, since Nature has set a limit to the amount of land in existence, there must also be a limit to the number of landowners.

A third of the net product, or, if we accept Baudeau's figures, six-twentieths, i.e. 30 per cent., was to be paid in taxes. Taking the net product at 2 milliard francs, which is the figure given in the Explication du Tableau Iconomique, this gives us exactly 600 million francs as the amount of the tax.2

The proprietors, who were then for the most part free from taxation, felt that this was a very considerable contribution, and that the Physiocrats demanded a heavy price for the high honour which

1 " The amount of the tax as compared with the amount of the net product should be such that the position of the landed proprietor shall be the best possible and the state of being a landowner preferable to any other state in society." (Dupont, p. 356.)

1 If we compare this figure with the total gross revenue of France, valued then at 5 milliard francs, it would represent a tax of 12 per cent., which is rather heavy for a State that was supposed to I e governed by the laws of the " natural order." The proportion which the present French Budget bears to the total revenue of the country is 16 per cent.

The French Budget of 1781, introduced by Necker, corresponded almost exactly with the figure given by the Physiocrats, namely, 610 millions. Of course, we ought to add to this the ecclesiastical dues, the seigniorial rights, and the compulsory labour of every kind, which were to disappear under the Phytiio- cratic rtgimt.

40 THE PHYSIOCRATS

they had conferred upon them. Even to-day a tax of 30 per cent, on the gross revenue of landlords would cause some consternation. The Physiocrats anticipated this objection, and .in reply brought forward an argument which shows that they possessed exceptionally keen economic insight. They argued that none would feel the burden, seeing that no one was really paying it. Land would now be bought at 70 per cent, of its former value, so that the 30 per cent, nominally paid by the proprietor was in reality not paid by him at all.1 Land let at £10,000 would be valued at £200,000. But with a tax of £3000 it is really only yielding £7000, and its value will be £140,000. The buyer who pays this price, despite the fact that he has paid a tax of £3000, will enjoy all the revenue to which he has any claim, for he can only lay claim to what he has paid for, and he did not pay for that portion of the revenue which is affected by the tax. It is exactly as if he had only bought seven-tenths of the land, the remaining three-tenths being the State's. And if at some later time this tax should be abolished, it would merely mean making him a present of £3000 a year — the equivalent of a lump sum of £60,000. a

The reasoning was excellent for those buying land after the tax had been levied. It had, however, a much wider import than the Physiocrats thought, for it might be applied not merely to taxes on land, but also to taxes on capital. But this gave little consolation to those who were to have the honour of inaugurating the new regime, and the first task evidently was to convert them.3

1 " The tax is a kind of inalienable common property. When proprietors buy or sell land they do not buy and sell the tar. They can only dispose of that portion of the land which really belongs to them, after deducting the amount of the tax. This tax is no more a charge upon property than is the right of fellow proprietors a burden upon one's property. And so the public revenue is not burdensome to anyone, costs nothing, and is paid by no one. Hence, it in no way curtails the amount of property which a person has." (Dupont, vol. i, pp. 357, 358.)

* In order to give every security to proprietors the Physiocrats were anxious that the value of the property, when once it was fixed, should vary as little as possible. Baudeau, however, recognised the advisability of periodical revalua- tions " in order that the sovereign power should always share in both the profits and the losses of the producer." And he addresses this important caution to the proprietors : " Take no credit to yourselves for the increase in the revenue of land. The thanks are really due to the growing efficiency of the sovereign authority." (P. 708.)

1 " Let us observe, in passing, that the terms ' taxation ' and ' public revenue ' have unfortunately become synonymous in the public mind. The term ' taxation ' is always unpopular. It implies a charge that is hard to bear, and which everybody is anxious to shirk. The public revenue is the product of the sovereign's landed

TAXATION 41

The sovereign's position in the main is like that of the landed proprietors, which is in agreement with the Physiocratic conception of sovereignty. The landed proprietors and the king in reality form one class of fellow landowners, with the same rights, the same duties, and the same revenues. Hence the sovereign's interests are completely bound up with those of his country.1

The Physiocrats attached the greatest practical importance to their fiscal system, and were thoroughly convinced that the misery of the people was due to the unequal distribution of the burden of taxa- tion. They thought that this was the true source of injustice — in short, that this was the social problem. To-day we ascribe misery to unequal distribution of wealth rather than to any particular fiscal system, and consequently the Physiocratic view seems to us somewhat extreme. Still, it was perhaps not so difficult to justify, in view of the frightful conditions of fiscal organisation under the old regime.

The objections which a single tax, levied only on the landed interest, was bound to provoke were not unforeseen by the Physiocrats, nor did they neglect to answer them.

To the objection that it was unjust to place the burden of taxation upon the shoulders of a single class of the nation,2 instead of dis- tributing it equally among all classes, the Physiocrats replied that the statesman's ideal was not equal taxation, but the complete abolition of all taxation. This could only be achieved by taxing the " net product."

Suppose that we agree that the taxes should be paid by some other class. The question then is to determine what class of the community should be chosen.

Shall we say that the farmer must pay them ? But after deduct- ing the " net product " what remains for the farmer is just the bare equivalent of his original outlay. Consequently, if we take 600 millions from the farmers by way of taxation there will be so much less capital for the land, resulting in a smaller gross product the following year,' unless they agitate for a reduction of 600 millions in

property, which is disAnct from his subjects' property." (Mercier de la Riviere, p. 451.)

1 " The sovereign takes a fixed amount of the net product for his annual income. This amount of necessity grows with every increase of the net product and diminishes with every shrinking of the product. The people's interests and the sovereign's are, consequently, necessarily one." (Baudeau, p. 769.)

1 This was the basis of Voltaire's lively satire, VHomme. avec Quarante Ecus. It treats of a wealthy financier who escapes taxation, and who makes sport of the poor agriculturist who pays taxes for both, although his income is only forty ecus.

'•> " Such a reduction of the necessary expenditure must result in diminished

42 THE PHYSIOCRATS

their rents. , If they succeed this will leave the proprietors in the position of having paid over the 600 millions to the State. But we must also reckon the losses and friction incurred in every devia- tion from the " natural order." Suppose we decide that the sterile classes should pay the taxes. This class is ex hypothesi sterile — that is, it produces the exact equivalent of what it consumes. To take 600 millions from this class is tantamount to a reduction of its consumption by 600 millions, or an equivalent limitation of its purchases of raw material. The result would be a diminished product in the future, unless the industrial classes succeeded in increasing prices by an equivalent amount. Even in that case the landed proprietors will have to bear the brunt of it : firstly, they will have to reduce their own consumption, and secondly, their tenants', whose efficiency will thereby be impaired.1

This process of reasoning seems to imply that the revenues of the agricultural and industrial classes are not squeezable because they represent the indispensable minimum necessary for the expenses of production. This seems to be an anticipation of the notorious " iron law." Turgot's formula incisively stating this law, but containing no attempt at a justification, is known to most people.2 Long before his day, however, it had been stated by Quesnay in terms no less pronounced, though perhaps not so well known. " It is useless to urge that wage-earners can pay the tax so levied upon them, by restricting consumption and depriving themselves of luxuries without thereby causing the burden to fall upon the classes who pay the wages. The rate of wages, and consequently the

production, because there can be no harvest without some amount of preliminary expense. You may check your expenditure, but it will mean diminishing your harvest — a decrease in the one means an equal decrease of the other. Such a fatal blow to the growth of population would, in the long run, injure the landed proprietor and the sovereign." (Dupont de Nemours, p. 353.)

" A fall in the expenditure means a smaller harvest, which means that less will be expended upon making preparation for the next harvest. This cyclical movement seems a terrible thing to those who have given it some thought." (Mercier de la Riviere, p. 499.)

1 " There would bo something to say for this if the rich repaid them by increased wages or additional almsgiving. But the poor give to the rich, and so add to their misery, already sufficiently great. The State demands from those who have nothing to give, and directs all its penalties and exercises all its severity upon the poor." (Turgot, (Euvres, vol .i, p. 413).

" It would be better for the landed proprietors to pay it direct to the Trea- sury, and thus save the cost of collection." (Dupont de Nemours, p. 352.)

1 " It might happen — arid, indeed, it often does happen — that the worker's wage is only equal to what is necessary for his subsistence." (Reflexions, vi.)

It IB also possible that Jesus was not formulating a general law when He said

TAXATION 43

amount of comfort and luxury which wages can purchase, are fixed at the irreducible minimum by the action of the competition which prevails among them." This is quite a characteristic trait.1 The author of the " natural order," without any hesitation, admits that the direct outcome of the establishment of that order would be to reduce the life of the wage-earners to a level of bare subsistence.

It is also remarkable that in their study of the industrial classes wages should have claimed the exclusive attention of the Physiocrats. Profits even then were by no means unsqueezable, but curiously enough they failed to realise this. Voltaire's rich banker would have proved embarrassing here. They would have had some difficulty in showing how a reduction of his extravagance could possibly have endangered production. But they might have replied that since he had so little difficulty in squeezing the 400,000 livres out of his fellow-citizens he would not experience much more trouble in getting another 400,000 out of them and paying them over to the State.

Another objection consists in the insufficiency of a single tax to meet all the needs of the State. " In some States it is said that a third, a half, or even three-fourths of the clear net revenue from all sources of production is insufficient to meet the demands of the Treasury, and consequently other forms of taxation are neces- sary." 2

In reply to this the Physiocrats would point out that the mere application of their fiscal system would result in such an increase in the net product that the yield from the tax would progressively grow. We must also take account of the economies resulting from the simplicity of the tax, and the almost complete absence of expenses of collection. But the most interesting point of all is that they thought the State should adapt its needs to meet its revenue, and not vice versa. The great advantage of the Physiocratic impot, however, was that it was regulated by a natural norm, which gave the amount of the net product. Without this, taxation becomes

that we have the poor always with us. Turgot likewise wished to state the simple fact, and not to draw a general conclusion.

1 Quesnay , Second Probleme iconomique, p. 1 34. The argument which follows is rather curious. He does not seem to think that a fall in wages even below the minimum would result in the death of many people, but simply that it would result in emigration to other countries, and that as a consequence of such emigra- tion the diminished supply at home would soon lead to higher wages being paid — a fairly optimistic conclusion for the period.

1 Baudeau (p. 770) points out the error of confusing the gross revenue with the net revenue. Allowance should be made for the cost of collecting the revenue, etc.

44 THE PHYSIOCRATS

arbitrary.1 At bottom the system affords a barrier against the autocracy of the sovereign — a barrier that is much more effective than a parliamentary vote.

One of the disciples of Quesnay put the theory to the test of practice. The Margrave of Baden had the advantage of being a prince, and he proceeded to experiment on his own subjects. The system was tried in three communes of his principality, but, like most social experiments, failed. In two of the communes it was abandoned at the end of four years. In a third, despite its evil effects, it was prolonged until 1802. The increase in the land tax caused a veritable slump in the value of property just when the remission of taxes upon consumption was resulting in the rapid multiplication of wineshops and beerhouses.2 It is unnecessary to add that the failure of the experiment did nothing to weaken the faith of the Margrave or his fellow Physiocrats. An experiment on so small a scale could not possibly be accepted as decisive. This is the usual retort of inno- vators when social experiments prove failures, but we must recognise the element of truth contained in their reply.

But if we wish to see the real results of the Physiocratic system we must look beyond the private experiments of a prince. Elsewhere the effects were much more far-reaching.

The fiscal aspect of the French Revolution owed its guiding inspiration to their ideas. Out of a budget of 500 million francs the Constituent Assembly decreed that about half of it — that is, 240 millions — should be got out of a tax levied upon land, equal to a tax of 2400 million francs nowadays ; and the greatest part of it was to be raised by direct taxation.

Distrust of indirect taxation, and of all taxes on commodities, is also a consequence of the Physiocratic system — a distrust that is bound to grow as society becomes more democratic. Most of the arguments in favour of direct taxation are to be found in the Physio- cratic writings. But the chief one employed nowadays — namely, that indirect taxes often bear no proportion to the amount of the

1 " If unfortunately it be true that three-tenths of the annual product is not sufficient to cover the ordinary expenditure, there is only one natural and reason- able conclusion to be drawn from this, namely, curtail the expenditure." (Dupont de Nemours, p. 775.)

" The tax must never be assessed in accordance with individual caprice. The amount is determined by the natural order." (Dupont, SurT Origin d'un Science nourelle.) Neither should the State, in their opinion, exceed the limit, because it would mean having recourse to borrowing, which would simply mean increased deferred taxation.

* See M. Gargon's instructive brochure, Un Prince ollemand physiocraie, for a resume of the Margrave's correspondence.

OF THE PHYSIOCRATIC DOCTRINE 45

revenue, but weigh heaviest upon those who have least, is not among them. This concern about proportionality, which is merely another word for justice, was quite foreign to their thoughts.1

At a later stage of this work it will be our duty to call attention to the enthusiasm aroused by this old theory of an impot unique as advocated in the works of an eminent American economist,2 who renders homage to the Physiocrats for inspiring him with ideals altogether opposed to those of the landed proprietors. And a similar movement under the very same name — the single-tax system — is still vigorous in the United States.

IV : RESUME OF THE PHYSIOCRATIC DOCTRINE. CRITICS AND DISSENTERS

A BRIEF risumi of the contributions made to economic science by the Physiocrats will help us to realise their great importance. From the theoretical point of view we have :

1. The idea that every social phenomenon is subject to law, and that the object of scientific study is to discover such laws.

2. The idea that personal interest if left to itself will discover what is most advantageous for it, and that what is best for the individual is also best for everybody. But this liberal doctrine had many advocates before the Physiocrats.

3. The conception of free competition, resulting in the establish- ment of the bon prix, which is the most advantageous price for both parties, and implies the extinction of all usurious profit.

4. An imperfect but yet searching analysis of production, and of the various divisions of capital. An excellent classification of incomes and of the laws of their distribution.

5. A collection of arguments which have long since become classic in favour of landed property.

From a practical point of view we have :

1. The freedom of labour.

2. Free trade within a country, and an impassionate appeal for the freedom of foreign trade.

3. Limitation of the functions of the State.

4. A first-class demonstration of the superiority of direct taxation over indirect.

1 We find the word in one of Dupont's letters to Say, but that is much later.

1 Henry George dedicated his volume entitled Protection or Free Trade to them because he considered that they were his masters. But his tribute loses its point somewhat when we remember that he admits that he had never read them.

46 THE PHYSIOCRATS

It is unjust to reproach the Physiocrats, as is sometimes done, with giving us nothing but social metaphysics. A little over- systemisation may prove useful in the early stages of a science. Its very faults have some usefulness. We must admit, however, that although their conception of the " natural order " supplied the foundation, or at least the scaffolding, for political economy, it be- came so intertwined with a kind of optimism that it nullified the work of the Liberal school, especially in France.1

But the greatest gap in the Physiocratic doctrine is the total absence of any reference to value, and their grossly material, almost terrestrial, conception of production. They seldom mention value, and what little they do say is often confused and commonplace. Herein lies the source of their mistakes concerning the unproductive character of exchange and industry, which are all the more remark- able in view of the able discussions of this very question by a number of their contemporaries. Among these may be mentioned Cantillon,* who resembles them in some respects and whose essay on commerce was published in 1755 ; the Abbe Galiani, who dealt with the question in his Delia Moneta (1750) ; and the Abbe Morellet, who dis- cussed the same topic in his Prospectus (Pun Nouveau Dictionnaire du Commerce (1769). More important than any of them, perhaps, is Condillac, whose work Du Commerce et du Gouvernement was unfor- tunately not published until 1776 ; but by that time the Physiocratic system had been completed, and their pre-eminence well established.

1 Listen to Mercier de la Riviere : " We must admire the way in which one man becomes an instrument for the happiness of others, and the manner in which this happiness seems to communicate itself to the whole. Speaking literally, of course I do not know whether there will not be a few unhappy people even in this State, but their numbers will be so few and the happy ones will be so numerous that we need not be much concerned about helping them. All our interests and wills will be linked to the interest and will of the sovereign, forming for our common good a harmony which can only be regarded as the work of a kind Providence that wills that the land shall be full of happy men." This enchanting picture only applies to future society, when the " natural order " will be estab- lished. The optimism of the Physiocrats is very much like the anarchists'.

* Very little seems to have been known about Cantillon for more than a century after his death. But, like all the rediscovered founders of the science, he has received considerable attention for some years past. His influence upon the Physiocrats has perhaps been exaggerated. Mirabeau's earliest book, L'Ami des Hommea, which appeared just twelve months after Cantillon's work, is un- doubtedly inspired by Cantillon. No discussion of his work is included in the text because it was felt that it might interfere with the plan of the work as already mapped out. There are several articles in various reviews which deal with Cantillon's work, the earliest being that contributed by Stanley Jevons to the Contemporary Review in 1881,

RBSUMS OF THE PHYSIOCRATIC DOCTRINE 47

Turgot, though one of their number, is an exception. He was never a thoroughgoing Physiocrat, and his ideas concerning value are much more scientific.1 He defines it as " an expression of the varying esteem which man attaches to the different objects of his desire." This definition gives prominence to the subjective character of value, and the phrases " varying esteem " and " desire " give it greater precision.2 It is true that he also added that besides this relative attribute value always implied " some real intrinsic quality of the object." He has frequently been reproached for this, but all that he meant to say was that our desire always implies a certain cor- rectness of judgment, which is indisputable unless every judgment is entirely illusory. But Turgot would never have admitted that.

