Nicholas Phillipson
Page 28
In the long first book of the Wealth of Nations, Smith elucidated a set of principles to explain how the stock of labour on which a nation’s survival and prosperity depended would be deployed in a society in which individuals were free to deploy their labour as they wished. In doing this he had used the methods of conjectural history to contrast the experience of savage societies with those which possessed systems of private property and government and enjoyed ‘tolerable security’, and had argued that under the same conditions the stock of labour of whole societies will be deployed in exactly the same way as that of individuals. It was an analogy which pointed towards a discussion of what instantly became Smith’s most famous doctrine, that of the unintended social consequences of individual actions. It was a problem he addressed in the short second book in discussing the accumulation and circulation of stock or capital, and in so doing he was to complete the theorizing of the principle of improvement which had for so long lain at the centre of his, and the Scottish literati’s, understanding of the science of man.
The importance of capital in generating economic growth had been highlighted by the économistes. If the progress of opulence depended on the division of labour, the love of improvement and relative security, it also depended on the existence of an adequate stock of investable capital. However, as Smith had put it in Glasgow, ‘till some stock be produced there can be no division of labour, and before a division of labour take place there can be very little accumulation of stock’.10 In modern societies, the stock of the labouring poor was so small that it could only be used for immediate consumption and the progress of opulence would therefore depend on the surplus stock of those engaged in trade, manufactures and agriculture. Smith was interested in the way in which these resources would circulate through the different sectors of a society in a relatively free market. It was a process he described in terms of a cyclical process of consumption and replenishment, a model which made it possible for Smith to remind the statesman that, ‘To maintain and augment the stock which may be reserved for immediate consumption, is the sole end and purpose both of fixed and circulating capitals. It is this stock which feeds, cloaths, and lodges the people. Their riches or poverty depends on the abundant or sparing supplies which those two capitals can afford to the stock reserved for immediate consumption.’11 This analysis allowed Smith to develop a complex discussion of the role of money and banking – Scottish banking in particular – in acting as ‘the great wheel of circulation and distribution’, a means of circulating the stock and capital of society in a way which would maximize the progress of the division of labour and increase the private and public revenue of a nation.12 The analysis also showed the économistes that it was the labour force engaged in a never-ending process of consumption and production, and not merely agriculture, on which the real wealth of a nation depended. And this made it possible to introduce one of the most characteristic and deeply seated principles on which his political economy and his understanding of improvement rested: the character and the natural parsimony of the improver.
But the principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation, as to be without any wish of alteration or improvement, of any kind. An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious …13
This natural parsimony explained the silent accumulation of the capital on which England’s economic progress had always depended. As for governments, ‘They are themselves always, and without any exception, the greatest spendthrifts in the society. Let them look well after their own expence, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.’14
Smith was now almost ready to apply theory to practice and to develop the critique of contemporary commercial policy for which the Wealth of Nations became instantly famous, using his theory to address the problem he had posed in the lectures, how to explain the slow progress of opulence in Europe. He was now in a position to contrast the natural progress of opulence in Europe, with its actual progress. The discussion was focused on the economic relations between the country and town. To contemporaries, who thought that towns drained the countryside of natural resources, Smith replied that their relationship was, naturally, a reciprocal one, the country being the source of the subsistence and raw materials on which the economy of towns depended, and towns being markets for the produce of the country and a source of manufactured goods and capital which could be invested in agriculture. ‘Compare the cultivation of the lands in the neighbourhood of any considerable town, with that of those which lie at some distance from it, and you will easily satisfy yourself how much the country is benefited by the commerce of the town,’ Smith commented, with the example of Glasgow doubtless in mind.15 For in the last resort ‘the inhabitants of the town and those of the country are mutually the servants of one another’. Theoretically, at any rate, and ‘all things and all profits being equal’, it was a relationship that would ensure that, ‘According to the natural course of things … the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce. This order of things is so very natural, that in every society that had any territory, it has always, I believe, been in some degree observed.’16 The trouble was that this natural order had somehow been subverted; it was ‘manufactures and foreign commerce’ that had given birth to much of the agricultural improvement that had taken place in the west; the commercial system was a product of ‘this unnatural and retrograde order’.17
For Smith the root cause of the slow progress of opulence and this inversion of the natural order of things, was the feudal system. As he had shown in the lectures on jurisprudence, the feudal system had encouraged landowners to extend rather than improve their estates, reducing their tenantry to a state of dependency and even slavery – always in Smith’s reckoning the least productive form of labour. What is more, it was a system that had been artificially preserved by means of primogeniture and a system of tenures and entails which were as offensive to a people’s sense of natural justice as to the cause of economic efficiency. The Scots literati probably knew the outlines of Smith’s story well enough from his conversation and from Select Society debates, but French readers sympathetic to physiocracy were more likely to have seen it as a radical attack on the claim that the estates of the great nobility were the ultimate source of the real wealth of a modern polity. What sharpened Smith’s analysis was his powerful discussion of the consequences of the feudal system for the relationship between town and country, on which the real wealth of a modern polity ultimately depended. The primitive state of feudal agriculture and baronial power had retarded the economic and political development of smaller towns and the regions to which they belonged, while overseas trade in luxuries, encouraged by cash-strapped rulers who were anxious to check the growth of baronial power, had allowed some coastal towns to develop as ‘a sort of independent republicks’ with money to invest in the neighbouring countryside. As a result, the commerce and manufactures, which ought to have been the effect of agricultural improvement, had become its ‘cause and occasion’. It was a development which Smith thought had retarded the overall economic growth of feudal nations and had led to a disastrous misunderstanding of the role of overseas trade in promoting economic growth.
