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  Lectures on the Harvard Classics.
The Harvard Classics.  1909–14.
 
Political Science
 
III. Adam Smith and “The Wealth of Nations”
 
By Professor Charles J. Bullock
 
 
FROM 1752 to 1764 the author of “The Wealth of Nations” occupied the chair of moral philosophy at Glasgow College, and his writings were the natural outgrowth of the lectures delivered to his college classes. Following an unbroken tradition received from Greek philosophy, Smith conceived the province of moral philosophy to be as broad as the entire range of human conduct, both individual and social. “Wherein,” says Smith, “consisted the happiness and perfection of a man, considered not only as an individual, but as a member of a family, of a state, and of the great society of mankind, was the object which the ancient moral philosophy proposed to investigate.” Smith’s own lectures followed substantially this plan of treatment.  1
 
THE UNDERLYING THEORY OF SMITH’S PHILOSOPHY

  At Smith’s hands, however, many of the traditional subjects received new treatment and development. In 1759, Smith published his “Theory of Moral Sentiments,” a treatise on ethics which immediately won for him international fame as a philosopher. This work presented the doctrine that the moral judgment is, in the last analysis, an expression of impartial sympathy with the motives and result of human action. From sympathy Smith derives the sense of justice, which is “the main pillar of the social structure.” Underlying the book is the common eighteenth-century theory of a beneficent natural order, by which it was held that a benevolent Creator had so ordered the universe as to produce the greatest possible human happiness. In this view of the matter the problem of philosophy, including politics and economics, is to discover the natural laws which make for the happiness of God’s creatures. Of these laws the chief seems to be that Providence has commended the welfare of every man chiefly to his own keeping, not to that of others; and has so ordered things that men, in pursuing their own welfare within the limits set by justice, are ordinarily contributing to the general welfare. Upon this doctrine of a natural harmony of interests, Smith based his theory of natural liberty, according to which every man, “as long as he does not violate the laws of justice,” is naturally free to pursue his own welfare in his own way.
  2
  Smith projected, but never published, a treatise on jurisprudence and government, subjects which in his lectures had naturally followed ethics. His “Wealth of Nations,” which was published in 1776, treated of political economy which in his lectures had followed the subject of government.  3
 
HIS CONCEPTION OF WEALTH AND OF POLITICAL ECONOMY

  “The Wealth of Nations” 1 combines a firm grasp of principles with a remarkable knowledge of the facts of economic life, derived from reading and personal observation. Smith’s generalizations are usually supported by an appeal to the facts of economic life, and in this manner he gives the work an air of reality that is lacking in many economic treatises. He does not deal extensively with definitions. Without defining wealth he plunges directly into the causes of national opulence, but in the last sentence of his “Introduction” states, parenthetically, that “real wealth” is “the annual produce of the land and labor of the society.” Even here he merely indicates that he considers the annual income of a society as its real wealth: whereas most economists prior to his time had conceived wealth as the accumulated stock of durable goods which a society possesses. Again Smith commences the treatise without offering a definition of political economy, and the nearest approach to such a definition is found in the first sentence of the fourth book: “Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to supply a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.”
  4
 
PRODUCTION AND DISTRIBUTION

  Captious critics have pronounced the arrangement of “The Wealth of Nations” unsystematic, but it is in fact well suited to Smith’s purpose. The first book studies the process by which wealth is produced and then distributed among laborers, entrepreneurs, and landlords. It lays down the doctrine that the increased productivity of the industry of modern societies is due to division of labor. The discussion of this subject is an economic classic, and the reader should observe that Smith finds here an illustration of his cardinal doctrine that it is self-interest, not the action of government, that has brought about the improvement of economic conditions. Division of labor presupposes exchange, and so Smith naturally proceeds to consider money and price. His study of price leads to an investigation of its component parts—wages, profits, and rent; and thus Smith is led to consider fully the subject of the distribution of wealth. His theory of value at the hands of certain later writers becomes the classical cost-of-production theory; while, given another slant, it becomes the labor theory of Marx and the socialists. His theory of wages becomes, at the hands of later writers, the wage-fund theory of the classical English school. His theory of profits supplied much material for his followers, particularly concerning the difference of profits in the various employments of capital. His theory of rent, or rather his three different theories, 2 needed to be reconstructed by Ricardo before it could be added to our stock of economic principles.
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THE NATURE AND USE OF CAPITAL