It is possible that Turgot inspired Condillac, and that he himself owed his inspiration to Galiani, whose book, which appeared twenty years earlier, he frequently quotes. This work contains a very acute psychological analysis of value, showing how it depends upon scarcity on the one hand and utility on the other.

Besides a difference in his general standpoint, there are other considerations which distinguish Turgot from the members of the Physiocratic school, and it would have been juster to him as well as more correct to have devoted a whole chapter to him.3 Generally speaking, his views are much more modern and more closely akin to Smith's. In view of the exigencies of space we must be content to draw attention to the principal doctrines upon which he differs from the Physiocrats.

1. The fundamental opposition between the productivity of agriculture and the sterility of industry, if not altogether abandoned, is at least reduced in importance.

2. Landed property is no longer an institution of divine origin. Even the appeal to the " ground expenses " is dropped. As an institu- tion it rests merely upon the fact of occupation and public utility.

3. Movable property, on the other hand, holds a prominent

1 Valeurs etMonnaies, which dates from 1769, and again in his Reflexions. Quesnay's conception of value may be gleaned from his article entitled Hommes, which remained unpublished for a long time, and has only recently appeared in the Revue d'Histoire des Doctrines iconomiques et societies, vol. i, No. 1.

1 He dilates at considerable length on the distinction between estimative value (what would now be called subjective value) and appreciative (or social) value. The first depends upon the amount of time and trouble we are willing to sacrifice in order to acquire it. In this connection the notion of labour- value appears. As to appreciative value, it differs from the preceding only in being an " average estimative value."

3 Turgot, though a disciple of Quesnay, remained outside the Physiocratio school. He always referred to them contemptuously as " the sect."

48 THE PHYSIOCRATS

place. The function of capital is more carefully analysed and the legitimacy of interest definitely proved.

But we must turn to Condillac's book if we want to see how the Physiocratic doctrine should be completed and expurgated of its errors. Condillac was already well known as a philosopher when, in his sixtieth year, he published this new work in 1776. This admirable book, entitled I*e Commerce et le Gouvernement considers relativement Vun a Vautre, contains an outline of most modern problems. The title gives no adequate indication of the character of the work, and possibly accounts for the oblivion into which the book has fallen.

It is a genuine economic treatise, and not a medley of economic and political suggestions concerning social science, with an admixture of ethics and jurisprudence. Value is regarded as the foundation of the science, and the Physiocrats are thus out-classed from the very first.1 Value itself is considered to be based upon utility, which is stripped of its popular meaning, and given a scientific connotation which it has never lost. It no longer implies an intrinsic, physical property of matter, but connotes a degree of correspondence between a commodity and a given human want. " Value is not an attribute of matter, but represents our sense of its usefulness, and this utility is relative to our need. It grows or diminishes according as our need expands or contracts." This is the foundation of the psycho- logical theory of value.2

But this is not all — though a great deal. He clearly realises that utility is not the only determinant of value ; that quantity, i.e. scarcity or abundance, also exercises an important influence. With admirable judgment he seizes upon the connection between them, and shows how the two statements are united in one, for quantity only influences value according as its action upon utility intensifies or weakens de- mand. " But since the value of things is based upon need it is natural that a more keenly felt need should endow things with greater value, while a less urgent need endows them with less. Value increases with scarcity and diminishes with plenty. In case of plenty it may even disappear ; a superabundant good will be valueless if one has no use for it." 8 This could not be put more clearly to-day. Here we have the germ of the theories of Jevons and the Austrian school, though it took a long time to develop.

We might naturally expect a superior treatment of exchange following upon this new theory of value. If value is simply the

1 " I am so struck with this notion that I think it must serve as the basis of this whole treatise." (Chap. 1.)

7 Le Commerce et le Gouvernement, p. 15. * Ibid., Part I, chap. 1.

RESUME OF THE PHYSIOCRATIC DOCTRINE 49

satisfaction of want, exchange creates two values when it satisfies two needs at the same time. The characteristic of exchange is that each of the two parties yields what it has in superabundance in return for what it needs. But what is given up is superabundant, is useless, and consequently valueless ; what is demanded has greater utility, and consequently greater value. Two men come to market each with a useless thing, and each returns with a useful one.1 Conse- quently the Physiocratic saying that exchange means no gain to anyone, or at least that the gain of on 3 only compensates for the loss of the others, is seen to be radically false. The Physiocrats — notably Trosne — attempted a reply, but, for reasons already given, they never succeeded in realising the subjective character of value.

This same theory should have carried Condillac a stage further, and helped in the rectification of the Physiocratic error concerning production. If value is simply utility and utility itself is just the correspondence between things and our demand for them, what is the agency that produces this harmony between things and desires ? It is very seldom that nature succeeds in establishing it. " Nature is frequently fertile in things we have no desire for and lavish of what is useless " — a profound remark that ought to have cooled the Physiocrats' love of the Alma Parens. " Matter is transformed and made useful by dint of human labour. Production means giving new form to matter." 2 If this be true, then there is no difference between agricultural and industrial production, for they both trans- form what already exists.8

Moreover, the theory proves very clearly that if artisans and pro- prietors are dependent upon the agriculturists — as, indeed, they are — the latter in their turn are nothing but artisans. " If someone asks whether agriculture ought to be preferred to manufacture or manufac- ture to agriculture, we must reply that we have no preferences, and that the best use should be made of both." *

Lastly, his definition of wages, short as it is, is of immense significance. " Wages represent the share of the product which is

1 " It is not correct to say that the exchanged values are equal ; on the contrary, each party seeks to give a smaller value in exchange for a larger one. The process proves advantageous to both ; hence, doubtless, the origin of the idea that the values must be equal. But one ought to have come to the conclu- sion that if each gains both must have given less and obtained more." (Op. cit., pp. 55, 86.) Compare this with the quotation from do Trosne, p. 27, and note its psychological superiority. * Op. cit., Part I, chap. 9.

3 " Even where the land is covered with products there is no additional material beyond what there was formerly. They have just boon given a new form, and wealth consists merely of such transformations."

* Op. cit., Part 1, chap. 29.

50 ADAM SMITH

due to the workers as co-partners." J Wages only " represent " the share that is due to the workers. In other words, the wage-earner, either through want of will or of power, cannot exercise his rightful claim to his own work, and simply surrenders the claim in return for a money price. This constitutes his salary, which is regulated, like every other price, by competition between buyers and sellers. Condillac makes no reference to an iron law of wages, but regards them as determined by the forces of demand and supply. He does, however, hint at the implicit alliance which exists between capital and labour.2

From a practical standpoint also, especially in his defence of free labour and his condemnation of corporations, Condillac is more categorical than the Physiocrats. " All these iniquitous privileges," he writes, " have no claim to a place in the order beyond the fact that they are already established." He is as persistent as Turgot in his justification of the taking of interest and in his demand for the determination of the rate by competition. This very elegant argument is employed to show its similarity to exchange : Exchange implies compensation for overcoming the drawbacks of distance, whether of place or of time.3 Exchange generally refers to place, interest to time, and this is really the foundation of the modern theory.

CHAPTER II: ADAM SMITH

NOTWITHSTANDING the originality and vigour displayed by the Physiocrats, they can only be regarded as the heralds of the new science. Adam Smith,4 it is now unanimously agreed, is its true

1 In a recent study of the wage bargain we find M. Chatelain giving expression to similar ideas, though apparently knowing nothing of Condillac's work. 1 Op. cit., chap, xv, par. 8.

* See Turgot, Memoir e aur les Frets <T Argent, p. 122 : " In every bargain involving the taking of interest a certain sum of money is given now in exchange for a somewhat larger sum to be paid at some future date ; difference of time as well as of place makes a real difference to the value of money." Further on he adds (p. 127) : " The difference is faniili&r to everyone, and the well-known proverb ' A bird in the hand is worth two in the bush ' is simply a popular way of expressing it."

* The life of Adam Smith presents nothing remarkable. It is easily summed up in the story of his travels, his professional activities, and the records of his friendships, and among these his intimacy with Hume the philosopher has become classical. He was born at Kirkcaldy, in Scotland, on June 5, 1723. From 1737 to 1740 he studied at the University of Glasgow under Francis Hutcheson, the philosopher, to whom he became much attached. From 1740 to

ADAM SMITH 51

founder. The appearance of his great work on the Wealth of Nations in 1776 instantly eclipsed the tentative efforts of his predecessors. To-day the Physiocratic doctrines scarcely do more than arouse historical curiosity, while Smith's work has been the guide for successive generations of economists and the starting-point of all their speculation. Even at the present day, despite many changes in the fundamental principles of the science, no economist can afford to neglect the old Scotch author without unduly narrowing his scientific horizon.

Several reasons account for the commanding position held by this book — a position which no subsequent treatise has ever suc- cessfully rivalled.

First is its supreme literary charm. It is above all an interesting book, bristling with facts and palpitating with life. The burning questions of the hour, such as the problems presented by the colonial regime, the trading companies, the mercantile system, the monetary question, and taxation, supply the author with congenial themes for

1746 he continued his studies at Oxford, where he seems to have worked steadily, chiefly by himself. The intellectual state of the university was at that time extremely low, and a number of the professors never delivered any lectures at all. Returning to Scotland, he gave two free courses of lectures at Edinburgh, one on English literature and the other on political economy, in the course of which he defended the principles of commercial liberty. In 1751 he became Professor of Logic at Glasgow, at that time one of the best universities in Europe. Towards the end of the year he was appointed to the chair of Moral Philosophy, which included the four divisions of Natural Theology, Ethics, Jurisprudence, and Politics within its curriculum. In 1759 he published his Theory of Moral Sentiments, which speedily brought him a great reputation. In 1764, when forty years of age, he quitted the professorial chair at Glasgow University and accompanied the young Duke of Buccleuch, son-in-law of Charles Townshend, the celebrated statesman, on his travels abroad. With the young nobility of this period foreign travel frequently took the place of a university training, on account of the disrepute into which the latter had fallen. Smith was given a pension of £300 a year for the rest of his life, so that the mere material advantage was considerably in excess of his earnings as a professor. The years 1764-66 were spent in this way. A year and a half was passed at Toulouse, two months at Geneva, where he met Voltaire, and another ten months at Paris. While in Paris he became acquainted with the Physiocrats, particularly with Turgot and the Encyclopaedists. It was at Toulouse that he began his Wealth of Nations. Returning to Scotland in 1767, he went to live with his mother, with the sole object of devoting himself to this work. By 1773 the book was nearly complete. But Smith moved to London, and the work did not appear till 1776. By this achievement Smith crowned the great celebrity which he already enjoyed. In January 1778 Smith was appointed Commissioner of Customs at Edinburgh, a distinguished position which he held until his death in 1790.

All that we know of Smith's character shows him to have been a man of tender feelings and of great refinement of character. His absent-mindedness

52 ADAM SMITH

his treatment. His discussion of these questions is marked by such mastery of detail and such balance of judgment that he convinces without effort. His facts are intermixed with reasoning, his illustra- tions with argument. He is instructive as well as persuasive. Withal there is no trace of pedantry, no monotonous reiteration in the work, and the reader is not burdened with the presence of a cumbersome logical apparatus. All is elegantly simple. Neither is there the slightest suggestion of the cynic. Rather a passion of genuinely human sympathy, occasionally bordering upon eloquence, breathes through the pages. Thanks to rare qualities such as these we can still feel something of the original freshness of this old book.

In addition to this, Smith has been successful in borrowing from his predecessors all their more important ideas and welding them into a more general system. He superseded them because he rendered their work useless. A true social and economic philosophy was substituted for their fragmentary studies, and an entirely new value given to their contributions. Taken out of their isolation, they help to illustrate his general theory, becoming themselves illuminated in the process.

has become proverbial. In politics his sympathies were with the Whigs. In religion he associated himself with the deists, a school that was greatly in vogue towards the end of the eighteenth century, and of which Voltaire, who was much admired by Smith, was the most celebrated representative.

For a long time the only life of Smith which we possessed was the memoir written by Dugald Stewart, Account of the Life and Writings of Adam Smith, and read by him in 1793 before the Royal Society of Edinburgh. It appeared in the Transactions of the society for 1794, and was published in volume form in 1811 along with other biographies, under the title of Biographical Memoir 9 oj Adam Smith, Robertson, etc., by Dugald Stewart. To-day we are more fortunate, John Rae in his charming Life of Adam Smith (London, 1895) has succeeded in bringing to light all that we can know of Smith and his circle. To him we are indebted for mcst of the details we havo given. In 1894 James Bonar published a catalogue of Smith's library, containing about 2300 volumes, and comprising about two-thirds of his whole library. A still more important con- tribution to the study of Smith's ideas has been made by Dr. Edwin Cannan, who in 1896 published Lectures on Justice, Police, Revenue, and Arms, delivered in Glasgow by Adam Smith, from Notes taken by a Student in 1763 (Oxford). This represents the course of lectures on political economy delivered by Smith while professor at Glasgow. A manuscript copy of the notes taken in this course by a student, probably in 1763, was accidentally discovered by a London solicitor in 1876. These notes were in 1895 forwarded to Dr. Cannan for publication. They are especially precious in helping us to understand Smith's ideas before his stay in France and his meeting with the Physiocrats. Of the numerous editions of the Wealth of Nations which have hitherto been published, the more important are those of Buchanan, McCulloch, Thorold Rogers, and Nicholson. The latest critical edition is that of Dr. Cannan, publishedin 1904 by Methuen, containing very valuable notes. This is the edition we have used.

ADAM SMITH 53

Like most great writers, Smith knows how to borrow without impairing his originality. Over a hundred authors are quoted in his book, but he does not always acknowledge them. The names of some of the writers who exercised such influence over him, and opened up the path which he afterwards followed, deserve more than a passing reference.

The first place among these belongs, perhaps, to Hutcheson, Smith's predecessor in the chair of Moral Philosophy at Glasgow. The divisions of the subject are almost identical with those given by Hutcheson, and many of Smith's best known theories can be traced in the System of Moral Philosophy published by Hutcheson in 1755, but which we know was written long before. Hutcheson laid great stress upon the supreme importance of division of labour, and his views on such questions as the origin and variations in the value of money and the possibility of corn or labour affording a more stable standard of value closely resemble those of the Wealth of Nations.

David Hume is a near second. Smith refers to him as " by far the most illustrious philosopher and historian of the present age,"1 and from 1752 onward they were the closest of friends. Hume was already the author of some essays on economic questions, the most important among them dealing with money, foreign trade, the rate of interest, etc. These, along with several other writings, were pub- lished in the Political Discourses in 1752. Hume's examination of these problems displays his original penetrative thought, and there is evident the profundity and lucidity of treatment characteristic of all his writings. The absurdity of the Mercantile policy and of interfering with the natural tendency of money to adapt itself to the needs of each community, the sophistry of the balance of trade theory, and the impious consequences resulting from com- mercial jealousy among nations are exposed with admirable force in these essays. No doubt the essays left a great impression upon Smith. He quoted them in his lectures at Glasgow, and Hume consulted him before bringing out a second edition. It is true that Smith eventually became the stauncher Liberal of the two. Hume, in his essay on the Balance of Trade, recognized the legitimacy of certain protective rights which Smith wished removed altogether. Still it was to Hume that Smith owed his conversion to the Liberal faith.

On this matter of commercial liberty there was already, towards the end of the seventeenth and the beginning of the eighteenth 1 Wealth of Nations, vol. ii, p. 275.

54 ADAM SMITH

centuries, a small but a growing band of Mercanti lists who had begun to protest against the irksomeness of the Customs regulations. They were, of course, still largely imbued with mercantile prejudice, but they are rightly classed as " Liberals." Just as in France Boisguillebert had foreshadowed the Physiocrats, so in England Child, Petty, Tucker, Dudley North, and Gregory King had been preparing the way for a more liberal policy in foreign trade.1

In addition to Hutcheson and Hume one other writer must be mentioned in this connection, namely, Bernard de Mandeville. He was not an economist at all, but a doctor with considerable philo- sophical interests. In 1704 he had published a small poem, which, along with a number of additions, was republished in 1714 under the title of The Fable of the Bees ; or, Private Vices Public Benefits. The fundamental idea of the book, which caused quite a sensation at the time, and which was seized by order of the Government, is that civilisation — understanding by that term not only wealth, but also the arts and sciences — is the outcome, not of the virtues of mankind, but of what Mandeville calls its vices ; in other words, that the desire for well-being, comfort, luxury, and all the pleasures of life arises from our natural wants. The book was a sort of apology for the natural man and a criticism of the virtuous.

