Adam Smith, a brilliant eighteenth-century Scottish political economist, had the advantage of judging the significance ol colonies by a rigorous examination based on the colonial experience of 300 years. His overview has a built-in bias: he strongly disapproved of excessive regulation of colonial trade by parent countries. But his analysis is rich with insight and remarkably dispassionate in its argument. Adam Smith recognized that the discovery of the New World not only brought wealth and prosperity to the Old World, but that it also marked a divide in the history of mankind.
The passage that follows is the work of this economic theorist who discusses problems in a language readily understandable by everyone. Adam Smith had retired from a professorship at Glasgow University and Was living in France in 1764-5 when he began his great work, The Wealth of Nations. The book was being written all during the years of strife between Britain and her colonies, but it was not published until 1776. In the passages which follow, Smith points to the impossibility of monopolizing the benefits of colonies, and pessimistically calculates the cost of empire, but the book appeared too late to ave any effect upon British policy.
Because the Declaration of Independence and The Wealth of Nations, the political and economic reliations of empire and mercantilism, appeared in the same year, historians have often designated 1776 as one of the turning points in modern history. The text On the cost of Empire, the eloquent exhortation to the rulers of Britain to awaken from their grandiose dreams of empire, is the closing passage of Smith’s book. Adam Smith was a Scottish political economist and philosopher. He has become famous by his influential book The Wealth of Nations (1776). Smith was the son f the comptroller of the customs at Kirkcaldy, Fife, Scotland.
The exact date of his birth is unknown. However, he was baptized at Kirkcaldy on June 5, 1723, his father having died some six months previously. At the age of about fifteen, Smith proceeded to Glasgow university, studying moral philosophy under “the never-to-be-forgotten” Francis Hutcheson (as Smith called him). In 1740 he entered Balliol college, Oxford, but as William Robert Scott has said, “the Oxford of his time gave little if any help towards what was to be his lifework,” and he relinquished his exhibition in 1746. In 1748 he egan delivering public lectures in Edinburgh under the patronage of Lord Kames.
Some of these dealt with rhetoric and belles-lettres, but later he took up the subject of “the progress of opulence,” and it was then, in his middle or late 20s, that he first expounded the economic philosophy of “the obvious and simple system of natural liberty” which he was later to proclaim to the world in his Inquiry into the Nature and Causes of the Wealth of Nations. About 1750 he met David Hume, who became one of the closest of his many friends. In 1751 Smith was appointed professor of logic at Glasgow university, ransferring in 1752 to the chair of moral philosophy.
His lectures covered the field of ethics, rhetoric, jurisprudence and political economy, or “police and revenue. ” In 1759 he published his Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work, which established Smith’s reputation in his own day, is concerned with the explanation of moral approval and disapproval. His capacity for fluent, persuasive, if rather rhetorical argument is much in evidence. He bases his explanation, not as the third Lord Shaftesbury and Hutcheson had done, on a special “moral sense,”nor, like Hume, to any decisive xtent on utility,but on sympathy.
There has been considerable controversy as how far there is contradiction or contrast between Smith’s emphasis in the Moral Sentiments on sympathy as a fundamental human motive, and, on the other hand, the key role of self-interest in the The Wealth of Nations. In the former he seems to put more emphasis on the general harmony of human motives and activities under a beneficent Providence, while in the latter, in spite of the general theme of “the invisible hand” promoting the harmony of interests, Smith finds many more occasions for pointing out cases of conflict and of the narrow elfishness of human motives.
Smith now began to give more attention to jurisprudence and political economy in his lecture and less to his theories of morals. An impression can be obtained as to the development of his ideas on political economy from the notes of his lectures taken down by a student in about 1763 which were later edited by E. Cannan (Lectures on Justice, Police, Revenue and Arms,1896), and from what Scott, its discoverer and publisher, describes as “An Early Draft of Part of The Wealth of Nations, which he dates about 1763.
At the end of 1763 Smith obtained a lucrative post as tutor to the young duke of Buccleuch and resigned his professorship. From 1764-66 he traveled with his pupil, mostly in France, where he came to know such intellectual leaders as Turgot, D’Alembert, AndreMorellet, Helvetius and, in particular, Francois Quesnay, the head of the Physiocratic school whose work he much respected. On returning home to Kirkcaldy he devoted much of the next ten years to his magnum opus, which appeared in 1776.
