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• INTRODUCTION-
Most of important historians of economic thought acknowledge Adam Smith’s greatness as the father of scientific political economy. But then his greatness is supposed to be in the areas of Real analysis- his formulation of the theory of allocative efficiency , distributive justice, growth and development, al are accepted as fundamental contributions in the real field. When Adam Smith (1723-90) turned his attention to economics there was already a well-established corpus of theory. His contributions were to sift its ideas, codify them, and give it an endowment of literary style vestiges of which are still occasionally in evidence. Our task from now on becomes easier, because economic thought is more and more using a standard mould- taking the shape, indeed, of the core curriculum and options of a modern university.
• EARLY LIFE-
Among companions of his earliest years, Mr. Smith soon attracted notice, by his passion for books, and by the extraordinary powers of his memory. The weakness of his bodily constitution prevented him from partaking in their more active amusements; but he was much beloved of them on account of his temper, which, though warm, was to an un common degree friendly and generous. Even then he was remarkable for those habits which remained with him through his life, of speaking to himself when alone, and of absence when in company….
The event that changed his life, and laid the foundation for the Wealth of Nations, was his trip to France, from 1763 to 1766, as tutor-companion to the young Duke of Buccleuch. He spent 18 months in Toulouse, then toured the south of France and made their way to Geneva. There Smith met, amongst other eminent Frenchmen, Turgot and Quesnay. So well was he rewarded, that on his return to Scotland he was able to retire to Kirkcaldy (his home town) and devote the next 10 years to writing his book. Then he stayed 2 years in London, resting on his laurels. After which his services were given recognition by his appointment as a commissioner of customs for Scotland.
• THE INDUSTRIAL AGE-
The first edition of The Wealth Of Nations appeared in 1776 and the 6th in 1790. Thus it is the 1st major work in political economy on which the industrial revolution may have been expected to make its mark. With the new machinery, the cotton textile industry had no further need for protection against imports from India, but was able to outdo the Indians in both quality and price. A triangular flow of trade was then created interacting with the industrial Revolution: manufactured goods from Britain to West Africa, slaves from West Africa to America, cotton from America to Britain. It was on the cotton textile industry that Britain’s greatness depended, and it was as industry whose techniques, growth and importance were clearly delineated in lifetime of Adam Smith.
• THE DIVISION OF LABOUR-
Adam Smith takes Petty’s idea (without acknowledgement) calls it the division of labour, and makes it the foundation for the growth of wealth. Smith expanded the idea in 3 chapters, beginning with the example of pin-making. Division of labour resulted in greater dexterity; avoided time lost through changing jobs, and inspired the invention of machinery. There is no doubt whose side he was on in the dispute that developed between the handicraftsmen and the new factory owners: The habit of sauntering and of indolent careless application, which is naturally, or rather necessarily acquired by every country workman who is obliged to change his work and his tools every half hour, and to apply his hand in 20 different ways everyday of his life; renders him always slothful and lazy, and incapable of any vigorous application even on the most pressing occasions.
Adam Smith proceeds by way of deduction. The presents as peculiar to human nature ‘the propensity to truck, barter, and exchange one thing for another’. By contrast, ‘Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog’-a statement on which Cannan comments, not unfairly, ‘it is by no means clear what object there could be in exchanging one bone for another.’ Smith then elaborates the principles in one of those bits of phoney anthropology that we have already discovered in North and Cantillon. It is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions. And in no time, hunters, armourers, carpenters and smiths are all busy exchanging their surpluses with one another. Machinery, too, is developed as a result of this blind, unpremeditated process:
It is naturally to be expected that someone or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement. A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it. Whoever has been much accustomed to visit such manufactures, must frequently have been shewn very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of work.
Nowadays alas, workers are more inclined to resist new methods than to initiate them. The only examples Smith gives of the invention of one of these ‘Pretty machines’, however, is that of the boy whose job it was to open and shut the valve of a steam engine. Since he loved to play with his companions, he worked out a way to tie a string to another part of the machine so that is opened and shut its own valve, leaving him ‘at liberty to divert himself with his play-fellows’ I wonder what the foreman said when the lad interrupted his play to ask for his wages at the end of the week?