Smith criticised Mandeville in his Theory of Moral Sentiments* and reproached him particularly for referring to tastes and desires as vices though in themselves they were nowise blameworthy. But despite his criticism Mandeville's idea bore fruit in Smith's mind. Smith in his turn was to reiterate the belief that it was personal interest (in his opinion no vice, but an inferior virtue) that unwittingly led society in the paths of well-being and prosperity. A nation's wealth for Smith as well as for Mandeville is the result, if not of a vice, at least of a natural instinct which is not itself virtuous, but which is bestowed upon us by Providence for the realisation of ends that lie beyond our farthest ken.

Such are the principal writers in whose works we may find an outline of some of the more important ideas which Smith was to incorporate in a true system.

Mere systematisation, however, would not have given the Wealth of Nations its unique position. Prior to Smith's time attempts had been made by Quesnay and the Physiocrats to outline the scope of

1 On this point see Schatz's Individualisme, economique et social (Paris, 1908).

* Chap iv of sec. ii of the 7th part of the Theory of Moral Sentiments is entitled Of Syatemt of License.

ADAM SMITH 55

the science and to link its various portions together by means of a few general principles. Although he was not the first to produce a connected scientific treatise out of this material, he had a much greater measure of success than any of his predecessors.

Smith owed much to the Physiocrats, but he had little personal acquaintance with them beyond that afforded by his brief stay in Paris in 1765. Slight as the intimacy was, however, there is no doubt about the influence they had upon him. It is also very im- probable that he had read all their works : Turgot's Reflexions, for example, written in 1766, but only published in 1769-70, was probably not known to him. But frequent* personal converse with both Turgot and Quesnay had helped him in acquiring precise first-hand knowledge -of their views. We can easily guess which ideas would attract him most.

On one point at least he had no need to be enlightened, for in the matter of economic liberalism he had long been known as a doughty champion. But the ardent faith of the Physiocrats must have strengthened his own belief very considerably.

On the other hand, it appears that he borrowed from the Physio- crats the important idea concerning the distribution of the annual revenue between the various classes in the nation. In his lectures at Glasgow he scarcely mentions anything except production, but in the Wealth of Nations an important place is given to distribution. The difference can hardly be explained except upon the hypothesis of Smith's growing acquaintance with the Tableau tconomique and the theory of the " net product."

But admitting that he borrowed what was most characteristic and most suggestive in their teaching, his treatment of its many complicated aspects is altogether superior to theirs. The Physiocrats were so impressed by the importance of agriculture that they utterly failed to see the problem in its true perspective. They scanned the field through a crevice, and their vision was consequently narrow and limited. Smith, on the other hand, took the whole field of economic activity as his province, and surveyed the ground from an eminence where the view was clearest and most extensive.

The economic world he regarded as a vast workshop created by division of labour, one universal psychological principle — the desire of everyone to better his lot — supplying unity to its diverse pheno- mena. Political economy was at last to be based, not on the interests of a particular class, whether manufacturing or agricultural, but upon a consideration of the general interest of the whole community. Such are the directing principles that inspire the whole work, the

56 ADAM SMITH

guiding lines amidst what had hitherto seemed a mere chaos of economic facts. Contemporaries never counted upon the diffi- culties which the new science was bound to encounter, so great was their enthusiasm at having a fixed standpoint from which for the first time the complex interests of agriculture, industry, and com- merce might be impartially surveyed. With Smith the study emerged from the " system " stage and became a science.

Our examination of Smith's views will be grouped around three points :

(I) Division of labour.

(II) The "natural" organisation of the economic world under the influence of personal interest.

(III) Liberalism.

I : DIVISION OF LABOUR

IT was Quesnay who had propounded the theory that agriculture was the source, of all wealth, both the State's and the individual's.1 Adam Smith seized upon the phrase and sought to disprove it in his opening sentence by giving to wealth its true origin in the general activity of society. " The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour or in what is purchased with that produce from other nations."

Labour is the true source of wealth. When Smith propounded this celebrated theory, which has given rise to so many misunder- standings since, it was not intended that it should minimise the importance of natural forces or depreciate the part which capital plays in production.2 No one, except perhaps J. B. Say, has been more persistent in emphasising the importance of capital, and to the land, as we shall presently see, he attributed a special degree of pro- ductivity. But from the very outset Smith was anxious to emphasise the distinction between his doctrine and that of the Physiocrats. So he definitely affirms that it is human activity and not natural forces which produces the mass of commodities consumed every year.

1 One ken's edition, p. 331.

1 The theory that there are three factors of production, which has since become a commonplace of economics, is not to be found in Smith. Indirectly, however, it was he who originated the idea by distinguishing in his treatment of distribu- tion between the various sources of revenue. The distinction once made, it waa quite natural to consider each source as a factor of production ; and this is just what J. B. Say did in his Treatise (2nd ed., chaps, iv and v). Cf. Cannan's History of the Theories of Production and Distribution, p. 40 (1894).

DIVISION OF LABOUR 57

Without the former's directing energy the latter would for ever remain useless and fruitless.

He is not slow to draw inferences from this doctrine. Work, employed in the widest sense, and not nature, is the parent of wealth — not the work of a single class like the agriculturists, but the work of all classes. Hence all work has a claim to be regarded as produc- tive. The nation's annual income owes something to everyone who toils. It is the result of their collaboration, of their ** co-operation " as he calls it. There is no longer any need for the distinction between the sterile and the productive classes, for only the idle are sterile.

A nation is just a vast workshop, where the labour of each, however diverse in character, adds to the wealth of all. The passage in which Adam Smith expresses this idea is well known, but no apology is needed for quoting it once again.1 " What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen ! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and brought to him perhaps by a long sea and a long land carriage, all the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habita- tion, together with the tools of all the different workmen employed in producing those different conveniences ; if we examine, I say, 1 Wealth of Nations, Book I, chap. 1 ; Carman, vol. i, pp. 13-14.

E.D. C

58 ADAM SMITH

all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and co-operation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated."

Division of labour is simply the spontaneous realisation of a particular form of this social co-operation. Smith's peculiar merit lies in placing this fact in its true position as the basis of his whole work. The book opens upon this note, whose economic and social importance has been so frequently emphasised since that it sounds almost commonplace to-day.

This division of labour effects an easy and natural combination of economic efforts for the creation of the national dividend. Whereas animals confine themselves to the direct satisfaction of their indi- vidual needs,1 men produce commodities to exchange them for others more immediately desired. Hence there results for the community an enormous increase of wealth ; and division of labour, by establish- ing the co-operation of all for the satisfaction of the desires of each, becomes the true source of progress and of well-being.

In order to illustrate the growth in total production as the outcome of division of labour, Smith gives an example of its effects in a particular industry. '* The effects of the division of labour, in the general business of society, will be more easily understood by considering in what manner it operates in some particular manu- factures." It is in this connection that he introduces his celebrated description of the manufacture of pins. " A workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head ; to make the head requires two or three distinct operations ; to put it on, is a

1 " In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature." (Wealth of Natiuna, Book I, chap. 2 ; Carman, vol. i, p, 16.)

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peculiar business, to whiten the pins is another ; it is even a trade by itself to put them into the paper ; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accom- modated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day." 1

Such is the picture of man as we find him in society. Division of labour and exchange have resulted in augmenting production a hundredfold, and thus increasing his well-being, whereas left to himself he could scarcely supply his most urgent needs.

In a subsequent analysis Smith ascribes the gain resulting from division of labour to three principal causes : (1) The greater dexterity acquired by each workman when confined to one particular task ; (2) the economy of time achieved in avoiding constant change of occupation ; (3) the number of inventions and improvements which suggest themselves to men absorbed in one kind of work.

Criticism has been levelled at Smith for his omission to mention the disadvantages of division of labour which might possibly counter- balance its many advantages. The omission is the result of his method of treating the whole question, and it is not of much real importance. The disadvantages, moreover, were not altogether lost sight of, and it would be difficult to find a more eloquent plea for some counteracting influence than that which Smith puts forward in the fifth book of the Wealth of Nations. " In the progress of the division of labour," he remarks, " the employment of the far greater part of those who live by labour, that is, of the great body of the people, comes to be confined to a few very simple operations ; frequently to one or two." But ** the man whose whole life is spent in performing a few simple operations, of which the effects too are, perhaps, always the same, or very nearly the same, has no occasion to exert his understanding, or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become." a

1 Wealth of Nations, Book 1, chap. 1 ; Oannan, vol. i, p. 6. * Ibid., Book V, chap, i, pur iii, art. 2 ; vol. ii, p. 207.

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This passage seems in contradiction with the ideas expressed above. At one moment constant application to one particular kind of work is regarded as the mother of invention, at another the unremitting task is branded as a fertile cause of stupefaction. The contradiction is, however, more apparent than real. An occupation at first stimulating to the imagination may, if constantly pursued, result in mental torpor. Smith's conclusions are at any rate interest- ing. In order to remove the inconveniences resulting from over- specialisation he emphasises the need for bringing within reach of the people, even of imposing upon them, a system of education consisting of the three R's 1 — such education to be supplied through institutions partly supported by the State. We can imagine the shock which such heterodoxy must have given to the prophets of laissez-faire. Fortunately it was not the only one they had to bear.

Smith next proceeds to indicate the limits of this division of labour. Of such limits he mentions two : (1 ) In the first place it must be limited by the extent of the market. " When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he has occasion for." 2 This is why foreign trade, including trade with the colonies, by extending the market for some products is favourable to further division of labour and a further increase of wealth. (2) The other consideration which, according to Smith, limits division of labour is the quantity of capital available.8 The significance of this observation is not quite so obvious as that of the former one. Here it seems to us that a conclusion drawn from one particular trade has been applied to industry as a whole. It may be true of a private manufacturer that

1 " For a very small expence the public can facilitate, can encourage, and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education." (Wealth of Nations, Book V, chap. 1, part iii, art. 2 ; Cannan, vol. ii, p. 270.)

1 Ibid., Book I, chap. 3 ; vol. i, p. 19.

1 " As the accumulation of stock must, in the nature of things, be previous to the division of labour, so labour can be more and more subdivided in proportion only as stock is previously more and more accumulated." (Ibid., Book II, Introd. ; vol. i, p. 259.) It is true that in another passage he speaks of the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it (Book I, chap. 10, part ii ; vol. i, p. 1 37). But this observation remains isolated, while the former represents his true teaching.

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he will be able to push technical division of labour further than any of his rivals provided he has more capital than they ; but taking society as a whole it is clear that the existence of division of labour enables the same product to be produced with less capital than is necessary for the single producer.1

Such is an outline of Adam Smith's theory of division of labour — a theory so familiar to everyone to-day that we are often unable to realise its importance and to appreciate its originality, and this despite the fact that certain sociologists like Durkheim have hailed it as supplying the basis of a new ethic. Juxtaposed with the Physiocratic theory, it is not very difficult to realise its superiority.

To the Physiocrats the economic world was a hierarchy of classes. The agriculturist in some mysterious way bore the " whole weary weight of this unintelligible world " upon his own shoulders, giving to the other classes a modicum of that sustenance which he had wrested from the soil. Hence the fundamental importance of the agri- cultural classes and the necessity for making the whole economic system subordinate to them. Adam Smith, on the other hand, attempted to get a view of production as a whole. He regarded it as the result of a series of joint undertakings engineered by the various sections of society and linked together by the tie of exchange. The progress of each section is bound up with that of every other. To none of these classes is entrusted the task of keeping all the others alive ; all are equally indispensable. The artisan who spares the labourer the task of building his house or of making his shoes contributes to the accumulation of agricultural products just as much as the ploughman who frees the artisan from turning the furrow or sowing the seed. The progress of national wealth cannot be measured in terms of a single net product ; it must be estimated by the increase in the whole mass of commodities placed at the disposal of consumers.

One very evident practical conclusion follows; namely, that taxation should fall, not upon one class, as the Physiocrats wished, but upon all classes alike. As against the impot unique, Smith advocates multiple taxation which shall strike every source of revenue equally, labour and capital as well as land ; and the funda- mental rule which he lays down is as follows : " The subjects of every State ought to contribute towards the support of the Govern- ment, as nearly as possible, in proportion to their respective abilities ; that is, in proportion to the revenue which they respectively enjoy

1 Cf. Carman's penetrating criticism of this idea of Smith's in Theories of Production atid Distribution, pp. 80-83.

62 ADAM SMITH

under the protection of the State." 1 This is his famous maxim of equality so frequently quoted in every financial discussion.2

It is very curious that Smith should have failed to make the best possible use of this theory. Its full significance was lost upon him. The theory of division of labour alone was sufficient to dispose of the whole Physiocratic system. Nevertheless, in the last chapter of Book IV we find him still valiantly struggling to disprove the con- clusions of the Physiocrats, by the aid of arguments not always very convincing. Forgetting his principle of division of labour, he even adopts a part of their thesis and finds himself entangled by the invalid distinctions which they had drawn between productive and unproductive workers. He simply gives another definition and describes as unproductive all works which " perish in the very instant of their performance, and seldom leave any trace or value behind them for which an equal quantity of service could afterwards be procured." 8 All these services, which comprise the labours of domestic servants, of administrators and magistrates, of soldiers and priests, of counsellors, doctors, artists, authors, musicians, etc., Say classed together as " immaterial products." By restricting the term " productive " to material objects only, Smith gave rise to a very useless controversy on the nature of productive and unproductive works — a controversy that was first taken up by Say and revived by Mill, but which to-day seems to be decided against Smith, thanks to a more exact interpretation of his own doctrines. It is, indeed, quite clear that all these services constitute a part of the

1 This is the first of the four celebrated maxims enunciated by Smith in his theory of taxation. Here are the other three : " (ii) The tax which each individual is bound to pay ought to be certain and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person, (iii) 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. (iv) Every tax ought to be so contrived as both 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." ( Wealth of Nations, Book V, chap. 2, part ii ; Carman, vol. ii, pp. 310-311.)

* This rule of payment according to ability did not prevent his pronouncing in another paragraph in favour of progressive taxation. This is an instance of a want of logic frequently evidenced in his writings. Speaking of taxes upon rent, he remarks that they weigh more heavily upon rich than upon poor, because the former in proportion to their income spend more upon house rent than the latter. But " it is not very unreasonable that the rich should contribute to the public expence, not only in proportion to their revenue, but something more than in that proportion." (Ibid., "Book V, chap. 2, part ii, art. 1 ; vol. ii, p. 327.)

1 Ibid., Book II, chap. 3 ; vol. i, p. 314.

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annual revenue of the nation, and that " production " in a general sense would be diminished if some persons did not exclusively devote themselves to the performance of such tasks.

After criticising the Physiocratic distinction drawn between the wage-earning classes and the productive, Smith immediately admits that the labour of artisans and traders is not as productive as that of farmers and agricultural labourers, for the latter not only return the capital employed by them together with profits, but they also furnish the proprietor with rent.1

Whence this hesitation on the part of Smith ? Where did he come by the idea of the special and superior productivity of agricul- ture ? An attempt to account for it may prove interesting, and it will help us to give Smith his true place in a history of economic doctrines.

Notwithstanding his recantation, Smith was never quite rid of Physiocratic influence. Writing of the Physiocratic system, he described it as perhaps " the nearest approximation to the truth that has yet been published." 2 So indelible was the impression which the Physiocrats left upon him that both they and their doc- trines, even when the latter are directly opposed to his own, are always spoken of with the greatest respect. The most important evidence of their power over him is the thesis just mentioned which he attempted to defend, namely, that between agriculture and other industries lies an essential distinction, because in industry and commerce the forces of nature are never brought into play, whereas in agriculture they always collaborate with man. " No equal quan- tity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing ; man does all ; and the reproduction must always be in proportion to the strength of the agents that occasion it." 8 We almost think we are dreaming when we read such things in the work of a great econo- mist. Water, wind, electricity, and steam, are they not natural forces, and do they not co-operate with man in his task of production ?

* " Fanners and country labourers, indeed, over and above the stock which maintains and employs them, reproduce annually a neat produce, a free rent to the landlord. As a marriage which affords three children is certainly more productive than one which affords only two ; so the labour of farmers and country labourers is certainly more productive than that of merchants, artificers, and manufacturers. The superior produce of the one class, however, does not render the other barren or urpro Inctive." (Wealth of Nations, Book IV, chap. 9 ; Cannan, vol. ii, p. 173.)

* Ibid., Book IV, chap. 9 ; vol. ii, p. 176. » Ibid., Book II, chap. 6 ; vol. i, p. 344.