In 1778 he was appointed to a comfortable post as commissioner of customs in Scotland and went to live with his mother in Edinburgh. He died there on July 17, 1790, after a painfull illness. He had pparently devoted a considerable part of his income to numerous secret acts of charity. Shortly before his death Smith had nearly all his manuscripts destroyed. In his last years he seems to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts.
The posthumously published Essays on Philosophical Subjects (1795) probably contain parts of what would have been the latter treatise. The Wealth of Nations has become so influential since it did so much to create the subject of political economy and develop it into an autonomous systematic discipline. In the western world, it is the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantalism, appeared in 1776, there was a strong sentiment for free trade in both Britain and America.
This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication, not everybody was convinced of the advantages of free trade right away: the British public and Parliament still clung to mercantilism for many years to come (Tindall and Shi). However, controversial views have been expressed as to the xtent of Smith’s originality in The Wealth of Nations. Smith has been blamed for relying too much on the ideas of great thinkers such as David Hume and Montesquieu.
Nevertheless, The Wealth of Nations was the first and remains the most important book on the subject of political ecomomy until this present day. It has never, I think, been the good fortune of any founder of a scientific system to think out to the very end even the more important ideas that constitute his system. The strength and lifetime of no single man are sufficient for that. It is enough if some few of the ideas which have to play the chief art in the system are put on a perfectly safe foundation, and analysed in all their ramifications and complexities.
It is a great deal if, over and above that, an equal carefulness falls to the lot of a few other favoured members of the system. But in all cases the most ambitious spirit must be content to build up a great deal that is insecure, and to fit into his system, on cursory examination, ideas which it was not permitted him to work out. We must keep these considerations before us if we would rightly appreciate Adam Smith’s attitude towards our problem. Adam Smith has not overlooked the problem of interest; neither has he worked t out.
He deals with it as a great thinker may deal with an important subject which he often comes across, but has not time or opportunity to go very deeply into. He has adopted a certain proximate but still vague explanation. The more indefinite this explanation is, the less does it bind him to strict conclusions; and a many-sided mind like Adam Smith’s, seeing all the many different ways in which the problem can be put, but lacking the control which the possession of a distinct theory gives, could scarcely fail to fall into all sorts of wavering and contradictory expressions.
Thus we have the peculiar phenomenon that, while Adam Smith has not laid down any distinct theory of interest, the germs of almost all the later and conflicting theories are to be found, with more or less distinctness, in his scattered observations. We find the same phenomenon in Adam Smith as regards many other questions. The line of thought which seems to commend itself principally to him as explaining natural interest occurs in very similar language in the sixth and eighth chapters of book i of the Wealth of Nations.
It amounts to this, that there must be a profit from capital, because otherwise the capitalist would have o interest in spending his capital in the productive employment of labourers. (1*) General expressions like these have of course no claim to stand for a complete theory. (2*) There is no reasoned attempt in them to show what we are to represent as the actual connecting links between the psychological motive of the capitalist’s self-interest and the final fixing of market prices which leave a difference between costs and proceeds that we call interest.
But yet, if we take those expressions in connection with a later passage,(3*) where Smith sharply opposes the “future profit” that rewards the resolution of the capitalist to the present enjoyment” of immediate consumption, we may recognise the first germs of that theory which Senior worked out later on under the name of the Abstinence theory. In the same way as Adam Smith asserts the necessity of interest, and leaves it without going any deeper in the way of proof, so does he avoid making any systematic investigation of the important question of the source of undertaker’s profit.
He contents himself with making a few passing observations on the subject. Indeed in different places he gives two contradictory accounts of this profit. According to one account, the profit of capital arises from the ircumstance, that, to meet the capitalist’s claim to profit, buyers have to submit to pay something more for their goods than the value which these goods would get from the labour expended on them. ccording to this explanation, the source of interest is an increased value given to the product over that value which labour creates; but no explanation of this increase in value is given. According to the second account, interest is a deduction which the capitalist makes in his own favour from the return to labour, so that the workers do not receive the full value created by them, but are obliged to share it with the capitalist. According to this account, profit is a part of the value created by labour and kept back by capital.