The division of labour operates within trades and between them, everyone pursuing his own interests and thus promoting the interests of all. This idea was by then a set-piece in economics, but no one had put it quite so beautifully before: ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from there regard to their own interest.’ He continues, ‘we address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.’ This is a recurrent theme, in the terms of which Smith reproduces the doctrine of natural law:
As every individual…endeavors as much as he can both to employee his capital in the support of domestic industry, and so to direct that industry that its produce maybe of greatest value: every individual necessarily labours to render the annual revenue of the society as great as he can, he generally, indeed neither intends to promote the public interests, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce maybe of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which has no parts of his intensions.
• HIGGLING AND BARGANINIG-
Smith follows the labour theory of value in its conventional form. ‘The real price of everything, what everything really costs to the man who wants to acquire it, it the toil and trouble of acquiring it…what is brought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body.
The measure is somewhat abstract because of variations in the quality of different sorts is labour, which it is not easy to measure. ‘it is adjusted, however, not by any accurate measure but by haggling 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.’ We are back, then , to what is in essence the doctrine of the just price: ‘It is natural that what is usually the produce of 2 days or 2 hours labour, should be worth double of what is usually the produce of 1 day’s or 1 hour’s labour. This view neatly avoids the matter of unearned income: the fact that it is other people’s labour that those who live by property acquire their goods.
When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in rising, preparing, and bringing it to market, according to their natural rates the commodity is than sold of what may be called Natural price.
The commodity is then sold precisely for what it is worth, or for what it really costs the person to bring it to market. The actual price at which any commodity is commonly sold is called market price. It may be either above, or below, or exactly the same with its natural price.
This is the ‘cost of production’ theory of value that runs parallel with the labour theory until the matter is banished in the 1870’s.
If M.P is less than natural price, he explains, landlords, labourers and employers will immediately be prompted to withdraw part of their land, labour or stock from this employment and mutatis pays mutandis, if it is more. He imagines the mechanism operating promptly. They will ‘soon’ be prompted: price will ‘soon’ sink…Cantillon’s ‘perpetual ebb and flow in market prices is elaborated into an constant tendency.’
Petty hinted at the ‘contingent’ causes that might disturb price, and Cantillon’s that entrepreneurs might ‘seek to snatch all they can in their calling and to get the better of their customers.’
Smith, too, suggests the presence of obstacles to the gravitational pull. One obstacle might be lack of knowledge: when by an increase in effectual demand the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stock in the same way, that…the market would soon be reduced to natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profit without ant new rivals.
Since the 1930’s, orthodox theory has suggested that monopolists are under market restraints not much different from competitors: Adam Smith took a different view:
The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken..The one is upon every occasion which can be squeezed out of the buyers…The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.
Then the curtains open once more as he tells us, 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. It is impossible indeed to prevent such meeting, by any law which either could be executed or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
• RENT-
Petty regarded rent as the surplus over what was necessary to maintain the cultivator; Cantillon agreed that ‘ the overplus of the land is at the disposition of the owner ‘ and explained, by bit of imaginative social anthropology, the inevitability of ownership coming into few hands. Petty, who had come by vast Irish estates by somewhat dubious means, was more concerned with the problem of safeguarding land titles than enquiring how they were come by in the first place. By contrast, Smith, like his friend Hume, had a low opinion of landlords as people more likely to damage the economy than serve it. ‘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.’ Buchanan, who produced an edition of The Wealth of Nations in 1814 commented ‘ they do so..but the question is why this apparently unreasonable demand is so generally is compiled with.’
Here, as with demand, supply and price, he seems to be of two minds: ‘the natural laws of succession’ implied that those who worked also owned; and at the same time there was a rent; for which it is naturally meant that land should for the most part be let.’
• PROFIT-
As rent immerges from appropriation of land so profit comes from accumulation of stock. It is no doubt the by now conspicuous role of industrial capital that led to the sophisticated treatment that we are given. Stock in Smith’s terminology, embraces the stock of things on which households live and the capital employed to yield a revenue or profit to its employer. Capital, in turn, he divides into circulating capital, used in raising, manufacturing or purchasing goods and selling them again at a profit, and fixed capital: machines or ‘such-like things as yield a revenue or profit without changing masters.’