64 ADAM SMITH

Considerations such as these were allowed to pass quite unheeded, and Smith persisted in his error because he believed that this new doctrine furnished him with an explanation of rent, that strange enigma which had puzzled English economists for so long. How was it that while other branches of production gave a return only suffi- cient to remunerate the capital and labour employed, agriculture, in addition to these two revenues, yielded a supplementary income known as rent ? It was because " in agriculture nature labours along with man : and though her labour costs no expence, its produce has its value as well as that of the most expensive workman." Thus " rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer." l Had Smith arrived at a true theory of rent this recourse to the natural powers of the soil to furnish an explanation of the proprietor's revenue would have been quite unnecessary, and in all probability he would not have so easily accepted the idea of the special produc- tivity of the soil. But this false conception of nature has persisted in economic theory, and in it Smith thought he saw an additional reason for adhering to those errors which the Physiocrats had first induced him to commit.2

1 Wealth of Nations, Book II, chap. 5 ; Carman, vol. i, p. 344. Note that here as elsewhere Smith entertains more than one opinion. In other passages in the book he regards rent as a monopoly price " that 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. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low. But it is because its price is high or low ; a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit, that it affords a high rent, or a low rent, or no rent at all." (Ibid., Book I, chap. 11 ; vol. i, p. 147.)

It is impossible to reconcile these statements. In the one case rent is regarded as a constituent element of price, in the other it is the effect of price.

In the first edition this contradiction was still more evident. In that edition rent, along with profit and wages, was treated as a third determinant of value. (See Caiman's edition, vol. i, p. 51, note 7.) The paragraph was deleted from the second edition, and rent was treated merely as a component part of the price. This modification was perhaps the outcome of a letter written by Hume to Smith on April 1, 1776, after he had read the Wealth of Nations for the first time. " I cannot think," says Hume, " that the rent of farms makes any part of the price of the produce, but that the price is determined altogether by the quantity and the demand." (Quoted by Bae in his Life of Adam Smith, p. 286.) The cele- brated controversy as to whether rent enters into prices is not a thing of yesterday. Its origin dates from the birth of political economy iteelf, and it will probably only die with it.

* His error is partly due to the fact that he failed to distinguish between the profits of the entrepreneur and the interest of the capitalist. Both with

DIVISION or LABOUR 65

Apart from his personal attachment to the Physiocrats we must also remember that Smith more than shared their predilection for agriculture.

Nothing can be more incorrect, though it is frequently done, than to regard Smith as the prophet of industrialism and to contrast him with the Physiocrats, the champions of agriculture. When the Wealth of Nations appeared in 1776 the economic transformation known to history as the Industrial Revolution, which consisted in the rapid substitution of machine production for the old domestic regime, had as yet scarcely begun. Hargreaves and Arkwright had doubtless some inventions to their credit. The one had pro- duced the spinning jenny in 1765, and the other had perfected the water frame in 1767, improvements that had given considerable impetus to the cotton trade. James Watt,1 who was known to Smith, took out a patent for a steam-engine in 1769. But these inventions were as yet quite novel, and required time before they could modify the industrial system. The more important among them, Crompton's " mule " 2 and Cartwright's weaving machine, were as yet of the future. These dates are significant ; they prove conclusively that the Industrial Revolution had scarcely begun when Smith's great work appeared. Moreover, several of the more important themes treated of in the Wealth of Nations may be dis- covered in the course of lectures which Smith delivered at Glasgow about 1759, so that it is quite impossible to establish anything like an exact connection between the Industrial Revolution which was just beginning and the ideas embodied in the Wealth of Nations. One cannot even say that Smith was particularly enamoured of the

Smith and with his successors th" word " profit " signified a twofold revenue, and this was perfectly correct so long as the entrepreneur was also a capitalist. The word " interest " was reserved for the income of that person who lent capital but who did not himself produce anything. The revenue " derived from stock, by the person who manages or employs it, is called profit. That derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money." (Ibid., Book I, chap. 6 ; vol. i, p. 54.) J. B. Say was the first to give us a definite idea of the entrepreneur. Had Smith realised more clearly the functions of the entrepreneur he would probably have perceived : (1) That the entrepreneur, in addition to paying interest on his capital, frequently has to pay rent for the use of the soil ; (2) that profit strictly so called includes an element analogous to rent. According to Smith, profit was simply payment for risks undergone or for work undertaken.

1 James Watt in 1756 had set up his workshop within the precincts of the University of Glasgow, for which he manufactured mathematical instruments. The corporation had refused him permission to set it up in the town — a striking .llustration of the narrowness and inflexibility of " the corporative regime."

1 A combination of Hargreave's spinning jenny and Arkwright's water frame.

E.D. 0'

60 ADAM SMITH

manufacturing regime — apart from the mechanical advance which it implied. For, as Marx says,1 the characteristic trait of English economic life, despite the undisputed advance that industry was making at that time, was commercial rather than industrial.* Especially was this true of Glasgow, where Smith made most of his observations. Glasgow then was an essentially commercial town, principally engaged in the importation of American tobacco.3

Far from constituting a prophetic manifesto of the new age, Smith's work reveals even to the most superficial reader a thorough abhorrence of traders and manufacturers. All his sarcasm is reserved for them, all his criticism levelled at them. While the interest of landed proprietors and workers appears to him always to accord with a country's general interest, that of traders and manu- facturers ** is never exactly the same with that of the public," the manufacturers having " generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." *

Again, when it comes to choosing between capitalists and work- men the issue is not long in doubt. It is quite clear from more than one passage that Smith's sympathy was wholly with the workers. Several paragraphs could be cited in proof of this. Suffice it to recall the very sympathetic way in which he speaks of the high wages of workmen and contrast it with his discussion of profits. " Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed,

1 Marx speaks of Smith as the economist who is the very epitome of the manufacturing period. (Das Kapital, vol. i, p. 313, note.)

1 See Mantoux' work, La Revolution industrielle au XVIII' Siede, p. 75 (Paris, 1905). "We are mistaken," says he, "if we think that manufacture was the dominant feature of the period preceding the factory system. Logically it may be the necessary antecedent, but historically its claim to priority is weak, although it left its indelible marks upon industry. The appearance of industry at the time of the Renaissance is an event of the greatest importance and signifi- cance, but it only played a part of secondary importance for a century or two."

• Rae's Life of Adam Smith, p. 89.

• Wealth of Nations, Book I, chap. 11 ; Cannan, vol. i, p. 250.

DIVISION OF LABOUR 67

cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged." * The tune changes when he comes to speak of profits. He is of opinion that high profits raise the price of commodities much more than high wages, and he dismisses the consideration of the problem with this ironical remark : " Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people." a The contrast is significant. It is still more deeply marked in that phrase which one is surprised not to see more frequently quoted by the champions of labour legislation. " Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the work- men, it is always just and equitable ; but it is sometimes otherwise when in favour of the masters." 3

This is not the tone of most of his contemporaries. Nor do we meet with this note m the writings of the appointed champions of the industrial system — the MacCullochs, the Ures, and the Babbages of the next fifty years. His words ring with that generous pity which proved a source of inspiration to Lord Shaftesbury and Michael Sadler in their efforts to secure the passing of the Factory Act of 1833.

Smith cannot, accordingly, be regarded as the herald of dawning industrialism. He clung to agriculture with all the tenacity of his nature, and no opportunity of showing his preference was ever missed. The difficulties of agriculture are quite beyond those of any other craft. " After what are called the fine arts, and the liberal professions, however, there is perhaps no trade which requires so great a variety of knowledge and experience." * Not only is it more difficult, but it is also more useful. Between agriculture, manu- facture, and commerce he draws a long comparison (to which we shall have to make reference again) purporting to show that of all employments agriculture is the most profitable field of investment, and the one most in accord with the general interest. For the more

1 Wealth of Nations, Book I, chap. 8 ; Cannan, vol. i, p. 80, 1 Ibid., Book I, chap. 9, in fine ; vol. i, p. 100. r Ibid., Book I, chap. 10, part ii ; vol. i, p. 143.

4 Ibid., Book I, chap. 10, part ii ; vol. i, p. 128. The whole passage contains a curious eulogy of proprietors and farmers.

68 ADAM SMITH

progressive nations ** the natural course of things " would seem to suggest the investment of capital firstly in agriculture, in the second place in industry, and finally in foreign trade. The whole of Book III is an endeavour to show how the policy of European nations had for many centuries been hostile to agriculture and how the natural order had been inverted in the interests of merchants and artisans. Agriculture had always been the victim. In his theory of taxation he shows how a portion of the taxes on profits and wages ultimately falls upon property. In his discussion of duties on imported corn — those duties which aroused the indignation of Ricardo against the landlords — he reveals the same partiality. And he even goes the length of saying that it is not because of their personal interest, but owing solely to a badly conceived imitation of the doings of merchants and manufacturers, that "the country gentle- men and farmers of Great Britain so far forgot the generosity which is natural to their station, as to demand the exclusive privilege of supplying their countrymen with corn and butchers'-meat." *

Smith's preference for agriculture and agriculturists need not be further insisted upon. Despite his own theory of division of labour, he still cherished a secret regard for the Physiocratic prejudice. He never subjected agriculture to the indignity of equal treatment along with other forms of economic activity. In his work at least it still retains its ancient pre-eminence.

II : THE " NATURALISM " AND " OPTIMISM " OF SMITH

IN addition to the conception of the economic world as a great natural community created by division of labour, we can distinguish in Smith's work two other fundamental ideas, around which his more characteristic theories group themselves. First is the idea of the spontaneous origin of economic institutions, and secondly their bene- ficent character — or, more briefly, Smith's naturalism and optimism.

The two ideas, though frequently intermingled and sometimes even confused in Smith's work, must be carefully distinguished by the historian of economic thought.

Spontaneity and beneficence were intimately connected for Smith. In the eighteenth century anything natural or spontaneous was immediately voted good, and the terms " natural," " just," and «' advantageous " were often used as synonymous. Smith did not escape the confusion of ideas. Having shown the natural origin of 1 Wealth of Nations, Book IV, chap. 2 ; Cannan, vol. i, p. 427.

THE NATURALISM AND OPTIMISM OF SMITH 69

economic institutions, he imagined that at the same time he had demonstrated their useful and beneficent character.1 The confusion is no longer permissible. To give a scientific demonstration of the origin of social institutions and to gauge their value from the point of view of the general interest are two equally legitimate but very different intellectual pursuits. We may agree with Smith that our economic organisations, both in their origin and functions, participate of thfe spontaneity of natural organisms, but we may at the same time reserve judgment as to their real worth. Pessimism no less than optimism may be engendered by contemplation of the spontaneous character of economic institutions. While this conception of the spontaneity of economic institutions seems to us just and fruitful, the demonstration given of their beneficent character appears in- sufficient and doubtful. The former conception is a commonplace with all the greatest economists ; the latter is rejected by the majority of them.

These two ideas which have played such an important part in the history of economic doctrines must be separately examined.

The conception of spontaneity is the one to which Smith refers most frequently. II mondo va da se. Here at any rate he and the Physiocrats were entirely at one. There is no need for organisation, no call for the intervention of any general will, however far-seeing or reasonable, and no necessity for any preliminary understanding between men. Such are the reflections that the study of the economic world suggests ever anew to our author. The present aspect of the economic world is the result of the spontaneous action of millions of individuals, each of whom follows his own sweet will, taking no heed of others, but never doubting the ultimate result. The noble outlines of the economic world as we know it have been traced, not by following a plan issuing complete from the brain of an organiser and deliberately carried out by an intelligent society, but by the accumulation of numberless deeds designed by a crowd of individuals in obedience to an instinctive force wholly unconscious of the work which it was encompassing.

This idea of the spontaneous constitution of the economic world is in some aspects analogous to the conception of an " economic law " of a later period. Both ideas suggest the presence of something superior to individual wills, and imposed upon them even despite their resistance. The differences are equally marked, however, the

1 For the connection between Smith's t ystem and the philosophy of his time Bee W. Hasbach, Die, allgemeinen philosophischen Grumllagen der von F. Quesnai und A. Smith begrdndtten polilisdt&n Oekonomie (Leipzig, 1890).

70 ADAM SMITH

scope of the former being far greater than that of the latter. The words " natural law," in the first place, suggest regularity and repeti- tion— the constant recurrence of the same phenomena under similar conditions. This is not the aspect that particularly struck Smith. He insists less upon the constancy of economic phenomena and more on their spontaneity, their instinctive and natural character. Say's delight was to compare the economic and the physical worlds. Smith loves to regard the economic world as a living organism which creates for itself its own indispensable organs. Nowhere is the term " economic law" employed, but his delineation of the chief economic institutions and the account of their functions always results in the same conclusion.

First of all take division of labour, which we have just studied, and which more than any other institution contributes to the increase of wealth.

This marvellous institution is " not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion." " It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility ; the propensity to truck, barter, and exchange one thing for another." 1 This tendency itself is the outcome of personal interest. " Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this : Give me that which I want, and you shall have this which you want, is the meaning of every such offer ; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantages." 2 This gives rise to exchange, and with exchange comes division of labour. " And thus the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consump- tion, for such parts of the produce of other men's labour as he may

1 Wealth of Nations, Book I, chap. 2 ; Carman, vol. i, p. 15. 1 The whole passage, almost word for word, may be found in Smith's course of lectures at Glasgow, and the whole is taken from Mandeville'e Fable des Abeille.s.

THE NATURALISM AND OPTIMISM OF SMITH 71

have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business." Division of labour is the outcome of a tendency common to all men, the tendency to barter ; and this tendency itself is spontaneously developed under the influence of personal interest, which acts simultaneously for the benefit of each and all.

Next comes money, and nothing has so facilitated exchange or so greatly increased wealth. Every economic treatise since Smith's has demonstrated its advantages in terms almost identical with his. But how did money first come to be employed T It was not by the act of a public body, nor was it the outcome of a nation's reflective judgment. It is simply the result of the operation of a collective instinct. Some men who were keener than others saw the incon- veniences of the truck system. And " in order to avoid the incon- veniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry." 1 Money is thus the product of the simultaneous though not concerted action of a great number of people, each obeying his personal inclination. The intervention of the public authority is much later, and its object is merely to guarantee by means of a design the weight and purity of such coins as are already in circulation.

Take another well-known phenomenon — capital.2 With the

1 Wealth of Nations, Book I, chap. 4 ; Canaan, vol. i, p. 24.

1 For a long time economists were quite content with Smith's theory of capital. Like other portions of his work, it readily became classic, and sub- sequent writers simply repeated it. To-day, however, this success hardly seems to have been warranted. " It can scarcely be denied," writes Cannan, " that Smith left the whole subject of capital in the most unsatisfactory state." (Theories of Production and Distribution, p. 89.) If this remark needs any justification we have it in the many discussions which have taken place on this subject during the last fifty years, and which are not yet at an end. Some of the most original works of recent years, Bohm-Bawerk's Positive Theory of Capital, for example, are entirely taken up with this topic. In England, America, and Italy the best-known economists, Cannan, Fisher, and Pareto, have recently revived the ancient notions, and the discussions which have followed are sufficient evidence that Smith had by no means exhausted the subject. If we carefully read Book II of the Wealth of Nations, which is entirely devoted to this topic, what do we find ? We have a distinction drawn between fixed and circulating capital borrowed from practical affairs, but

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exception of division of labour and the invention of money, Smith thought there was no phenomenon of greater importance and no more essential fount of national wealth than capital. The larger the store of capital, the greater the number of productive workers, makers of tools and machinery — the essentials of increased produc- tivity— the further will division of labour extend. To increase a nation's capital is to expand its industry and to further its well- being.1 In some passages the growth of wealth appears not merely as the chief but as the only method of augmenting a nation's wealth. " The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue." 2 In short, capital limits industry,3 a phrase that was destined to become classic, and one that was repeated by every economist down to Mill. Capital is the true source of economic life. Let capital increase and industry will expand in every direction ; diminish it and a bar is set to all improvement. Capital fertilises the earth, whereas the labour of man simply leaves it a weary waste.

Criticism has been freely levelled at this extravagant importance which capital is made to assume. It is certainly somewhat curious that labour should now be treated as altogether subordinate to capital, whereas earlier in the volume labour alone was regarded as the great wealth-producing agent. But we are not here concerned

possessing no great scientific value; the very doubtful identification of national capital with the sum of private capitals ; a very unsatisfactory attempt at differentiating between the notions of capital and revenue ; the affirmation that saving involves consumption, a paradox repeated ad nauseam down to the days of Mill; the commonplace statement that capital increases as saving grows ; and, finally, the proposition that " capital limits industry."

1 Wealth of Nations, Book II, chap. 3 ; Cannan, vol. i, p. 325. " 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 main- taining them. The productive powers of the same number of labourers cannot be increased, but in consequence either of some addition and improvement to these 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."

1 Ibid., Book IV, chap. 2 ; vol. i, p. 423.

1 " The general industry of the society never can exceed what the capital of the society can employ." (Ibid., Book IV, chap. 2 ; vol. i, p. 419.) John Stuart Mill was the first to employ the formula in its condensed form, " Industry is limited by capital."