  The second book investigates the nature and employment of “capital stock,” which is the force that sets laborers at work and puts industry in motion. Smith holds that capital originates in saving, that its function is to maintain productive labor, and that it may be either fixed or circulating.
  6
  Unproductive labor, the reader should observe, is not useless labor; it may, indeed, be very useful 3; but it does not produce any durable material product, and for that reason Smith does not consider it productive. Parsimony, or saving, leads to an increase of the capital available for the employment of productive labor; while spending consumes funds which otherwise might have been given such employment.  7
  Private frugality, due to the desire to better one’s condition, is the cause of the growth of capital and the increase of national opulence; while government can do nothing more than protect the individual and allow him liberty to act in the manner he finds most advantageous. Finally Smith considers the different employments of capital. Agriculture gives more employment to productive labor than manufactures, and both are superior, in this regard, to transportation and trade. Domestic trade gives more employment than foreign, and foreign trade gives more than the carrying trade.  8
  All these employments are useful; but a country with insufficient capital to engage in all of them will increase in opulence most rapidly if it employs its capital in agriculture first of all, then engages in manufactures and the home trade, and refrains from entering upon foreign commerce and the carrying trade until the natural increase of capital makes such a course advantageous. If governments merely withhold their hands, this is the course that industrial development will actually follow under the free play of individual self-interest. Smith’s argument at this point is exceedingly important, for it lays the foundation for his doctrine of freedom of trade.  9
 
HIS THEORY OF TRADE

  After examining in the third book the various policies of restriction and preference adopted by the countries of Europe, Smith in the fourth book launches into the famous polemic against the so-called mercantile system of political economy. Smith shows that the restrictive measures of the mercantilists tended rather to prevent men serving each other than to promote public opulence. He assailed the theory of the balance of trade, much as David Hume had done. Everywhere he vindicated the system of natural liberty, and maintained that prosperity is not manufactured by governments but comes from “the natural effort of every individual to better his own condition.” After disposing of the mercantilists, Smith treats of the “agricultural system” of political economy, which held that the net produce of the land is the sole source of national opulence. Since economists of this school had maintained that perfect liberty is the only policy that can raise this annual produce to a maximum, Smith considered their doctrines “the nearest approximation to the truth that has yet been published upon the subject of political economy.”
  10
 
PUBLIC FINANCE

  The fifth book treats of public finance. His chapter upon the expenses of the sovereign is the first philosophical investigation of this important subject. The second chapter presents a noteworthy treatment of the subject of taxation, and lays down the celebrated maxims which, perhaps, have been quoted oftener than any other paragraphs in economic literature. Smith was especially successful in correlating his theory of taxation with his theory of the production and distribution of wealth, while on the practical side he proposed reforms many of which were later adopted. The chapter on public debts, while unduly pessimistic, criticizes forcibly the unwise financial policies pursued by Great Britain and other countries during the eighteenth century. In his theory of the essential nature of a public debt Smith was undoubtedly correct.
  11
  “The Wealth of Nations” achieved instant success, went through five editions in the author’s lifetime, and was soon translated into French, German, Italian, Spanish, and Danish. In the United States it began to be quoted by statesmen before the end of the Revolution, and an American edition was published at Philadelphia in 1789. Alexander Hamilton’s state papers show the clearest evidence of his indebtedness to Smith’s masterpiece. In time the book began to influence legislation, and to contribute powerfully to the removal of obsolete restrictions on industry and commerce. Its place as an economic classic is secure, and the lapse of time seems to detract nothing from its eminence.  12
 
Note 1. Harvard Classics, Vol. X. [back]
Note 2. He first treats rent as the surplus product of land above the substance of the laborers. He also speaks of it as a form of monopoly income extorted by landlords; and again, in treating of the rent of mines, says that it varies with fertility and situation. [back]
Note 3. See “The Wealth of Nations,” H. C., X, 258, 259. [back]
 

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