Smith, like Hume, accepted fatalistically the concentration of capital in the hands of a few people, though in the distant this had not been so. The employer provided the material of work, and maintained his workers until it was completed. In return he shared in the value that their labour added to the materials on which was bestowed, ‘and in this share consists his profit.’
There was an ‘ordinary or average’ rate of profit, ‘naturally regulated’ by stock moving from one trade to another in response to changes in supply and demand, but he goes on to show the difficulty of finding out what it is. In the case of wages, it is seldom possible to determine more than what are the most usual, ‘BUT EVEN THIS CAN SELDOM BE DONE WITH REGARDS TO PROFIT OF STOCK.’
So, the curious contradiction: On the one side a paradigm that sees the economy governed by natural law, guided by invisible hand that turns recourses to their most favorable use, the pursuit of self interest promoting universal interest, on the other owners, the owners of capital acting in a state of ignorance so great that they do not always know their own rate of power let alone that of other people.
• WAGES-
The contradiction is again conspicuous in his treatment of wages. He presents a number of considerations that affect the way in which the product is divided between workers and employers, the causes that make wages raise, fall or stagnate, and determine relative wages for workers in different occupations. In any place, the more capital there is relative to labour, the lower will be the rate of profit and higher the rate of wages. The accumulation of capital determines whether a country will be progressive, stationery or declining. It deserves to be remarked, perhaps, that it is in the progressive, while the society is advancing to further acquisition, rather than when it has acquired full complement of riches, that the condition of the laboring poor, of the great body of people, seems to be the happiest and the most comfortable. It is hard in the stationery, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationery is dull; the declining melancholy.
But what occasions these differences? He has already suggested that progress was the inevitable outcome of the division of labour, which itself results from human propensity of to ‘truck’. But this natural development might be impeded by unfavorable laws and institutions. Most immediately employers and workers struggle over the division of the product. Their ‘interest are by no means the sale. The workmen desire to get as much, the masters to give as less as possible. The former are disposed to combine in order to raise, the later in order to lower the wages of labour. Industrial relations, In those days, have some similarities with those of today.
We rarely hear, it has been said, of the combination of masters, though of frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is an ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and union combination, not to raise the wages of labour above their actual rate. To violate this combination is always a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody hears of. Masters too sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yelled as they sometimes do without resistance, those severely felt by them, they are never heard of other people. Such combinations, however, are frequently resisted by a contrary defense combination to raise the rises of the workmen; who sometimes too…combine of their own accord to raise their price of their labour. Their usual pretences are sometimes the high price of provisions; sometimes the great profits which their master’s make by their work. But whether their combinations be offensive or defensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extrawagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands, the masters upon this occasion are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of this laws which have been enacted with so much severity. Against the combinations of servants, laborers and journeymen. The workmen, accordingly, very seldom derived any advantage of from the violence, generally end in nothing, but the punishment or the ruin of the ring leaders. But a rise in wages may itself cause a rise in output: ‘ where the wages r high, accordingly, we shall always find a workmen more active, diligent and expeditious, then where they are low.
• ACCUMULATION AND GROWTH-
Adam smith distinguished between productive and unproductive labour in a way significantly different from that of the Physiocrats. To the latter, only farm labour was productive, in the sense that it yielded a surplus. But smith attributes this quality to all labour that adds to the value of the object on which it is bestowed. Thus a manufacturer has his outlay restored, together with a profit. ‘But the maintenance of a menial servant is never restored. A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants.
Amongst the unproductive labourers he daringly classifies the sovereign, ‘with all the officers both of justice and war who serves under him.’ ‘Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.
Now by what formula can one maximize the production of a country? Everyone must be maintained by the annual produce of its land and labour, and the more of this that is allocated to productive hands, and the less to unproductive, the greater will the next years produce be. But the sources from which unproductive hands draw their subsistence are principally rent and profits. That leads him to the rather paradoxical conclusion that the greater the capital employed and the lower the profits made on it, the greater will be the growth and wealth.
The proportion between capital and revenue, therefore, seems everywhere to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails: wherever revenue, idleness. Every increase or diminution of capital, therefore naturally tends to increase or diminish the real quantity of industry, the number of productive hands and consequently the exchangeable value of the annual produce of the land and labour of the country, the real wealth and revenue of all its inhabitant.