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with the revival of these threadbare controversies.1 We merely wish to note that Smith finds in this accumulation of capital a new illustration of spontaneity. The saving of capital is not the result of any foresight on the part of society, but is solely due to the simul- taneous and concurrent actions of thousands of individuals. These individuals, urged on by a desire to better their situation, are spontaneously urged to save their earnings and to employ those savings productively.

" The principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispas- sionate, comes with us from the womb, and never leaves us till we go into the grave. . . . An augmentation of fortune is the means by which the greater part of men propose and wish to better their condi- tion. It is the means the most vulgar and the most obvious ; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire." This desire is so powerful that even the greatest follies perpetrated by Governments have never succeeded in annulling its beneficial effects. " The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improve- ment, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor."*

But the idea of the spontaneity of economic institutions finds its most interesting illustration in the theory of demand and supply, upon which we must dwell a little.

In a society based upon division of labour, where everyone

1 We have spoken of the controversies as threadbare, for every economist is by this time persuaded that, assuming the necessity for the co-operation of capital, land, and labou in production, it is quite clear that the amount of produce raised must depend upon the amount of each of these factors employed, and not upon thu amount of any one of them.

Smith had anticipated the arguments advanced by such socialists as Rodbertus and Lassalle, who regard saving rather than labour as the source of capital. "Parsimony, and not industry, is the immediate cause oi 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." (Wealth of Nations, Book II, chap. 3; Cannan, vol. i, p. 320.)

» Ibid., Book II, chap. 3 ; vol. i, pp. 323, 324, 325.

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produces for a market without any previous arrangement with his fellow producers and without any external direction, the great diffi- culty lies in adapting the amount of goods supplied to the amount demanded. How, as a matter of fact, are these producers to know at any particular moment what they ought to produce and in what quantities ? Moreover, who is to direct and who can restrain them ? It is true that Smith was careful to point out that they are not concerned with the satisfaction of all needs, of whatever kind they may be. Their duty lies towards what he calls the " effectual," not the " absolute," demand. By effectual demand we are to under- stand the demand of those who are capable of offering not merely something in exchange for the products which they desire, but of offering at least enough to cover the expenses of raising those products.1 Society founded upon division of labour and exchange implies that nothing can be gratuitous and every loss involves a sacrifice on the part of some person or other.2 But if production is carried on in this haphazard fashion how are we to avoid an occasional over-production or an accidental under-supply ?

Before we can understand this we must acquaint ourselves with Adam Smith's theory of prices.

In the preceding chapter we had occasion to note how Condillac in 1776 put forward a theory of value which was altogether superior to the Physiocrats'. Smith's book, also published in 1776, betrays not the least sign of Condillac's influence, and the new theory never

1 Wealth of Nations, Book I, chap. 7 ; Cannan, vol. i, p. 58. " The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand ; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six ; he might like to have it ; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it."

1 For Smith oppression meant the tyranny either of producers or consumers. When profits are above the normal rate "it is a proof that something is either bought cheaper or sold dearer than it ought to be, and that some particular class of citizens is more or less oppressed either by paying more or by getting less than what is suitable to that equality which ought to take place, and which naturally does take place among all the different classes of them." (Ibid.. Book IV, chap. 7, part iii ; vol. ii, p. 128.)

The correspondence between selling price and the cost of production seemed to Smith to be of the very essence of justice. Complete correspondence would realise t e ideal of the just price.

THE NATURALISM AND OPTIMISM OF SMITH 75

comes up for discussion. The very success of the Wealth of Nations had eclipsed the fame of the French philosopher, and Smith's theory, though quite inferior to Condillac's, held the field for so many years simply because it won the allegiance of the English economists, whose influence was paramount throughout the first half of the nineteenth century. Its popularity only waned with the publication of the works of Walras, Jevons, and Menger. Its historic interest is further enhanced by the fact that it had the singular good fortune to win the approval both of the socialists and the Liberal economists. It is the fate of writers like Smith, remarkable for wealth of ideas rather than for logical presentation, to impel minds along different and sometimes even opposite paths. Unfortunately the theory of value is not the only one that presents a somewhat hazy outline. We cannot here enter into the details of the theory, but must content ourselves with a mere sketch of it. Even this, however, will imme- diately enable us to understand its insufficiency, and appreciate the twofold influence which it exercised upon subsequent doctrines.

Smith opens his treatment by emphasising the fundamental distinction which exists between " value in use " and " value in exchange." J By value in use he means almost 2 exactly what we understand by utility, or what other writers call subjective value, desirability, or ophelimity.

Present-day economists when treating of prices — the exchange value of things — chiefly rely upon this conception of " value in use." The explanation of the " ratio of exchange " of commodities is based upon a previous analysis of their utility for those who exchange

1 Wealth of Nations, Book I, chap. 4 ; Cannan, vol. i, p. 30. The passage is well known. " The word ' value,' it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ' value in use,' the other ' value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have fre- quently little or no value in use. Nothing is more useful than water : but it will purchase scarce anything ; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any valu in use ; but a very great quantity of other goods may frequently be had in exchange for it."

1 The statement has been qualified because in the passage referred to Smith seems to define utility in the vulgar sense (i.e. utility as contrasted with mere agreeableness). This want of exactness was corrected by Ricardo, and is the subject of a searching criticism by Mill. The following passage from his Lectures on Justice may serve to throw some light upon the definition : " There is no demand for a thing of little use ; it is not a rational object of desire." Smith could not conceive the possibility of a demand or even a desire for a commodity which was useless from a rational point of view. But this is evidently a great mista ke.

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them. Smith proceeds in a different fashion. ** Value in use " is mentioned, but only for the purpose of contrasting it with value in exchange. It is then dismissed without further consideration. The two notions seem to have no point of contact. Value in exchange was the only one that was of any interest to Smith ; hence there was all the more reason for denying its derivative character.1

Thus from the very first the only avenue that might have led to a satisfactory solution of this problem of prices was closed. One could easily have predicted that this was bound to land Smith in difficulty ; as a matter of fact he is doubly involved.2 Two different but equally erroneous solutions have been successively adopted by him, but he has never actually decided between them. The socialists and economists who are to follow will be engaged in the same task, and the cleavage between them will be marked by their adoption of one or other of these two theories.

Smith was led to the study of prices because he wished to know something of the constant oscillation which is such a feature of their history. The actual or market price is unstable because of the unstable connection between demand and supply, 3 or, as he puts it, " It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life." 4 It seemed impossible that their perpetual fluctuation should represent the true value of the com- modity. Its real value could not vary from this moment to the next or from one place to another. Underneath the constantly oscillating market price may be discerned another price, referred to by Smith as the real or sometimes as the natural price. The discovery of a more stable and a more constant element beneath the continual fluctuations of price movements still constitutes the great problem of pure economics.6

1 The radical separation of the two ideas was perhaps more a matter of expression than of reasoning, for in his Lectures on Justice, p. 176, value in use, coupled with the purchasing power possessed by those who desired the commodity, was regarded as one of the elements which determined the demand for it and fixed its market price. The whole discussion of the theory of value by Smith is very unsatisfactory.

1 We ought perhaps to have said that he had to choose between three possible definitions, for in the Lectures on Justice we find a third definition of " natural price " (p. 176).

* Wealth of Nations, Book I, chap. 7 ; Carman, vol. i, p. 58.

* Ibid., Book I, chap. 5 ; vol. i, p. 33.

* Pareto in his recent article L'Economie et la Sociologie au point de vue scienti- fique (Rivista di Scienza, 1907, No. 2) expresses himself as follows : " Underneath-

THE NATURALISM AND OPTIMISM OF SMITH 77

Smith's first theory makes the true value of any commodity I depend upon the amount of labour or effort it has taken to produce, j " Labour, therefore, is the real measure of the exchangeable value of all commodities. " " The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." l Labour — that is, the effort expended upon the production of a commodity — is both the origin and the measure of its exchange value. The theory that labour or effort is the cause of value (if value can be said to have a cause) was first formulated by the father of political economy himself. It is curious to think that it was this same theory that was used with such good effect by Karl Marx in his attack upon capitalism.

This first attempt to find a firmer foundation for exchange value than that afforded by the shifting sands of demand and supply was scarcely made before Smith became aware of some difficulties in the path. For example, how was this work and the value dependent upon it to be measured ? " There may be more labour in an hour's hard work than in two hours' easy business ; or in an hour's applica- tion to a trade which it cost ten years' labour to learn, than in a month's industry at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity." a A second objection arises when the theory is applied to civilized society. Work by itself cannot produce anything; something must be contributed by both land and capital. But neither of these is a free good, and they must cost something to those who employ them. Accordingly primitive societies 3 are the only ones where " the quantity of labour commonly employed in acquiring or producing any commodity is the only circumstance determining its value." We must nowadays take some account of land and

the actual prices quoted on the exchanges, prices varying according to the exi- gencies of time and place and dependent upon an infinite number of circumstances, is there nothing which has any constancy or is in any degree less variable ? This is the problem that political economy must solve."

1 Wealth of Nations, Book I, chap. 6 ; Carman, vol. i, p. 32. In this passage Smith seems to imply that the value of an object is determined, not by the amount of labour which it cost to produce it, but by the amount of labour which can be bought in exchange for it. Fundamentally the two ideas are one, for objects of equal value only can be exchanged, so that the amount of labour anyone can buy with any given object is equal to the amount of labour which that object cost to produce. " Goods," says Smith, " contain the value of a certain quantity of labour, which we exchange for what is supposed at the time to contain the value of an equal quantity."

1 Ibid., Book I, chap. 5 ; vol. i, p. 33.

» Ibid., Book I, chap. 6 ; vol. i, p. 60.

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capital. So that labour is not the only source of value, nor is it its sole measure.

Another hypothesis becomes necessary forthwith. This time cost of production is hit upon as the likely regulator of value. Hitherto the " real " price has signified the price that is based upon labour. Now the " natural " price is defined as the price of goods valued at their cost pf production. The change of name is not of any great significance. What Smith was in search of on both occasions was that true value which always kept in hiding behind the fluctuations of market prices. It is the same problem, but with a new solution. Just now we were informed that if a commodity sold at a price representing the labour which it cost to produce, that price would also represent its real cost. With no less assurance we are now told that a commodity sold at cost of production " is then sold precisely for what it is worth, or for what it really costs the person who brings it to market." x The true value of goods corresponds to their cost of production. By this we are to understand a sum sufficient to pay at normal rates the wages of labour, the interest of capital, and the rent of land, all of which have collaborated in the production of the particular commodity.

Smith, having discarded labour, finds a new determinant of value in cost of production, and if socialists rallied to his first hypothesis the great majority of economists right up to Jevons have clung to his second. As for Smith himself, he never had the courage to choose between them. They remain juxtaposed in the Wealth of Nations because he never made up his mind which to adopt. As a result his work is full of contradictions which it would be futile to try to reconcile. For example, land and capital in one place are regarded as sources of new values, adding to and increasing the value which labour creates, and producing normally an element of profit and rent, which, together with the wages of labour, makes up the cost of production. In another connection they are treated as deductions made by capitalists and landlords from the value created by labour alone." Some writers accordingly argue that Smith must

1 Wealth of Nations, Book I, chap. 7 ; Carman, vol. i, p. 57.

1 Ibid., chap. 6 ; vol. i, p. 51. Here, for example, is a passage in which, as Bohm-Bawerk forcibly remarks (Kapital und Kapitakins, 2nd ed., 1900, p. 84), the two conceptions are found in juxtaposition without any attempt at reconciliation: "In this state of things [where labour and capital have already been appropriated] the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed iu acquiring or producing any commodity, the only circumstance which can

THE NATURALISM AND OPTIMISM OF SMITH 79

have been a socialist. On the whole the cost of production theory prevailed, and the natural price of commodities is taken to mean that price which coincides with their cost of production. As to market price, he makes the remark that it is higher or lower than the natural price according as the quantity offered diminishes or increases as compared with the quantity demanded.

Such is Smith's theory of prices. The element of truth which it contains, namely, that the prices of goods tend to coincide with their cost of production (the remark is not originally Smith's at all), must not blind us to its many faults. It is open to at least two very serious objections.

An attempt is made to explain the price of goods by referring to the price of the services (wages, interest, and rent) which make up the cost of production. When the cost of those services comes up for consideration it is assumed that their cost is dependent upon the price of the goods. Wages, for example, are determined by the selling price of the commodities which labour has produced. Escape from the vicious circle is only possible by availing ourselves of the.

regulate the quantity which it ought commonly to purchase, command, or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour." At the beginning of the passage the workman shared the produce of his labour and profits constituted a deduction from the value created by labour alone ; at the end of the paragraph profits issue from a supplementary value which is an addition to the value already given it by labour. Other passages where the two conceptions come into contact are also cited by Bohm-Bawerk. Interest and rent are also occasionally taken as evidence that the workman is being exploited, and this entitles Smith to be regarded as the father of socialism. More than one passage in his work seems to point to this conclusion. " In other countries, rent and profit eat up wages, and the two superior orders of people oppress the inferior one." (Book IV, chap. 7, part ii ; vol. ii, p. 67.) Con- cerning property he writes : " 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." (Book V, chap. 1, part ii ; vol. ii, p. 207.) And finally there is the famous passage from the sixth chapter : " As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. . . . He [the workman] must then pay for the licence to gather them ; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities makes a third component part." (Book I, chap. 6 ; vol. i, p. 51.) Dr. Caiman in his History of the. Theories of Production and Distribution goes the length of declaring that the theory of spoliation is the only one in Smith's work. It is to Smith that we owe that idea BO frequently expressed by socialists, namely, that the workman in modern society never really obtains the produce of his toil.

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modern theory of economic equilibrium. That theory shows us how prices generally, whether of goods or of services, are inter- dependent ; all being determined simultaneously — like the unknown in an algebraical formula — just when the exchange is taking place. But this theory of economic equilibrium was, of course, unknown to Smith.

Cost of production being the regulator of price, it is very important that an analysis of cost of production and a study of the causes which determine the rates of wages, profit, and rent should be made. One might have expected that this study would have cleared away any obscurity that still clung to the theory of prices. But this analysis is one of the least satisfactory portions of Smith's work. We have already had occasion to note the unsatisfactory charactei of his theory of rent. That of profits — which Smith fails to dis- tinguish from interest — is equally useless ; l and his theory of wages is hopelessly inconsistent. He hesitates between the subsistence theory of wages and the other theory which makes them depend upon the relations between demand and supply, without ever making a final choice.

We cannot agree with Say in considering Smith's theory of distribution one of his best claims to fame. His treatment of this problem, which afterwards became the kernel of Ricardian economics, is altogether inferior to his handling of production. We also know that this is the least original part of his work. It was simply added as a kind of afterthought, the original intention being to deal only with production. This becomes evident if we compare the Wealth of Nations with the Glasgow course of 1763, the whole of which is devoted to production. The addition of a theory of distribution to the original skeleton was probably due to the Physiocrats, with whom in the meantime he had become acquainted ; and the hesitations and uncertainties which mar this part of the work merely go to prove that Smith had not thought it out a* clearly as the other sections.

The subject cannot be pursued here. We can only point to the inference which Smith draws from his theory of value, and how it is made to support the contention that demand adapts itself spon- taneously to the conditions of supply. This is how Smith explains the continual oscillation of prices : " When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be

* Cf. supra, p. 64, note 2.

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sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity." The reverse will happen when demand exceeds supply. " When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price. The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less." Thus " the quantity of every commodity brought to market naturally suits itself to the effectual demand." 1

And this very remarkable result is simply the outcome of personal interest. " If at any time it exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land ; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to the natural price."

And so, in the majority of cases at least, this natural and spon- taneous mechanism secures a constant balancing of the quantities of goods produced and the quantities effectively demanded. The circumstances under which such a result does not follow are really quite exceptional — although Smith does not deny that sometimes they do exist. Whenever such conditions obtain — that is, when the market price remains for a considerable length of time above the natural price — we find that it is always due to the capitalists' action in concealing the high rate of profits which they draw, or in retaining possession of some patent or natural monopoly, such as wine of a special quality. It occasionally happens also as the result of an artificial monopoly.2 But these are mere exceptions, their rare

1 Wealth of Nations, Book I, chap. 7 ; Cannan, vol. i, p. 59.

1 Smith only gives at most seven or eight lines to monopoly price. He simply states that " the price of monopoly is upon every occasion the highest which can be got." (Ibid., Book I, chap. 7 ; vol. i, p. 63.) To-day the theory of monopoly priors is one of the most important in the whole of economics.

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occurrence confirming the fundamental rule concerning the spon- taneous adaptation of the quantity offered to the quantity demanded, thanks to this oscillation of the market price about the natural.

This theory of adaptation, we know, is one of the most important in the whole of political economy. Since Smith wrote it has been reproduced by almost every economist, and without any very substantial alteration. It remains even to this day the basis of our theory of production.

It is interesting to note the manner in which Smith makes use of his theory to illustrate his thesis. We shall refer to two cases which are intrinsically important as well as affording admirable illustrations of that spontaneity upon which Smith laid such stress.