Smith was just as curious, just as indignant about the causes of this inversion of the natural order as he was in its disastrous consequences. Like Hume writing about English party ideology, he saw the problem as one which had its roots in the political culture of Europe and in the frailties of h
uman nature. The belief that a nation’s wealth and power depended on its foreign and not its domestic trade was built on the idea that ‘wealth consists in money, or in gold and silver’ and not in labour. It was a belief that had taken hold in all European nations. It had been theorized by scholars, manipulated by merchants and had become the intellectual engine of national policies that were threatening the peace and prosperity of the modern world, a belief as dangerous to the progress of civilization as the religious superstitions that had fuelled the wars of religion and still stalked the corridors of every European state. Smith devoted Book IV to exploding this new superstition and attacking the merchants and theorists who propagated it with the same vehemence that Voltaire and Hume had attacked priestcraft. But the basis of his assault had already been carefully set out in the difficult and, as he admitted, potentially ‘tedious’ discussion of value and price in Book I. Here he had carried out a meticulously executed thought experiment to explain why we find it so easy to think of the value of labour and commodities in terms of money when the ordinary experience of higgling and bargaining in everyday life provides us with a much juster understanding of value and price. Smith’s explanation was one Hume would have understood. It was the result of a confusion ‘which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value’ and feeds into common language to the point that ‘this ambiguity of expression has rendered this popular notion so familiar to us, that even they, who are convinced of its absurdity, are very apt to forget their own principles, and in the course of their reasonings to take it for granted as a certain and undeniable truth’.18
Smith’s first example of the power and destructive potential of this superstition was conventional enough, the ‘sacred thirst of gold’ that had fuelled the exploration and colonization of Spanish America and the genocidal atrocities that had been visited on native Americans. But this was merely a curtain-raiser for his main purpose of showing how this primitive belief had become the superstition that now lay at the centre of the political culture of a whole civilization and was fuelling policies which were distorting its economic development. The analysis is tight and sardonic, both an example of Smith’s skill as a moral anatomist and a classic example of the later Enlightenment’s determination to combat superstition with philosophy and history. Smith began with a review of contemporary arguments defending the policy of accumulating national stocks of gold and silver.
Such as they were, however, those arguments convinced the people to whom they were addressed. They were addressed by merchants to parliaments, and to the councils of princes, to nobles and to country gentlemen; by those who were supposed to understand trade, to those who were conscious to themselves that they knew nothing about the matter. That foreign trade enriched the country, experience demonstrated to the nobles and country gentlemen, as well as to the merchants; but how, or in what manner, none of them well knew. The merchants knew perfectly in what manner it enriched themselves. It was their business to know it. But in what manner it enriches the country, was no part of their business. This subject never came into their consideration, but when they had occasion to apply to their country for some change in the laws relating to foreign trade. It then became necessary to say something about the beneficial effects of foreign trade, and the manner in which those effects were obstructed by the laws as they then stood. To the judges who were to decide the business, it appeared a most satisfactory account of the matter, when they were told that foreign trade brought money into the country, but that the laws in question hindered it from bringing so much as it would otherwise do. Those arguments therefore produced the wished-for effect. The prohibition of exporting gold and silver was in France and England confined to the coin of those respective countries. The exportation of foreign coin and bullion was made free. In Holland, and in some other places, this liberty was extended even to the coin of the country. The attention of government was turned away from guarding against the exportation of gold and silver, to watch over the balance of trade as the only cause which could occasion any augmentation or diminution of those metals. From one fruitless care it was turned away to another care much more intricate, much more embarrassing, and just equally fruitless. The title of Mun’s book, England’s Treasure in Foreign Trade, became a fundamental maxim in the political oeconomy, not of England only, but of all other commercial countries. The inland or home trade, the most important of all, the trade in which an equal capital affords the greatest revenue, and creates the greatest employment to the people of the country, was considered as subsidiary only to foreign trade. It neither brought money into the country, it was said, nor carried any out of it. The country therefore could never become either richer or poorer by means of it, except so far as its prosperity or decay might indirectly influence the state of foreign trade.19