A strange view this, reminiscent of that of the African pastoral peoples who value their wealth in cattle – the more you have and the less use you make of them, the richer you are. Here, the more people there are with their noses to the grindstone, and the less the rent and profit that might be squandered, the faster will wealth grow.
This leads on to the belief in the virtues of parsimony first expressed by Hume, a belief that was to become a tenet of the orthodox faith. Previous writers had stressed the obligation of prodigality amongst the rich; only thus could depressions be avoided. Smith was not at all concerned about the evils of trade fluctuations, but much concerned with the growth of industrial capital. His thoughts are full of portent for the future of economic thought.
Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.
Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not store and save up, the capital would never be greater.
Parsimony, by increasing the fund which is destined for the maintenance of productive hands, tends to increase the number of those hands whose labour adds to the value of the subject upon which it is bestowed………
What is annually saved is as regularly consumed as what is annually spent and nearly in the same time too; but it is consumed by a different set of people. That portion of his revenue which a rich man annually spends, is in most cases consumed by idle guests, and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as for the sake of the profit it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people, by labourers, manufacturers, and artificers, who re-produce with a profit the value of their annual consumption.
So reference to the phenomenon of what Keynes long afterwards called ‘liquidity preference’ is struck from the record, and the warnings of North, Boisguillebert and the others forgotten. Before long, Sismondi and Malthus will be ridiculed for trying to revive them.
The number of workers can be increased only by an increase in the funds destined for maintaining them. The increase in their productive powers requires ‘some addition and improvement to those machines and instruments which facilitate and abridge labour; or of a more proper division and distribution of employment. And thus, despite the profusion of government, the annual produce of England had increased considerably since the restoration: ‘capital has been silently and gradually accumulated by the private frugality and good conduct of individuals….. hence, a warning to governments to keep off:
It is the highest impertinence and presumption…… in kings and ministers, to pretend to watch over the economy of private people…… they are themselves always and without any exception, the greatest spendthrifts in society. Let them look well after their own expence, and they may safely trust people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
• THE TWO SMITHS-
So we observe in Adam Smith a curious conflict in beliefs. There is the received gospel that he must faithfully transmit; then he changes roles and becomes intermittently an apostate denying what he has preached. The paradigm was of a world where only government interference hindered the invisible hand from guiding mankind along the road to plenty. But his knowledge of the world suggested that the fundamental postulates did not apply: how could capital go unerringly to those activities where profit was highest when employers were unsure even of their own rate of profit? ‘Natural’ prices were distributed because those who were supposed to compete considered to fleece the public. Completion failed to establish equal work, and labour, through ignorance or obstinacy, declined to be allocated in the most economical way.
In the course, Smith the doctrinaire was installed as the Father of Economics, while smith the empiricist and sceptic was forgotten, and the curious legend fostered that he had invented or discovered it all. Perhaps it would have strained credulity if people had been asked to suppose that a theory developed long before the industrial age was relevant to problems to which industrialism had given rise? And the fact that, as we have seen the main corpus of theory ante-dates the industrial revolution by a hundred years and lives on in the textbooks of today is, indeed, a testimony that it is remote enough from reality to be impervious to those substantial changes, for better to worse, to which reality has been a prey.
• CONCLUSION-
Adam Smith is a great economist, and his reputation is mainly built upon his economic theorizing. But he is equally great as a social and political thinker. His economics is intimately connected with his political philosophy and social theory. Unless Smith’s economic theory is viewed against the background of his social and political philosophy, one does not get the right perspective. There is an organic unity in, what we may call his complete model of the society. In The Wealth of Nations Smith had a striking and complete comprehension of the special nature of the new economic order that came into being with the emergence of the bourgeoisie. This comprehension was complete because he had a deeper understanding of the economic sociology of the system. Therein lays his greatness as a “political economist”. And we would have a better appreciation of Smith’s contribution to human thought if we pay more attention to his social and political thinking.