The first concerns population. Population, like commodities, may be superabundant or it may be insufficient. What regulates its numbers ? " The number of people," Smith replies, " depends upon the demand of society, and this is how it works. Among the proletariat, generally speaking, children are plentiful enough. It is only when wages are very low that poverty and misery cause the death of many of them ; but when wages are fairly high several of them manage to reach maturity." " It deserves to be remarked, too," he continues, " that it necessarily does this as nearly as possible in the proportion which the demand for labour requires. If this demand is continually increasing, the reward of labour must necessarily encourage in such a manner the marriage and multiplica- tion of labourers as may enable them to supply that continually increasing demand by a continually increasing population. If the reward should at any time be less than what was requisite for this purpose, the deficiency of hands would soon raise it ; and if it should at any time be more, their excessive multiplication would soon lower it to this necessary rate. The market would be so much under-stocked with labour in the one case, and so much over-stocked in the other, as would soon force back its price to that proper rate which the circum- stances of the society required. It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men ; quickens it when it goes on too slowly, and stops it when it advances too fast." x

The second case relates to the demand for money and its supply. We have already seen how the problem of its origin is solved. Alongside of that problem is now placed another, namely, how is the quantity in circulation regulated to meet the requirements of exchange ? Smith's first task was to expose the popular fallacy 1 WttUlh of Nations, Book I, chap. 8; Cannan, vol. i, pp. 81-82.

THE NATURALISM AND OPTIMISM OF SMITH 83

concerning this topic.1 According to one school of thinkers, money was wealth par excellence, and it was all the more important that he should get rid of this view seeing that it constituted the very foundation of the Mercantile theory, the overthrow of which was the immediate object in publishing the Wealth of Nations. The Mercan- tilists contended that a country should export more than it imports, receiving the balance in money. If it can be proved that this balance is useless because money is a mere commodity possessing no greater and no less utility than any other, then the Mercantilist foundation is completely destroyed. Smith thought that money was less indispensable than some other goods, seeing that we are anxious to pass it on as often as we can. The disdain with which Smith regarded money was the result of a reaction against Mercantilism, and it led some of his followers to over-emphasise his point of view and to misconceive the special character of monetary phenomena. A nation's true wealth " consists," Smith tells us, " not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds." z " It is the annual produce of the land and labour of the society." 3 Hence in evaluating a country's net revenue we must omit money because it is not consumed. It only serves as an instrument for the circulation of wealth and for the measure- ment of value. It is the " great wheel of circulation," 4 In virtue of this title, although Smith himself classed money along with circu- lating capital, he remarks that it might be likened to the fixed capital of an industry, to machinery or workshops. The greater the economy in the use of fixed capital, provided there is no diminution in production, the better, for the larger will be the net product.

1 " That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value." (Wealth of Nations, Book IV, chap. 1 ; Cannan, vol. i, p. 396.) The whole chapter is an attempt to get rid of this prejudice.

1 Ibid., Book IV, chap. 1 ; vol. i, p. 416 ; also Book II, chap. 2 ; vol. i, p. 274. " Though the weekly or yearly revenue of all the different inhabitants of any country, in the same manner, may be, and in reality frequently is, paid to them in money, their real riches, however, the real weekly or yearly revenue of all of them taken together, must always be great or small in proportion to the quantity of consumable goods which they can all of them purchase with this money. The whole revenue of all of them taken together is evidently not equal to both the money and the consumable goods ; but only to one or other of those two values, to the latter more properly than to the former."

* We meet with this expression several times : in Book I, chap. 11, part iii (vol. i, pp. 4 and 240), and in Book II, chap. 3 (vol. i, pp. 315, 323).

* An expression that is met with three times — in chap. 2 of Book II (vol. i, pp. 272, 276, 279).

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This is equally true of money — a necessary but a very costly instru- ment of social production. " Every saving in the expence of collect- ing and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind " x as that which reduces the fixed capital of industry.2

This is why bank-notes — the circulation of which diminishes the quantity of money needed — have proved such a precious invention. What they do is to set free a certain quantity of gold and silver which may be sent abroad to pay for machinery and other instruments of production, and which will in turn increase the true revenue of the country. Smith's parable in which he illustrates these advantages, has long since become classic : " The gold and silver money which circulates in any country may very properly be compared to a high- way, which, while it circulates and carries to market alT the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air ; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour." 3

The conclusion is that every policy — the Mercantilist, for example — which aims at increasing the quantity of money within the country, whether by direct or indirect methods, is absurd, for money, far from being indispensable, is really an encumbrance.

It is not only absurd, but also useless. Have we not seen already that money is a mere commodity designed to facilitate circulation and that the demand for it is entirely determined by that object ? But the supply of any commodity usually adapts itself spontaneously to the demand for it. No one concerns himself with supplying the nation with wine or with crockery. Why trouble about money ? * If the quantity of goods diminishes, exchange slackens and a part of the money becomes useless. But " the interest of whoever possesses it requires that it should be employed." 5 Accordingly

1 Wealth of Nations, Book II, chap. 2 ; Carman, vol. i, p. 275.

1 All these questions so obscurely treated in Smith's work are handled with admirable lucidity in Irving Fisher's Nature of Capital and Income (New York, 1907). Revenue is entirely stripped of that material suggestion which was always associated with it in Smith's work, and is looked upon as a continual flow of services, whilst capital as a whole is regarded as total wealth existing at one particular moment and from which these services flow out.

8 Wealth of Nations, Book II, chap. 2 ; Cannan, vol. i, p. 304.

* Ibid., Book IV, chap. 1 ; vol. i, pp. 402, 406.

* Ibid., Book II, chap. 3 ; vol. i, p. 322.

THE NATURALISM AND OPTIMISM or SMITH 85

•' it will, in spite of all laws and prohibitions, be sent abroad, and employed in purchasing consumable goods which may be of some use at home."

On the other hand, as the prosperity of a nation grows it neces- sarily attracts the precious metals because a multiplication of exchanges leads to a growing demand for money. These exporta- tions and importations will depend, as Hume x had already shown, upon the relative cheapness or dearness of money. What is true of metallic money is also true of a special kind of money known as bank-notes. Smith has given us a vivid description of the functions of banks, and especially of the fortunes of the most famous bank of this period, the Bank of Amsterdam. This afforded him another opportunity of demonstrating how the quantity of notes offered spontaneously adapts itself to the quantity demanded. If banks issue more notes than the circulation warrants prices will rise. Buy- ing from foreign countries will be resorted to and the notes will be returned to the banks to be exchanged for gold and silver — the only international money. The banks clearly have no interest in issuing too many notes, because it involves a greater metallic reserve as the result of the more frequent demands for payment which they will have to face. Of course, " every particular banking company has not always understood or attended to its own particular interest, and the circulation has frequently been overstocked with paper money." 2 But this does not affect the main principle, and we have one further proof of the spontaneous activity of the economic mechanism.

We have now reviewed some of Smith's principal themes, and we have seen how every phenomenon impresses him in the same fashion. Had space permitted we might have cited other examples all pointing to the same conclusion.8 This conception of spontaneity and wise beneficence is by no means the product of mere a priori thinking. It was no abstract theory that needed the backing of a rigid demonstra- tion. It was a belief gradually borne in upon him in the course of

1 Hume's treatment of the quantity theory of money in his essays on Money and The Balance of Trade is much clearer than Smith's.

1 Wealth of Nations, Book II, chap. 2 ; Cannan, vol. i, p. 285.

* For instance, a high rate of exchange immediately readjusts the commercial indebtedness of nations. (Ibid., Book IV, chap. 1 ; vol. i, p. 400.) Elsewhere' he points out that the advantages enjoyed by Europe from the possession of colonies were not exactly Bought by her. The search for colonies, their discovery and exploitation, all this was undertaken without any preconceived plan, and in spite of the disastrous regulations imposed by European Governments. (Ibid., Book TV, chap. 7, part ii ; vol. ii, pp. 90, 91.)

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his review of the economic field. This is characteristic of all his thought, and with every new vista we are reminded of it. The conclusion is hinted at again and again, and the impression left upon the reader's mind is that no other conclusion could ever be possible. Smith thought of the economic order as an organism — the creation of a thousand human wills unconscious of the end whither they are tending, but all of them obedient to the impulse of one instinctive, powerful force. This force, the root of all economic activity, its constancy and uniformity triumphant over every artificial obstacle and giving unity to the whole system, what is it ?

We have already encountered it on more than one occasion. It is personal interest, or, as Smith prefers to call it, " the natural effort of every individual t« better his own condition." 1 Hidden deep in the heart of every individual lies this essential spring of human life and social progress.

Doubtless it is not the only one. Smith is never exclusive. He knew that there were other passions 2 besides self-interest, and he is not afraid of naming them, as when he attributes an economic revolution which had such beneficial effects as the emancipation of the rural classes to " the most childish vanity of proprietors." * Neither did he omit to point out that personal interest is not equally strong in the breast of every one, and that there is the greatest diversity in human motives. All this he had forgotten, according to some of his critics, while others charge him with the creation of the homo aeconomicus, a poor representation of reality and a mere auto- maton exclusively guided by material interests. Someone has remarked that if you add to this figure a tinge of patriotism you have a faithful picture of the Englishman and Scotsman of his day. Had he been acquainted with Germans or Frenchmen, with their less sordid attachment to material gain, he might have judged differently. It may be that our reading of him is incorrect. He seems to have taken care to note that his remarks do not apply to all, but only to the generality of men. He continually recalls the fact that he is speaking of men of common understanding,4 or of those gifted

1 Wealth of Nations, Book IV, chap. 5 ; Caiman, vol. i, p. 324 ; Book II, chap. 9 ; vol. ii, p. 43 ; Book IV, chap. 9 ; vol. ii, p. 172.

1 " It is thus that the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society." The word " passion " was not inserted by chance. It occurs no less than three times on the same page. (Ibid., Book IV, chap. 7, part iii ; vol. ii, p. 129.)

3 Ibid., Book III, chap. 4 ; vol. i, pp. 389, 390.

4 Ibid., Book II, chap. 1, in fine ; vol. i, p. 267.

THE NATURALISM AND OPTIMISM OF SMITH 87

with common prudence.1 He knew well enough that the principles of common prudence do not always govern the conduct of every individual, but he was of opinion that they always influenced that of the majority of every class and order.2 His reasoning is applicable to men en masse, and not to individuals in particular. Moreover, he does not deny that man may be unacquainted with or may even entirely ignore his own interest. We have just quoted a passage wherein he remarks that bankers who temporarily issue too many notes are at that moment ignorant of their own interests.

These reservations notwithstanding, and full account being taken of all the exceptions to the principle as laid down by Smith, it is still true to say that as a general thesis he considers " the natural effort of every individual to better his own condition " — that is, personal interest — as the fundamental psychological motive in political economy. Any reference to the case of business men who are really actuated by a desire to take general welfare as their guide in matters of conduct is treated with a measure of scepticism which it is difficult not to share. " I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it." 8 Not that sentiment does not play a part, and a very important part, in the philosophy of Smith ; but sentiment, or sympathy, as he calls it, has the domain of morality for its own, while interest dominates that of economics. All his thinking led him to a firm belief in a spontaneous economic order founded and guided by self-interest.

Comparison with the Physiocratic doctrine concerning the natural and essential order of societies is illuminating. To the Physiocrats the " natural order " implied a system — an ideal. It required a genius to discover it, and only an enlightened despotism could realise it. For Smith the ** spontaneous order " was a fact. It was not a thing to be brought into being. It already existed. It was doubtless held in check by a hundred imperfections, including, among others, the stupidity of human legislation.4 But it was triumphant over them all. Beneath the artificial constitution of society lay the natural constitution which completely dominated it.

1 Wealth of Nations, Book II, chap. 4, beginning of chapter ; Cannan, vol. i, p. 332.

» Ibid., Book II, chap. 2 ; vol. i, p. 278.

1 Ibid., Book IV, chap. 2 ; vol. i, p. 421. After having just said : " Bj pursuing hia own interest, he frequently promotes that of the society more effectually than when he really intends to promote it."

• Ibid., Book IV, chap. 5 ; vol. ii, p. 43.

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This natural constitution, which for the Physiocrats was nothing more than an ideal, Smith discovered in actual operation, and he was able to describe its modus operandi. Political economy, which with Quesnay was nothing better than a system of rules and regulations, became in Smith's hands a natural science based upon the observation and analysis of existing facts. In a passage written in his usual lucid style Smith shows the superiority of his system over that of the Physiocrats. " Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. . . . Mr. Quesnai, who was himself a physician, and a very speculative phy- sician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political oeconomy in some degree both partial and oppressive. Such a political oeconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man ; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance." l

This passage leads us to his second thesis, namely, the excellence of these economic institutions. As we have already remarked, these two ideas of spontaneity and excellence, though confused by Smith, ought to be treated apart. His naturalism and optimism are inseparable, and both of them find expression in the same paragraph. The passage just quoted affords a proof of this. Personal interest not only creates and maintains the economic organism, but at the same time ensures a nation's progress towards wealth and prosperity. The institutions are not only natural, but are also beneficial. They interest him not merely as objects of scientific curiosity, but also as 1 Wealth of Nations, Book IV, chap. 9 ; Carman, vol. ii, p. 172.

THE NATURALISM AND OPTIMISM OF SMITH 89

the instruments of public weal. Herein lies their chief attraction for him, for political economy to him was more of a practical art than a science.1

But this is hardly emphatic enough. Natural economic insti- tutions are not merely good : they are providential. Divine Pro- vidence has endowed man with a desire to better his condition, whence arises the ** natural " social organism : so that man, following where this desire leads, is really accomplishing the beneficent designs of God Himself. By pursuing his own interest, man " is in this as in many other cases " (he is writing now of the employment of capital) " led by an invisible hand to promote an end which was no part of his intention." 2 The Physiocrats could hardly have improved upon that.

We can scarcely share in his optimism to-day. But it has played too prominent a role in the history of ideas not to detain us for a moment. We must examine the arguments upon which it is based and endeavour to grasp their import.

Let us note, in the first place, that every example hitherto deduced with a view to proving the spontaneity of economic institutions at the same time furnishes a demonstration of the beneficial effects of personal interest. Owing to a coincidence by no means fortuitous every institution mentioned by Smith as owing its existence to the prevalence of action of this kind is at the same time favourable to economic progress. Division of labour, the invention of money, and the accumulation of capital are so many natural social facts that also increase wealth. The adaptation of demand and supply, the distribution of money according to the need for a circulating medium, the growth of population according to the demand for it, are so many spontaneous phenomena which ensure the efficient working of economic society. A perusal of Smith's work leaves us with the impression that these spontaneous institutions must also be the best.

The general proof of this thesis is scattered throughout the whole book. But there was one point especially upon which Smith was very anxious to show complete accord between public and private interest. This was in connection with the investment of capital. In his opinion capital spontaneously seeks, and as spon-

1 " The great object of the political oeconomy of every country, is to increase the riches and power of that country." ( Wealth of Nations, Book II, chap. 6 ; Carman, vol. i, p. 351.) The expression " the political economy of every count ry," which Smith frequently employed, might be used in answer to writers such as Knies, who speak of the Universalism or Internationalism of Smith.

1 Ibid., Book IV, chap. 1 ; vol. i, p. 421.

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90 ADAM SMITH

taneously finds, the most favourable field for investment — most favourable, that is to say, to the interest of society in general. This proof at first sight seems to apply only to one special fact, but it really has a more general import. We know the great stress which Smith laid upon capital. Division of labour depends upon it, and so does the abundance or scarcity of produce. It determines the quantity of work and fixes the limit of population. To show that the investment of capital conforms to the general interest is to show that all production is organised in the manner most favourable to national prosperity.

Smith distinguishes between four methods of investing capital : in agriculture, in industry, in the wholesale and in the retail trades. Wholesale industry is further divided into three classes : domestic trade ; foreign trade, furnishing the nation with foreign products ; and the carrying trade which transports those goods from one country to another. Smith maintained that the order in which these various forms of activity were mentioned was also the order of their utility, agriculture being the most advantageous, industry the second best, etc.

He also proposes two criteria for testing this hierarchy : (1 ) the quantity of productive labour put into operation by means of the capital employed by each; (2) the amount of exchange value annually added to the revenue by each of these employments. As we pass from agriculture to the other branches, the quantity of productive labour brought into operation and the amount of exchange value obtained gradually decreases, and with this decrease goes a diminishing utility for the country. Smith thought that a nation ought to employ its capital in the way he had suggested. It ought to give the preference to agriculture, and engage in the other branches only as the accumulation of capital permitted.