Both accounts are to be found in a great number of passages; and these passages, oddly enough, sometimes stand quite close to each other, as, e. g. in the sixth chapter of the first book. Adam Smith has been speaking in that chapter of a past time, — of course a mythical time, — when the land was not yet appropriated, and when an accumulation of capital had not yet begun, and has made the remark that, at that time, the quantity of labour required for the production of goods would be the sole determinant of their price.
He continues: “As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in this adventure.
This sentence, when taken with the opposite remark of the previous paragraph (that, in primitive conditions, labour is the sole determinant of price), very clearly expresses the opinion that the capitalist’s claim of interest causes a rise in the price of the product, and is met from this raised price. But Adam Smith immediately goes on to say: “The value which the workman adds to the material, therefore, resolves itself in this case into two parts, of which the one pays the wages, the other the profits of the employer upon the whole stock of materials and wages which he advanced.
Here again the price of the product s looked upon as exclusively determined by the quantity of labour expended, and the claim of interest is said to be met by a part of the return which the worker has produced. We meet the same contradiction, put even more strikingly, a page farther on. “In this state of things,” says Adam Smith, “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. ” This is an evident paraphrase of the second account.
But immediately after that come the words: “Neither is the quantity of labour commonly employed in acquiring or producing any commodity, he only circumstance which can 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. ” He could scarcely have said more plainly that the effect of a claim of interest is to raise prices without curtailing the wages of labour.
Later on he says alternately: “As in a civilised community there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing largely to that of the far greater part of them, so the nnual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than was employed in raising, preparing, and bringing that produce to market” (first account, chap. vi. ) “The produce of almost all other labour is liable to the like deduction of profit.
In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be completed. He shares in the produce of their labour, or in the value which it adds to the materials upon which it is bestowed; and in this consists his rofit” (second account, chap. viii. ) “High or low wages and profit are the causes of high or low price; high or low rent is the effect of it” (first account, chap. xi.
Contradictions like these on the part of such an eminent thinker admit, I think, of only one explanation; — that Adam Smith had not thoroughly thought out the interest problem; and — as is usual with those who have only imperfectly mastered a subject — was not very particular in his choice of expressions, but allowed himself to be swayed very much by the changing impressions which the subject may have made on him from time to time. Adam Smith, then, has no perfected theory of interest.
But the suggestions he threw out were all destined to fall on fruitful soil. His casual remark on the necessity of interest was developed later into the Abstinence theory. In the same way the two accounts he gave of the source of interest were taken up by his followers, logically carried out, and raised into principles of independent theories. With the first account — that interest is paid out of an additional value which the employment of capital calls into existence — are connected the later Productivity theories.
With the second account — that nterest is paid out of the return to labour — are connected the Socialist theories of interest. Thus the most important of later theories trace their pedigree back to Adam Smith. The position taken by Adam Smith towards the question may be called that of a complete neutrality. He is neutral in his theoretical exposition, for he takes the germs of distinct theories and puts them beside each other, without giving any one of them a distinct prominence over the others.
And he is neutral in his practical judgment, for he maintains the same reserve, or rather the same contradictory hesitancy, both in praise and blame of interest. Sometimes he commends the capitalists as benefactors of the human race, and as authors of enduring blessing;(5*) sometimes he represents them as a class who live on deductions from the produce of other people’s labour, and compares them significantly with people “who love to reap where they never sowed. (6*) In Adam Smith’s time the relations of theory and practice still permitted such a neutrality, but it was not long allowed to his followers. Changed circumstances compelled them to show their colours on the interest question, and the compulsion was certainly not to the disadvantage of the science. The special requirements of economic theory could not any longer put up with uncertain makeshifts. Adam Smith had spent his life in laying down the foundations of his system.
His followers, finding the foundations laid, had now time to take up those questions that had been passed over. The development now reached by the related problems of land-rent and wages gave a strong inducement to pursue the interest problem. There was a very complete theory of land-rent; there was a theory of wages scarcely less complete. Nothing was more natural than that systematic thinkers should now begin to ask in earnest about the third reat branch of income the whence and wherefore of the income that comes from the possession of capital.
But in the end practical life also began to put this question. Capital had gradually become a power. Machinery had appeared on the scene and won its great triumphs; and machinery everywhere helped to extend business on a great scale, and to give production more and more of a capitalist character. But this very introduction of machinery had begun to reveal an opposition which was forced on economic life with the development of capital, and daily grew in importance,the opposition between capital and labour.