Most of important historians of economic thought acknowledge Adam Smith’s greatness as the father of scientific political economy. But then his greatness is supposed to be in the areas of Real analysis- his formulation of the theory of allocative efficiency , distributive justice, growth and development, al are accepted as fundamental contributions in the real field. When Adam Smith (1723-90) turned his attention to economics there was already a well-established corpus of theory. His contributions were to sift its ideas, codify them, and give it an endowment of literary style vestiges of which are still occasionally in evidence. Our task from now on becomes easier, because economic thought is more and more using a standard mould- taking the shape, indeed, of the core curriculum and options of a modern university.
• EARLY LIFE-
Among companions of his earliest years, Mr. Smith soon attracted notice, by his passion for books, and by the extraordinary powers of his memory. The weakness of his bodily constitution prevented him from partaking in their more active amusements; but he was much beloved of them on account of his temper, which, though warm, was to an un common degree friendly and generous. Even then he was remarkable for those habits which remained with him through his life, of speaking to himself when alone, and of absence when in company….
The event that changed his life, and laid the foundation for the Wealth of Nations, was his trip to France, from 1763 to 1766, as tutor-companion to the young Duke of Buccleuch. He spent 18 months in Toulouse, then toured the south of France and made their way to Geneva. There Smith met, amongst other eminent Frenchmen, Turgot and Quesnay. So well was he rewarded, that on his return to Scotland he was able to retire to Kirkcaldy (his home town) and devote the next 10 years to writing his book. Then he stayed 2 years in London, resting on his laurels. After which his services were given recognition by his appointment as a commissioner of customs for Scotland.
• THE INDUSTRIAL AGE-
The first edition of The Wealth Of Nations appeared in 1776 and the 6th in 1790. Thus it is the 1st major work in political economy on which the industrial revolution may have been expected to make its mark. With the new machinery, the cotton textile industry had no further need for protection against imports from India, but was able to outdo the Indians in both quality and price. A triangular flow of trade was then created interacting with the industrial Revolution: manufactured goods from Britain to West Africa, slaves from West Africa to America, cotton from America to Britain. It was on the cotton textile industry that Britain’s greatness depended, and it was as industry whose techniques, growth and importance were clearly delineated in lifetime of Adam Smith.
• THE DIVISION OF LABOUR-
Adam Smith takes Petty’s idea (without acknowledgement) calls it the division of labour, and makes it the foundation for the growth of wealth. Smith expanded the idea in 3 chapters, beginning with the example of pin-making. Division of labour resulted in greater dexterity; avoided time lost through changing jobs, and inspired the invention of machinery. There is no doubt whose side he was on in the dispute that developed between the handicraftsmen and the new factory owners: The habit of sauntering and of indolent careless application, which is naturally, or rather necessarily acquired by every country workman who is obliged to change his work and his tools every half hour, and to apply his hand in 20 different ways everyday of his life; renders him always slothful and lazy, and incapable of any vigorous application even on the most pressing occasions.
Adam Smith proceeds by way of deduction. The presents as peculiar to human nature ‘the propensity to truck, barter, and exchange one thing for another’. By contrast, ‘Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog’-a statement on which Cannan comments, not unfairly, ‘it is by no means clear what object there could be in exchanging one bone for another.’ Smith then elaborates the principles in one of those bits of phoney anthropology that we have already discovered in North and Cantillon. It is this same trucking disposition which originally gives occasion to the division of labour. In a tribe of hunters or shepherds a particular person makes bows and arrows, for example, with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions. And in no time, hunters, armourers, carpenters and smiths are all busy exchanging their surpluses with one another. Machinery, too, is developed as a result of this blind, unpremeditated process:
It is naturally to be expected that someone or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement. A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it. Whoever has been much accustomed to visit such manufactures, must frequently have been shewn very pretty machines, which were the inventions of such workmen, in order to facilitate and quicken their own particular part of work.
Nowadays alas, workers are more inclined to resist new methods than to initiate them. The only examples Smith gives of the invention of one of these ‘Pretty machines’, however, is that of the boy whose job it was to open and shut the valve of a steam engine. Since he loved to play with his companions, he worked out a way to tie a string to another part of the machine so that is opened and shut its own valve, leaving him ‘at liberty to divert himself with his play-fellows’ I wonder what the foreman said when the lad interrupted his play to ask for his wages at the end of the week?