But this is precisely what the capitalists would do were they entirely free. Every one of them, in fact, is interested in keeping his capital as near home as possible, with a view to better super- vision. Only as a last resource does he venture to engage in foreign commerce. Again, even among the industries carried on in his own country every capitalist will preferably choose that which will result in the production of the greatest exchange value, seeing that his profit varies with the amount of this exchange value. His investments will accordingly be made in the order mentioned, an order which roughly corresponds to the greater or lesser quantity of exchange values produced by each industry. And finally, when contemplating investment in foreign trade he will for the same reason follow the

THE NATURALISM AND OPTIMISM OF SMITH 91

order specified above — the order of greatest general utility. Thus the double desire of keeping one's capital within one's reach and of finding for it the most lucrative field of investment leads every capitalist to employ his capital in the fashion which is most advan- tageous for the nation. Such is the argument, whatever its value.

Even if we adopted his criteria it is obvious that his classification is altogether too arbitrary. How, for example, can we justify the statement that an industrial enterprise or the carrying trade employs less capital than agriculture ? The exact contrary would be nearer the truth, and agriculture ought to be given a much more modest position. Moreover, the conception of such a hierarchy does not accord very well with the theory of division of labour, which seeks to put the various forms of human activity more nearly on an equality.

As a matter of fact we cannot even accept a criterion which takes the amount of exchange values furnished by an industry as the test of its social utility. This increase in the quantity of exchange values simply proves that the demand for the goods concerned is stronger than the demand for some others. When capital flows into certain industries it only points to the spontaneous satisfaction of social demand. But social demand and social utility are not necessarily the same. Demand is the outcome of human desires, and its intensity depends upon the revenue drawn by the individual. But we can neither regard these desires in themselves or the system of distribution that makes such desires " effective " as sufficient tests of social utility. And to say that production follows demand is to prove nothing at all. Smith himself seems to have realised this ; hence his other criterion — the quantity of productive labour em- ployed by capital. According to this test those industries that employ the least amount of machinery and the greatest amount of hand labour are the most useful — quite an untenable view.

A demonstration of a somewhat similar character has been attempted by the Hedonistic school. They have shown how free competition always tends to direct production into such channels as will result in maximum utility, or, in other words, that it affords the best method of satisfying the actual demands of the market. But they have been very careful to note that social utility and ophelimity are two very different expressions that must never be confused, and that they have failed to find any scientific test of social utility.

Smith's argument is unsatisfactory, and its foundation untrust- worthy. We do not forget that his optimism is based not so much upon this specious demonstration as upon the great number

92 ADAM SMITH

of observations which he had occasion to make in the course of his work. This idea of a harmony between private interest and the general well-being of society was not put forward as a rigidly demon- strable a priori theory, open to no exceptions. It was rather a general view of the whole position — the conclusion drawn from repeated observations, the resume of a detailed inquiry which had covered every corner of the economic field. A particular process of reasoning may have helped to confirm this conclusion, but the reasoning itself was largely based upon experience, the universal experience of history. It was the study of this experience that led to the discovery of a " vital " principle of health and progress in the " body social." Smith would have been the first to oppose the incorporation of his belief in any dogma. He was content to say that " most frequently " and in a " majority of cases " general interest was satisfied by the spontaneous action of private interest. He was also the first to point out instances — in the case of merchants and manufacturers, for example — where the particular and the general interest came into conflict. We might cite many charac- teristic passages in which he takes pains to qualify his optimism.

Absolute his optimism was not, neither was it universal. In fact, it would not be difficult to prove that it was never intended to apply to anything other than production. Nowhere does the great Scotch economist pretend that the present distribution of wealth is the justest possible — a trait that distinguishes him from the optimists of Bastiat's school. His optimism deserted him when he reached that portion of his subject. On the contrary, he showed that landed proprietors as well as capitalists " love to reap where they have not sown," that in- equalities in social position give masters an advantage in bargaining with their men.1 In more than one passage he speaks of interest and rent as deductions from the produce of labour.2 Smith, indeed, might well be regarded as a forerunner of socialism. There is no difficulty in believing, so far as the experience of old countries goes, that " rent and profit eat up wages and the two superior orders of people oppress the inferior one." 3

It is especially important that we should make a note of the opinions of those people who think that Smith intended his optimism

1 Wealth of Nations, Book I, chap. 8 ; Cannan, vol. i, p. 68. The masters possess the advantage in discussion (1) because they can combine much more easily ; (2) becau«a, thanks to their superior funds, they can afford to wait while " many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment."

1 Cf. supra, p. 78.

• raid., Book IV, chap. 7, part ii, the beginning ; vol. ii, p. 67.

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to extend to distribution as well as to production. As a matter of fact he was too level-headed to entertain any such idea. Even Say himself in the last edition of his Treatise expresses some doubts as to the equity of the present system of distribution.1 Smith was not really concerned with the question at all. It is only at a much later date, when the socialists had demonstrated the importance of the problem, that we hear of this belief in the beneficence of economic institutions. It really represents a reaction against the ., socialistic teaching and an attempt at a justification of the present methods of distribution.

We must beware of confusing Smith's optimism with that of modern Hedonism, or of identifying it with Bastiat's answer to the socialists. It lacks the scientific precision of the one and has none of the apologetic tone of the other. It is little more than a reflection prompted by the too naive confidence of the eighteenth century in the bounty of " nature," and an expression of profound conviction rather than the conclusion of a logical argument.

Ill : ECONOMIC LIBERTY AND INTERNATIONAL TRADE

THE practical conclusion to which naturalism leads and to which Smith's optimism points is economic liberty. So naturally does it proceed from what we have just said that the reader finds himself quite prepared for Smith's celebrated phrases : " All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into com- petition with those of any other man, or order of men." As to the Government, or " sovereign," as Smith calls him, " he is com- pletely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient ; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interests of the society."

Smith, following the Physiocrats, but in a more comprehensive

1 Say, speaking of the working classes, remarks : " Are we quite certain that the workman obtains that share of wealth which is exactly proportioned to the amount which he has contributed to production ? " (Treatise, 6th ed., p. 110.)

94 ADAM SMITH

and scientific fashion, finds himself driven to the same conclusion, namely, the wisdom of non-intervention by the State in matters economic.1

But here, as elsewhere in his work, the sense of the positive and the concrete, so remarkable in Smith, prevents his being content with a general demonstration. He is not satisfied with proving the inefficiency of intervention as compared with the efficiency of those institutions which are spontaneously created by society itself, but he attempts to show that the State, by its very nature, is unfitted for economic functions. His arguments have been the arsenal from which the opponents of State intervention have been supplied with ammunition ever since.

Let us briefly recall them.

" No two characters seem more inconsistent than those of trader and sovereign." f Governments are " always, and without any exception, the greatest spendthrifts in the society." 3 The reasons for this are numerous. In the first place, they employ money which has been gained by others, and one is always more prodigal of the wealth of others than of one's own. Moreover, the Government is too far removed from the centres of particular industries to give them that minute attention which they deserve if they are going to prosper. " The attention of the sovereign can be at best but a very general and vague consideration of what is likely to contribute to the better cultivation of the greater part of his dominions. The attention of the landlord is a particular and minute consideration of what is likely to be the most advantageous application of every inch of ground upon his estate." 4

This necessity for a thorough cultivation of the soil and for the best employment of capital, for direct and careful superintendence, is an idea to which he continually reverts. He regrets, among other things, that the growth of public debts causes a portion of the land and the national capital to pass into the hands of fund-holders, who are doubtless interested in the good administration of a country, but " are not interested in the good condition of any particular por- tion of land, or in the good management of any particular portion of capital stock." 6

1 Wealth of Nations, Book IV, chap. 9, in fine ; Caiman, vol. ii, p. 184.

1 Ibid., Book V, chap. 2, part i ; vol. ii, p. 304. He makes exception only of the post-office, " perhaps the only mercantile project which has been success- fu'ly managed by, I believe, every sort of government." (P. 303.)

« Ibid., Book II, chap. 3 ; vol. i, p. 328.

• Ibid., Book V. chap. 2, part ii, art. 1 ; vol. ii, p. 318.

• Ibid., Book V, chap. 3 ; vol. ii, p. 413.

ECONOMIC LIBERTY AND INTERNATIONAL TRADE 95

Lastly, the State is an inefficient administrator because its agents are negligent and thriftless, not being directly interested in adminis- tration, but paid out of public funds'. Should the administration of the land pass into the hands of the State he exclaims that not a fourth of the present produce would ever be raised, because of " the negligent, expensive, and oppressive management of his factors and agents." l On the contrary, he proposes that the remainder of the common land should be distributed among individuals. On this point European Governments have followed his advice somewhat too closely.* For the same reason — the necessity for stimulating personal interest wherever possible — he commends, instead of a fixed salary for public officers, payment by those who benefit by their services, such payment in every case to be in strict proportion to the zeal and activity displayed. This was to apply, for example, to judges and professors.*

State administration is accordingly a pis aller, and intervention ought to be strictly limited to those cases in which individual action is impossible. Smith recognises three functions only which the State can perform, namely the administration of justice, defence, " and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain ; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society." 4

We must beware, however, lest we exaggerate this point. Although Smith, in the majority of cases, preferred individual action, we must not conclude from this that he had unlimited confidence in individuals. Smith's individualism was of a particular kind. It was not a mere blind preference for every private enterprise, for he knew that industry frequently falls a prey to the spirit of monopoly. ** People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." 6 In order that a private enterprise may be useful for the community two conditions are necessary. The entrepreneur must be : (1 ) actuated by personal interest ; (2) his actions must by means of competition be kept

1 Wealth of Nations, Book V, chap. 2, part ii ; Caiman, vol. ii, p. 308. 1 Cf. particularly Burgin, Lea Communaux et la Revolution fran^aise, in Nouvette Revue historique de Droit, Nov. -Dec. 1908.

• Wealth of Nations, Book V, chap. 1, part iii, art. 2 ; Caiman, vol. ii, p. 250.

• Ibid., Book IV, chap. 9 ; vol. ii, p. 185.

• Ibid., Book I, chap. 10, part ii ; vol. i, p. 130.

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within the limits of justice. Should either of these two conditions be wanting, the public would run the risk of losing as much by private as they would by State enterprise.

Thus Smith throughout remains very hostile to certain collective enterprises of a private nature, such as joint-stock companies,1 because of the absence of personal interest. The only exceptions which he would tolerate are banks, insurance companies, and com- panies formed for the construction or maintenance of canals or for supplying great towns with water, for the management of such undertakings can easily be reduced to a kind of routine, " or to such a uniformity of method as admits of little or no variation." 2

His opposition to every kind of monopoly granted either to an individual or to a company is even more pronounced. A whole chapter is devoted to an attack upon the great trading companies of the seventeenth and eighteenth centuries, which were created with a view to the development of colonial trade, and of which the East India Company was the most famous.

One other observation remains to be made. Non-intervention for Smith was a general principle, and not an absolute rule. He was no doctrinaire, and he never forgot that to every rule there are some exceptions. An interesting list could be made, giving all the cases in which, according to Smith, the legitimacy of State intervention was indisputable — legal limitation of interest,3 State administration of the post-office, compulsory elementary education, State exami- nations as a condition of entry into the liberal professions or to any post of confidence whatever, bank-notes of a minimum value of £5, etc.* In a characteristic phrase he gave expression to his feeling on the question of restricting the liberty of banks. " Such regulations may, no doubt, be considered as in some respects a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole of society, are, and ought to be, restrained by the laws of all governments ; of the most free, as well as of the most

1 Wealth of Nations, Book V, chap. 1, part iii, art. 1; Carman, vol. ii, p. 233.

* Ibid., Book V, chap. 1, part iii, art. 1; vol. ii, p. 246.

* Ibid., Book II, chap. 4, in fine. It is probable that his conversion to belief in absolute liberty took place later as the result of his perusal of Bentham's Defence of Usury, published in 1787, advocating the right of taking interest. This seems to have been the case if we can credit the report of a conversation which Smith had with one of Bentham's friends, mentioned in a letter written to Bentham by another cf hi» friends — George Wilson. Cf. John Rae, Life of Adam Smith, p. 423.

* Wealth of Nations. Book II, chap. 2 ; Cannan, vol. 5, p. 307.

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despotical." 1 Despite these reservations it is still very evident that the whole of Smith's work is a plea for the economic freedom of the individual. It is an eloquent appeal against the Mercantilist policy and a violent attack upon every economic system inspired by it.

On this point there is absolute agreement between the work done by Smith in England and that carried on at the same time by the Physiocrats in France. Both in foreign and domestic trade pro- ducers, merchants, and workmen were hemmed in by a network of restrictions either inherited from the traditions of the Middle Ages or imposed by powerful party interests and upheld by false economic theories. The corporations still existed in the towns ; although their regulations could not be applied to industries born after the passing of Elizabeth's famous law concerning apprenticeship. The Colbertian system, with its mob of officials entrusted with the task of super- intending the processes of production, of examining the weight, the length, and the quality of the material employed, was still a grievance with the woollen manufacturers.2 The fixing of the duration of apprenticeship at seven years, the limitation of the number of apprentices in the principal industries, the obstacles put in the way of the mobility of labour by the Poor Law and by the series of statutes passed since the reign of Elizabeth, fettered the movement of labour and the useful employment of capital. Smith opposed these measures with the whole of his energy. England, unlike France, had fortunately escaped internal restrictions upon trade, but the restraints placed upon foreign trade still kept England and Ireland commercially separated. These checks upon foreign trade proved as irksome in England as they did everywhere else. Manu- factured goods from foreign countries were heavily taxed or were prohibited entrance altogether. Certain natural products, e.g. French wine, were similarly handicapped ; the importation of a number of commodities necessary for national industry was banned ; a narrow and oppressive policy regarded the colonies as the natural purveyors

1 Wealth of Nations, Book II, chap. 2 ; Carman, vol. i, p. 307. He continues : " The obligation of building party walls in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regula- tions of the banking trade which are here proposed." This passage proves that Smith was in favour of public regulations which would further the material security of the citizens. Elsewhere he shows his partiality for adopting hygienic precautions against the spread of contagious diseases (Book V, chap. 1, part iii ; rol. ii, p. 272).

* Cf. Mantoux, op. cit., pp. 65-66. This work gives most interesting details bearing upon all the points mentioned here. Internal restrictions are criticised by Smith in the second part of chap. 10 of Book I.

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98 ADAM SMITH

of raw materials for the mother-country and the willing buyers of its manufactured goods. Against all this mass of regulations, destined, it was thought, to secure the supremacy of England among other commercial nations, Smith directed his most spirited onslaughts. The fourth book of the Wealth of Nations is an eloquent and vigorous attack upon Mercantilism, admirable alike for the precision and the extent of its learning. It was this section of his work that interested his contemporaries most. For us it would have been the least interesting but for its theory of international trade and its criticism of Protection in general. On this account, however, it is of con- siderable importance in the study of economic doctrines.

In the struggle for Free Trade, as on other points, Smith was forestalled by the Physiocrats. But again has he shown himself superior in the breadth of his outlook. Physiocratic Liberalism was the result of their interest in agriculture, foreign trade being of quite secondary importance. Smith, on the other hand, considered foreign trade in itself advantageous, provided it began at the right moment and developed spontaneously.1 Although his point of view is far superior to that of the Physiocrats, even Smith failed to give us a satisfactory theory. It was reserved for Ricardo and his successors, particularly John Stuart Mill, to find a solid scientific basis for the theory of international trade. The doctrine of the Scotch economist is somewhat lame. But the hesitancy of a great writer is often interesting, and some of his arguments deserve to be recalled.

Already in our review of his theory of money we have become familiar with Smith's criticism of the balance of trade theory. But the balance of trade theory is not the whole of Protection, and we find in Smith something more than its mere refutation. In the first place, we have a criticism of Protectionism in general considered in its Mercantilist^ aspect, followed by an attempt to demonstrate the positive advantages of international commerce.

The first criticism that he offers might be summed up in the well-known phrase : " Industry is limited by capital." " The general industry of the society can never exceed what the capital of the society can employ." But Protection, perhaps, increases the quantity of capital ? No, " for it can only divert a part of it into a direction into which it might not otherwise have gone." But the direction spontaneously given to their capital by individuals is the most

1 " Each of those different branches of trade, however, is not only advan- tageous, but necessary and unavoidable, when the course of things, without any constraint or violence, naturally introduces it," says he, after giving an exposition of the respective advantages of the various forms of economic activity. (Wealth of Nations, Book II, chap. 5 ; Cannan, vol. i, p. 362.)

favourable to a country's industry. Has not Smith demonstrated this already ? Protection, consequently, is not merely useless ; it may even prove injurious.1

The argument does not appear decisive, especially when we recall the criticism of Smith's optimism given above. To borrow an expression of M. Pareto, it is the maximum of ophelimity and not the maximum of utility that is realised by the capitalists under the action of personal interest.

A second and a more striking argument shows the absurdity of manufacturing a commodity in this country at a great expense, when a similar commodity might be supplied by a foreign country at less cost. " It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. . . . What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." a It is foolish to grow grapes in hothouses in Scotland when better and cheaper can be got from Portugal or France. Everybody is convinced of that. But a similar stupidity prevails when we are hindered by tariffs from profiting by the natural advantages which foreign nations possess as compared with ourselves. All " the mean rapacity and the monopolizing spirit of merchants and manu- facturers " 3 was necessary to blind men to their true interests on this point. According to Smith, there exists a natural distribu- tion of products among various countries, resulting in an advantage to all of them. It is Protection that hinders our sharing in the advantages. This is the principle known as the " territorial division of labour."