With this analysis to hand, Smith was ready to relaunch the ‘very violent attack’ on the entire commercial system he had begun in Edinburgh in 1750, pursued in Glasgow and was now able to bring to an intellectually and polemically devastating conclusion. In Glasgow, his critique of policies which had obstructed free trade had been piecemeal; now they could be viewed as part of this superstition that lay at the heart of an entire civilization, and was infecting the governance of every European state. He was now able to attack restraints on foreign imports, which had been designed to seal off domestic markets from foreign competition, and attempts to create a favourable balance of trade with foreign competitors. Protected domestic markets had the effect of artificially raising prices, discouraging improvement and promoting trade policies designed to increase national wealth by ‘beggaring’ one’s neighbours. It was all a function of ‘the wretched spirit of monopoly’ which had afflicted mercantile and manufacturing activity throughout history and was now reshaping the history of the world. It had fostered the growth of the great, ‘exclusive’ trading companies that were opening Asia and the Americas to European commerce and were taking over the governance of countries like Bengal, leaving Smith to comment sourly that, ‘The government of an exclusive company of merchants, is, perhaps, the worst of all governments for any country whatever.’20 As for what Hume had called the ‘jealousy of trade’, that was fostering ruinously expensive wars in Europe and overseas which threatened the very survival of every great power. ‘Commerce,’ said Smith,
which ought naturally to be, among nations, as among individuals, a bond of union and friendship, has become the most fertile source of discord and animosity. The capricious ambition of kings and ministers has not, during the present and preceding century, been more fatal to the repose of Europe, than the impertinent jealousy of merchants and manufacturers. The violence and injustice of the rulers of mankind is an ancient evil, for which, I am afraid, the nature of human affairs can scarce admit of a remedy. But the mean rapacity, the monopolizing spirit of merchants and manufacturers, who neither are, nor ought to be the rulers of mankind, though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquillity of any body but themselves.21
So far, Smith’s attack on the commercial system had been theoretical and based on his discussion of the division of labour and the natural progress of opulence in a nation unencumbered by the relics of feudalism and enjoying a system of free trade and perfect liberty. He had, of course, been meticulous in illustrating different aspects of his theory with carefully, and often painstakingly chosen historical examples. But what his theory and his attack on the commercial system had lacked was any strong example of a nation whose economic progress had actually followed the route laid out in an essentially conjectural analysis. He had naturally called attention to Scotland’s remarkable economic and political progress since the creation of its free-trade union with England to illustrate his Glasgow lectures, and he made copious use of Scottish examples to illustrate various themes of the Wealth of Nations. But Scotland, still encumbered by the constraints of the feudal system, was not the perfect example of the s
ort of natural progress Smith had envisaged. His masterstroke was to introduce the experience of colonial America as the classic, and indeed the only possible, example of a society whose progress had been rapid and natural by comparison with that of Europe.
In his eyes, the root cause of the American colonies’ progress was simple enough: ‘plenty of good land, and liberty to manage their own affairs their own way’.22 American land was cheap, and inheritance – in some colonies at least – was unencumbered by primogeniture, entails and high taxes. The colonists themselves appeared educated, frugal, tractable and hardworking. They were natural Smithian improvers who invested their stock in agriculture and simple manufactures and, because labour was relatively scarce, paid their labourers high wages, which encouraged them to set up on their own. Above all, they possessed a spirit of equality that encouraged a ‘republican’ attitude to government. For whatever claims the mother country might make in matters of sovereignty, taxation and the regulation of trade, it was too far away for these claims to be enforced. As a result the American and West Indian colonies had developed a system of regional trade that was everything Smith could have longed for in Europe. ‘The most perfect freedom of trade is permitted between the British colonies of America and the West Indies, both in the enumerated and in the non-enumerated commodities. Those colonies are now becoming so populous and thriving, that each of them finds in some of the others a great and extensive market for every part of its produce. All of them taken together, they make a great internal market for the produce of one another.’23
Smith’s analysis was schematic and introduced what became a celebrated contribution to contemporary debate about Britain’s future relations with America. It was also the basis of his crucial discussion of the consequences of colonial trade for the colonies and the mother country. Smith had to show that the Navigation Acts and the various regulations that had turned trade with the colonies into a ‘monopoly trade’ had retarded the overall development of the British economy. His argument was fairly predictable: the monopoly trade had diverted capital from European to American trade, with the result that