The division of labour operates within trades and between them, everyone pursuing his own interests and thus promoting the interests of all. This idea was by then a set-piece in economics, but no one had put it quite so beautifully before: ‘it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from there regard to their own interest.’ He continues, ‘we address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages.’ This is a recurrent theme, in the terms of which Smith reproduces the doctrine of natural law:
As every individual…endeavors as much as he can both to employee his capital in the support of domestic industry, and so to direct that industry that its produce maybe of greatest value: every individual necessarily labours to render the annual revenue of the society as great as he can, he generally, indeed neither intends to promote the public interests, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce maybe of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which has no parts of his intensions.
• HIGGLING AND BARGANINIG-
Smith follows the labour theory of value in its conventional form. ‘The real price of everything, what everything really costs to the man who wants to acquire it, it the toil and trouble of acquiring it…what is brought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body.
The measure is somewhat abstract because of variations in the quality of different sorts is labour, which it is not easy to measure. ‘it is adjusted, however, not by any accurate measure but by haggling 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.’ We are back, then , to what is in essence the doctrine of the just price: ‘It is natural that what is usually the produce of 2 days or 2 hours labour, should be worth double of what is usually the produce of 1 day’s or 1 hour’s labour. This view neatly avoids the matter of unearned income: the fact that it is other people’s labour that those who live by property acquire their goods.
When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in rising, preparing, and bringing it to market, according to their natural rates the commodity is than sold of what may be called Natural price.
The commodity is then sold precisely for what it is worth, or for what it really costs the person to bring it to market. The actual price at which any commodity is commonly sold is called market price. It may be either above, or below, or exactly the same with its natural price.
This is the ‘cost of production’ theory of value that runs parallel with the labour theory until the matter is banished in the 1870’s.
If M.P is less than natural price, he explains, landlords, labourers and employers will immediately be prompted to withdraw part of their land, labour or stock from this employment and mutatis pays mutandis, if it is more. He imagines the mechanism operating promptly. They will ‘soon’ be prompted: price will ‘soon’ sink…Cantillon’s ‘perpetual ebb and flow in market prices is elaborated into an constant tendency.’
Petty hinted at the ‘contingent’ causes that might disturb price, and Cantillon’s that entrepreneurs might ‘seek to snatch all they can in their calling and to get the better of their customers.’
Smith, too, suggests the presence of obstacles to the gravitational pull. One obstacle might be lack of knowledge: when by an increase in effectual demand the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stock in the same way, that…the market would soon be reduced to natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profit without ant new rivals.
Since the 1930’s, orthodox theory has suggested that monopolists are under market restraints not much different from competitors: Adam Smith took a different view:
The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken..The one is upon every occasion which can be squeezed out of the buyers…The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.
Then the curtains open once more as he tells us, 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. It is impossible indeed to prevent such meeting, by any law which either could be executed or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
• RENT-
Petty regarded rent as the surplus over what was necessary to maintain the cultivator; Cantillon agreed that ‘ the overplus of the land is at the disposition of the owner ‘ and explained, by bit of imaginative social anthropology, the inevitability of ownership coming into few hands. Petty, who had come by vast Irish estates by somewhat dubious means, was more concerned with the problem of safeguarding land titles than enquiring how they were come by in the first place. By contrast, Smith, like his friend Hume, had a low opinion of landlords as people more likely to damage the economy than serve it. ‘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.’ Buchanan, who produced an edition of The Wealth of Nations in 1814 commented ‘ they do so..but the question is why this apparently unreasonable demand is so generally is compiled with.’
Here, as with demand, supply and price, he seems to be of two minds: ‘the natural laws of succession’ implied that those who worked also owned; and at the same time there was a rent; for which it is naturally meant that land should for the most part be let.’
• PROFIT-
As rent immerges from appropriation of land so profit comes from accumulation of stock. It is no doubt the by now conspicuous role of industrial capital that led to the sophisticated treatment that we are given. Stock in Smith’s terminology, embraces the stock of things on which households live and the capital employed to yield a revenue or profit to its employer. Capital, in turn, he divides into circulating capital, used in raising, manufacturing or purchasing goods and selling them again at a profit, and fixed capital: machines or ‘such-like things as yield a revenue or profit without changing masters.’