But the argument is inconclusive, for capital and labour do not circulate from one nation to another in the same way as they do within a country. The distribution of industry among the various nations is regulated, not by absolute cost of production, but by relative cost of production. The credit of having shown this belongs to Ricardo.

Smith's demonstration of the inconveniences of Protection is incomplete, and we feel the incompleteness all the more when he attempts to prove the advantages of international trade.

The real and decisive argument in favour of free exchange turns upon a consideration of the consumer's interests. Increased utilities placed at his disposal mark the superiority of free exchange,

1 Wealth of Nations, Book IV, chap. 2 ; Cannan, vol. i, p. 419.

8 Ibid., Book IV, chap. 1; vol. i, p. 422.

' Ibid., Book IV, chap. 3, part ii ; vol. i, pp. 457-458.

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or as John Stuart Mill puts it, " the only direct advantage of foreign commerce consists in the imports." l With Smith this is the point of view developed least of all. True, he wrote that " consump- tion is the sole end and purpose of all production. But, in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer." * This criticism, however, was placed at the end of his examination of the Mercantilist system in chap. 8 of Book IV. It is not found in the first edition of the work, and was only added in the third.3

It is the point of view of the producer that Smith invariably adopts when attempting to illustrate the advantages of international trade.4

Just now foreign trade seemed to afford a means of disposing of a country's surplus products, and this extension of the market, it was argued, would lead to further division of labour and increased productivity.6 But one is led to ask why, instead of producing the superfluous goods which it must export, it does not produce those things which it is obliged to import.

Smith, being now desirous of showing that international trade necessarily benefits both countries, bases his argument upon the fact that the merchants in both countries must make a profit — i.e. get an additional exchange value, which must be added to the others. To this Ricardo justly replied that the profits of a merchant do not necessarily increase the sum of utilities possessed by any country.

Here again, in striking contrast with the attitude of the Physio- crats, Smith, despite himself, has championed his own adversaries. As yet he is not sufficiently rid of Mercantilist prejudice not to be concerned with the welfare of the producer, and in his great work we find excellent argument and debatable points of view placed side by side. It does not appear that he himself realised this incom- patibility. An irresistible tide was sweeping everybody before it in the direction of a more liberal policy. It proved too powerful for

1 Principles of Political Economy, Book III, chap. 17.

! Wealth of Nations, Book IV, chap. 8 ; Carman, vol. ii, p. 159.

• It is true that in Book IV, chap. 3, part 2, he declares : " In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest. The proposition is so very manifest, that it seems ridiculous to take any pains to prove it." (Cannan, vol. i, p. 458.)

4 Speaking of duties on corn, he writes : " To prohibit by a perpetual law the importation of foreign corn and cattle, is in reality to enact, that the popula- tion and industry of the country shall at no time exceed what the true produce of its own soil can maintain." (Ibid., Book IV, chap. 2 ; vol. i, p. 427.) He always views the question from the standpoint of increased population and labour, and not from that of the consumer.

• Ibid., Book II, chap. 5. Cf. Book IV, chap. 1.

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his contemporaries, who were not concerned to give a careful consideration to every part of his thesis. Enough that they found in him an ardent champion of an attractive cause.

We have already noticed more than once the hesitation which Smith displays when he comes to apply his principle, and we must again refer to it in this connection.

Theoretically a champion of absolutely free exchange, he miti- gates his belief in practice, and mentions an exception to his policy which seemed to him a mere matter of common sense. ** 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. Not only the prejudices of the public, but what is more unconquerable, the private interests of many individuals, irresistibly oppose it." J Facts have belied this prophecy, like many others. England of the nineteenth century succeeded in realising this Utopia of free exchange — almost to perfection.

Without any illusion as to the future, his condemnation of the past was not altogether unqualified. He justified some of the. acts that were inspired by Mercantilism. " The act of navigation 2 is not favourable to foreign commerce," said he ; " as defence, however, is of much more importance than opulence, the act of navigation is, perhaps, the wisest of all the commercial regulations of England."8 In another instance he justifies an import duty where a tax is levied upon goods similar to those imported. Here an import duty merely restores that normal state of competition which was upset by the imposition of the Excise. Retaliation as a means of securing the abolition of foreign duties is not altogether under his ban.4 And he finally admits that liberty is best introduced gradually into those countries in which industry has long enjoyed Protection or where a great number of men are employed.5

1 Wealth of Nations, Book IV, chap. 2, in fine ; Carman, vol. i, p. 435.

* The " Navigation Laws " is a generic term for a number of laws, the most famous of them dating from the time of Cromwell. Their immediate object was the destruction of the Dutch fleet, and English commerce was organised with a view to securing this. There is no doubt but that they contributed very considerably to the development of English maritime power.

1 Ibid., Book IV, chap. 2 ; vol. i, p. 429.

* But " when there is no probability that any euch repeal can be procured it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them." (Ibid., Book IV, chap. 2 ; vol. i, p. 433.)

1 The discussion of these various cases is to be found towards the end of chap. 2 of Book IV.

102 ADAM SMITH

His practical conclusion is somewhat as follows : Instead of innumerable taxes which hinder importation and hamper production, England ought to content herself with the establishment of a certain number of taxes of a purely fiscal character, placed upon com- modities such as wine, alcohol, sugar, tobacco, cocoa. Such a system, though perfectly consonant with a great deal of free exchange, would yield abundant revenue to the Treasury, and would afford ample compensation for the losses resulting from the introduction of Free Trade.1

England has followed his advice, and her financial system is to-day founded on these bases. Few economists can boast of such a complete realisation of their projects.

IV: THE INFLUENCE OF SMITH'S THOUGHT AND ITS DIFFUSION. J. B. SAY

THE eighteenth century was essentially a century of levelling down. In Smith's conception of the economic world we have an excellent example of this. Its chief charm lies in the simplicity of its outlines, and this doubtless accounted for his influence among his contem- poraries. The system of natural liberty towards which both their political and philosophical aspirations seemed to point were here deduced from, and supported by, evidence taken direct from a study of human nature — evidence, moreover, that seemed to tally so well with known facts that doubt was out of the question. Smith's work still retains its irresistible charm. Even if his ideas are some day shown to be untenable — a contingency we cannot well imagine — his book will remain as a permanent monument of one of the most important epochs in economic thought. It must still be considered the most successful attempt made at embracing within a single purview the infinite diversity of the economic world.

But its simplicity also constituted its weakness. To attain this simplicity more than one important fact that refused to fit in with the system had to remain in the background. The evidence employed was also frequently incomplete. None of the special themes — price, wages, profits, and rent, the theory of international trade or of capital — which occupy the greater portion of the work, but has been in some way corrected, disputed, or replaced. But the structure loses stability if some of the corner-stones are removed. And new points of view have appeared of which Smith did not take sufficient account. Instead of the pleasant impression of simplicity and 1 This system is expounded in Book V, chap 2, part ii, art. 5.

INFLUENCE OF THOUGHT AND ITS DIFFUSION 103

security which a perusal of Smith's work gave to the economists of the early nineteenth century, there has been gradually substituted by his successors a conviction of the growing complexity of economic phenomena.

To pass a criticism on the labours of Adam Smith would be to review the economic doctrines of the nineteenth century. That is the best eulogy one can bestow upon his work. The economic ideas of a whole century were, so to speak, in solution in his writings. Friends and foes have alike taken him as their starting-point. The former have developed, extended, and corrected his work. The latter have subjected his principal theories to harsh criticism at every point. All with tacit accord admit that political economy commenced with him. As Gamier, his French translator, put it, " he wrought a complete revolution in the science." J To-day, even although the Wealth of Nations may no longer appear to us as a truly scientific treatise on political economy, certain of its fundamental ideas remain incontestable. The theory of money, the importance of division of labour, the fundamental character of spontaneous economic institu- tions, the constant operation of personal interest in economic life, liberty as the basis of rational political economy — all these appear to us as definite acquisitions to the science.

The imperfections of the work will be naturally demonstrated in the chapters which follow. In order to complete our exposi- tion of Smith's doctrines it only remains to show how they were diffused.

The rapid spread of his ideas throughout Europe and their incontestable supremacy remains one of the most curious phenomena in the history of ideas. Smith persuaded his own generation and governed the next. 2 History affords us some clue. To attribute it solely to the influence of his book is sheer exaggeration. A great deal must be set to the credit of circumstances more or less fortuitous.

M. Mantoux remarks with much justice that " it was the American War rather than Smith's writings which demonstrated the decay of the ancient political economy and compassed its ruin. The War of Independence proved two things : (1) The danger lurking in a colonial system which could goad the most prosperous colonies to revolt ; (2) the uselessness of a protective tariff, for on the very morrow of the war English trade with the American colonies was more flourishing than ever before. " The loss of the American colonies to England was really a gain to her." So wrote Say in

1 In the preface to his translation, 1821 ed., p. Ixix.

1 llae, Life of Smith, p. 103. The author of this famous phrase is not known.

104 ADAM SMITH

1803, and he adds : " This is a fact that I have nowhere seen dis puted." x To the American War other causes must be added : (1) The urgent need for markets felt by English merchants at the close of the Napoleonic wars ; they were already abundantly supplied with excellent machinery. (2) Coupled with this was a growing belief that a high price of corn as the result of agricultural protection increased the cost of hand labour. These two reasons were enough to create a desire for a general lowering of the customs duties.

Subsequent events have justified Smith's attitude on the question of foreign trade. In the matter of domestic trade he has been less fortunate.

The French Revolution, which owed its economic measures to the Physiocrats, gave a powerful impulse to the principle of liberty. The influence of the movement was patent enough on the Continent. Even in England, where this influence was least felt; everybody was in favour of laissez-faire. Pitt became anxious to free Ireland from its antiquated system of prohibitions, and he succeeded in doing this by his Act of Union of 1800. The regulations laid down by the Elizabethan Statute of Apprentices, with its limitation of the hours of work and the fixing of wages by justices of the peace, became more and more irksome as industry developed. Every historian of the Industrial Revolution has described the struggle between workers and masters and shown how the former clung in despair to the old legislative measures as their only safeguard against a too rapid change, while the latter refused to be constrained either in the choice of workmen or the methods of their work.2 They wished to pay only the wages that suited them and to use their machines as long as possible. These repeated attacks rendered the old Statute of Apprentices useless, and Parliament abolished its regulations one after another, so that by 1814 all traces of it were for ever effaced from the Statute Book.

But Smith did not foresee these things. He did not write with a view to pleasing either merchants or manufacturers. On the contrary, he was never weary of denouncing their monopolistic tendencies. But by the force of circumstances manufacturers and merchants became his best allies. His book supplied them with arguments, and it was his authority that they always invoked.

> J. B. Say, Traite, 1st ed., p. 240.

1 Mantoux, La Revolution industriette, p. 83. M. Halevy gives expression to a similar idea in his La Jeunesse de Bsnlham, p. 193 (Paris, 1901).

INFLUENCE OF THOUGHT AND ITS DIFFUSION 105

His authority never ceased growing. As soon as the Wealth of Nations appeared, men like Hume, and Gibbon, the historian, expressed to Smith or to his friends their admiration of the new work. In the following year the Prime Minister, Lord North, borrowed from him the idea of levying two new taxes — the tax on malt and the tax on inhabited houses. Smith was yet to make an even more illustrious convert in the person of Pitt. Pitt was a student when the Wealth of Nations appeared, but he always declared himself a disciple of Smith, and as soon as he became a Minister he strove to realise his ideas. It was he who signed the first Free Trade treaty with France— the Treaty of Eden, 1786.1 When Smith came to London in 1787, Pitt met him more than once and consulted him on financial matters. The story is told that after one of these conversations Smith exclaimed : " What an extraordinary person Pitt is 1 He understands my ideas better than myself."

While Smith made converts of the most prominent men of his time, his book gradually reached the public. Four editions in addition to the first appeared during the author's lifetime.2 The third, in 1784, presents important differences in the way of additions and corrections as compared with the first. From the date of his death in 1790 to the end of the century three other editions were published.3

Similar success attended the appearance of the work on the Conti- nent. In France he was already known through his Theory of Moral Sentiments. The first mention of the Wealth of Nations in France appears in the Journal des Savants in the month of February, 1777. Here, after a brief description of the merits of the work, the critic gives expression to the following curious opinion : ** Some of our men of letters who have read it have come to the conclusion that it is not a book that can be translated into our language. They point out, among other reasons, that no one would be willing to bear the expense of publishing because of the uncertain return, and a book- seller least of all. They are bound to admit, however, that the work is full of suggestions and of advice that is useful as well as curious, and might prove of benefit to statesmen." In reality, despite the opinion of those men of letters, several translations of the work did appear in France, as well as elsewhere in Europe. In little more than twenty years, between 1779 and 1802, four translations had

1 So called in honour of the leading English representative. Lord Eden. 1 In 1778, 1784, 1786, 1789. * 1781, 1793, 1790.

106 ADAM SMITH

appeared. This in itself affords sufficient proof of the interest which the book had aroused.1

Few works have enjoyed such complete and universal success. But despite admiration the ideas did not spread very rapidly. Faults of composition have been burdened with the responsibility for this, and it is a reproach that has clung to the Wealth of Nations from the first. Its organic unity is very pronounced, but Smith does not seem to have taken the trouble to give it even the semblance of outward unity. To discover its unity requires a real effort of thought. Smith whimsically regarded it as a mere discourse, and the reading occasionally gives the impression of conversation. The general formulae which summarise or recapitulate his ideas are indifferently found either in the middle or at the end of a chapter, just as they arose. They represent the conclusions from what preceded as they flashed across his mind. On the other hand, a consideration of such a question as money is scattered throughout the whole work, being discussed on no less than ten different occa- sions. As early as April 1, 1776, Hume had expressed to Smith some doubts as to the popularity of the book, seeing that its reading demanded considerable attention. Sartorius in 1794 attributed to this difficulty the slow progress made by Smith's ideas in Germany. Germain Gamier, the French translator, gave an outline of the book in order to assist his readers. It was generally agreed that the work was a striking one, but badly composed and difficult to penetrate owing to the confused and equivocal character of some of the paragraphs. When Say referred to it as " a chaotic collection of just ideas thrown indiscriminately among a number of positive truths," 2 he expressed the opinion of all who had read it.

But a complete triumph, so far as the Continent at least was concerned, had to be the work of an interpreter. Such an inter- preter must fuse all these ideas into a coherent body of doctrines, leaving useless digressions aside.3 This was the task that fell into the

1 Professor Kraus, writing in 1796, declared that no book published since the days of the New Testament would effect so many welcome changes when it became thoroughly known (J. Rae, p. 360). By the beginning of the nineteenth century its influence had become predominant. All the Prussian statesmen who aided Stein in the preparation and execution of those important reforms that gave birth to modern Prussia were thoroughly versed in Smith's doctrines, and the Prussian tariff of 1821 is the first European tariff in which they are deliberately applied. (Cf. Roscher, GeschicJite der Nationaldkonomik in Deittschland.)

1 In his introduction to the Traitl, 1st ed. (The phrase was deleted in the 6th ed.)

» J. B. Say, Traite, 1st ed., introduction, p. xxxiii

INFLUENCE OF THOUGHT AND ITS DIFFUSION 107

hands of J. B. Say. Among his merits (and it is not the only one) is that of popularising the ideas of the great Scotch economist on the Continent, and of giving to the ideas a somewhat classical appearance. The task of discrediting the first French school of economists and of facilitating the expansion of English political economy fell, curiously enough, to the hands of a Frenchman.

J. B. Say was twenty-three years of age in 1789.1 At that time he was Clavieres' secretary. Clavieres became Minister of Finance in 1792, but at this period he was manager of an assurance company, and was already a disciple of Smith. Say came across some stray pages of the Wealth of Nations, and sent for a copy of the book.2 The impression it made upon him was profound. " When we read this work," he writes, " we feel that previous to Smith there was no such thing as political economy." Fourteen years afterwards, in 1803, appeared Le Traiii d 'Economic politique. The book met with immediate success, and a second edition would have appeared had not the First Consul interdicted it. Say had refused to support the Consul's financial recommendations, and the writer, in addition to having his book proscribed, found himself banished from the Tribunate. Say waited until 1814 before republishing it. New editions rapidly followed, in 1817, 1819, and 1826. The treatise was translated into several languages. Say's authority gradually extended itself; his reputation became European; and by these means the ideas of Adam Smith, clarified and logically arranged in the form of general principles from which conclusions could be easily deduced, gradually captivated the more enlightened section of public opinion.

* He was born at Lyons on January 5, 1767. After a visit to England he entered the employment of an assurance company, and took part

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