Smith, like Hume, accepted fatalistically the concentration of capital in the hands of a few people, though in the distant this had not been so. The employer provided the material of work, and maintained his workers until it was completed. In return he shared in the value that their labour added to the materials on which was bestowed, ‘and in this share consists his profit.’
There was an ‘ordinary or average’ rate of profit, ‘naturally regulated’ by stock moving from one trade to another in response to changes in supply and demand, but he goes on to show the difficulty of finding out what it is. In the case of wages, it is seldom possible to determine more than what are the most usual, ‘BUT EVEN THIS CAN SELDOM BE DONE WITH REGARDS TO PROFIT OF STOCK.’
So, the curious contradiction: On the one side a paradigm that sees the economy governed by natural law, guided by invisible hand that turns recourses to their most favorable use, the pursuit of self interest promoting universal interest, on the other owners, the owners of capital acting in a state of ignorance so great that they do not always know their own rate of power let alone that of other people.
• WAGES-
The contradiction is again conspicuous in his treatment of wages. He presents a number of considerations that affect the way in which the product is divided between workers and employers, the causes that make wages raise, fall or stagnate, and determine relative wages for workers in different occupations. In any place, the more capital there is relative to labour, the lower will be the rate of profit and higher the rate of wages. The accumulation of capital determines whether a country will be progressive, stationery or declining. It deserves to be remarked, perhaps, that it is in the progressive, while the society is advancing to further acquisition, rather than when it has acquired full complement of riches, that the condition of the laboring poor, of the great body of people, seems to be the happiest and the most comfortable. It is hard in the stationery, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationery is dull; the declining melancholy.
But what occasions these differences? He has already suggested that progress was the inevitable outcome of the division of labour, which itself results from human propensity of to ‘truck’. But this natural development might be impeded by unfavorable laws and institutions. Most immediately employers and workers struggle over the division of the product. Their ‘interest are by no means the sale. The workmen desire to get as much, the masters to give as less as possible. The former are disposed to combine in order to raise, the later in order to lower the wages of labour. Industrial relations, In those days, have some similarities with those of today.
We rarely hear, it has been said, of the combination of masters, though of frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is an ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and union combination, not to raise the wages of labour above their actual rate. To violate this combination is always a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody hears of. Masters too sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy, till the moment of execution, and when the workmen yelled as they sometimes do without resistance, those severely felt by them, they are never heard of other people. Such combinations, however, are frequently resisted by a contrary defense combination to raise the rises of the workmen; who sometimes too…combine of their own accord to raise their price of their labour. Their usual pretences are sometimes the high price of provisions; sometimes the great profits which their master’s make by their work. But whether their combinations be offensive or defensive, they are always abundantly heard of. In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extrawagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands, the masters upon this occasion are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of this laws which have been enacted with so much severity. Against the combinations of servants, laborers and journeymen. The workmen, accordingly, very seldom derived any advantage of from the violence, generally end in nothing, but the punishment or the ruin of the ring leaders. But a rise in wages may itself cause a rise in output: ‘ where the wages r high, accordingly, we shall always find a workmen more active, diligent and expeditious, then where they are low.
• ACCUMULATION AND GROWTH-
Adam smith distinguished between productive and unproductive labour in a way significantly different from that of the Physiocrats. To the latter, only farm labour was productive, in the sense that it yielded a surplus. But smith attributes this quality to all labour that adds to the value of the object on which it is bestowed. Thus a manufacturer has his outlay restored, together with a profit. ‘But the maintenance of a menial servant is never restored. A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants.
Amongst the unproductive labourers he daringly classifies the sovereign, ‘with all the officers both of justice and war who serves under him.’ ‘Like the declamation of the actor, the harangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of its production.
Now by what formula can one maximize the production of a country? Everyone must be maintained by the annual produce of its land and labour, and the more of this that is allocated to productive hands, and the less to unproductive, the greater will the next years produce be. But the sources from which unproductive hands draw their subsistence are principally rent and profits. That leads him to the rather paradoxical conclusion that the greater the capital employed and the lower the profits made on it, the greater will be the growth and wealth.
The proportion between capital and revenue, therefore, seems everywhere to regulate the proportion between industry and idleness. Wherever capital predominates, industry prevails: wherever revenue, idleness. Every increase or diminution of capital, therefore naturally tends to increase or diminish the real quantity of industry, the number of productive hands and consequently the exchangeable value of the annual produce of the land and labour of the country, the real wealth and revenue of all its inhabitant.
A strange view this, reminiscent of that of the African pastoral peoples who value their wealth in cattle – the more you have and the less use you make of them, the richer you are. Here, the more people there are with their noses to the grindstone, and the less the rent and profit that might be squandered, the faster will wealth grow.
This leads on to the belief in the virtues of parsimony first expressed by Hume, a belief that was to become a tenet of the orthodox faith. Previous writers had stressed the obligation of prodigality amongst the rich; only thus could depressions be avoided. Smith was not at all concerned about the evils of trade fluctuations, but much concerned with the growth of industrial capital. His thoughts are full of portent for the future of economic thought.
Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits. As the capital of an individual can be increased only by what he saves from his annual revenue or his annual gains, so the capital of a society, which is the same with that of all the individuals who compose it, can be increased only in the same manner.
Parsimony, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not store and save up, the capital would never be greater.
Parsimony, by increasing the fund which is destined for the maintenance of productive hands, tends to increase the number of those hands whose labour adds to the value of the subject upon which it is bestowed………
What is annually saved is as regularly consumed as what is annually spent and nearly in the same time too; but it is consumed by a different set of people. That portion of his revenue which a rich man annually spends, is in most cases consumed by idle guests, and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as for the sake of the profit it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people, by labourers, manufacturers, and artificers, who re-produce with a profit the value of their annual consumption.
So reference to the phenomenon of what Keynes long afterwards called ‘liquidity preference’ is struck from the record, and the warnings of North, Boisguillebert and the others forgotten. Before long, Sismondi and Malthus will be ridiculed for trying to revive them.
The number of workers can be increased only by an increase in the funds destined for maintaining them. The increase in their productive powers requires ‘some addition and improvement to those machines and instruments which facilitate and abridge labour; or of a more proper division and distribution of employment. And thus, despite the profusion of government, the annual produce of England had increased considerably since the restoration: ‘capital has been silently and gradually accumulated by the private frugality and good conduct of individuals….. hence, a warning to governments to keep off:
It is the highest impertinence and presumption…… in kings and ministers, to pretend to watch over the economy of private people…… they are themselves always and without any exception, the greatest spendthrifts in society. Let them look well after their own expence, and they may safely trust people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.
• THE TWO SMITHS-
So we observe in Adam Smith a curious conflict in beliefs. There is the received gospel that he must faithfully transmit; then he changes roles and becomes intermittently an apostate denying what he has preached. The paradigm was of a world where only government interference hindered the invisible hand from guiding mankind along the road to plenty. But his knowledge of the world suggested that the fundamental postulates did not apply: how could capital go unerringly to those activities where profit was highest when employers were unsure even of their own rate of profit? ‘Natural’ prices were distributed because those who were supposed to compete considered to fleece the public. Completion failed to establish equal work, and labour, through ignorance or obstinacy, declined to be allocated in the most economical way.
In the course, Smith the doctrinaire was installed as the Father of Economics, while smith the empiricist and sceptic was forgotten, and the curious legend fostered that he had invented or discovered it all. Perhaps it would have strained credulity if people had been asked to suppose that a theory developed long before the industrial age was relevant to problems to which industrialism had given rise? And the fact that, as we have seen the main corpus of theory ante-dates the industrial revolution by a hundred years and lives on in the textbooks of today is, indeed, a testimony that it is remote enough from reality to be impervious to those substantial changes, for better to worse, to which reality has been a prey.
• CONCLUSION-
Adam Smith is a great economist, and his reputation is mainly built upon his economic theorizing. But he is equally great as a social and political thinker. His economics is intimately connected with his political philosophy and social theory. Unless Smith’s economic theory is viewed against the background of his social and political philosophy, one does not get the right perspective. There is an organic unity in, what we may call his complete model of the society. In The Wealth of Nations Smith had a striking and complete comprehension of the special nature of the new economic order that came into being with the emergence of the bourgeoisie. This comprehension was complete because he had a deeper understanding of the economic sociology of the system. Therein lays his greatness as a “political economist”. And we would have a better appreciation of Smith’s contribution to human thought if we pay more attention to his social and political thinking.