SMITH, ADAM (1723-1790), English economist, was the only child of Adam Smith, comptroller of the customs at Kirkcaldy in Fifeshire, Scotland, and of Margaret Douglas, daughter of Mr Douglas of Strathendry, near Leslie. He was born at Kirkcaldy on the 5th of June 1723, some months after the death of his father. When he was three years old he was taken on a visit to his uncle at Strathendry, and when playing alone was carried off by a party of " tinkers." He was at once missed, and the vagrants pursued and overtaken in Leslie wood. He received his early education in the school of Kirkcaldy under David Miller, amongst whose pupils were many who were afterwards distinguished men. Smith showed great fondness for books and remarkable powers of memory; and he was popular among his schoolfellows. He was sent in 1737 to the university of Glasgow, where he attended the lectures of Dr Hutcheson; and in 1740 he went to Balliol College, Oxford, as exhibitioner on Snell's foundation. He remained at that university for seven years. At Glasgow his favourite studies had been mathematics and natural philosophy; but at Oxford he appears to have devoted himself almost entirely to moral and political science and to ancient and modern languages. He also laboured to improve his English style by translation, particularly from the French. After his return to Kirkcaldy he resided there two years with his mother, continuing his studies, not having yet adopted any plan for his future life. In 1748 he removed to Edinburgh, and there, under the patronage of Lord Kames, gave lectures on rhetoric and belles-lettres. About this time began his acquaintance with David Hume, which afterwards ripened into friendship. In 1751 he was elected professor of logic at Glasgow, and in 1752 was transferred to the chair of moral philosophy, which had become vacant by the death of Thomas Craigie, the successor of Hutcheson. This position he occupied for nearly twelve years, which he long afterwards declared to have been " by far the most useful, and therefore by far the happiest and most honourable period of his life." His course of lectures was divided into four parts (i) natural theology; (2) ethics; (3) a treatment of that branch of morality which relates to justice, a subject which he handled historically after the manner of Montesquieu; (4) a study of those political regulations which are founded, not upon the principle of justice, but that of expediency, and which are calculated to increase the riches, the power and the prosperity of a state. Under this view he considered the political institutions relating to commerce, to finances, to ecclesiastical and military establishments. He first appeared as an author by contributing two articles to the Edinburgh Review (an earlier journal than the present, which was commenced in 1755, but of which only two numbers 1 were published), one on Johnson's Dictionary and the other a letter to the editors on the state of literature in the different countries of Europe. In 1759 appeared his Theory of Moral Sentiments, embodying the second portion of his university course, to which was added in the 2nd edition an appendix with the title, " Considerations concerning the first Formation of Languages. " After the publication of this work his ethical doctrines occupied less space in his lectures, and a larger development was given to the subjects of jurisprudence and political economy. Stewart gives us to understand that he had, as early as 1752, adopted the liberal views of commercial policy which he afterwards preached; and this we should have been inclined to believe independently from the fact that such views 1 These two numbers were reprinted in 1818. Smith's letter to the editors is specially interesting for its account of the Encyclopedic and its criticism of Rousseau's pictures of savage life.
were propounded in that year in the Political Discourses of Hume.
In 1762 the senatus academicus of Glasgow conferred on him the honorary degree of doctor of laws. In 1 763 he was invited to take charge of the young duke of Buccleuchon his travels. He accepted, and resigned his professorship. He went abroad with his pupil in February 1764; they remained only a few days at Paris and then settled at Toulouse, at that time the seat of a parlement, where they spent eighteen months in the best society of the place, afterwards making a tour in the south of France and passing two months at Geneva. Returning to Paris about Christmas of 1765, they remained there till the October of the following year. Smith at this time lived in the society of Quesnay, Turgot , d'Alembert, Morellet, Helvetius, Marmontel and the duke de la Rochefoucauld. His regard for the young nobleman 1 last named dictated the omission in the later editions of his Moral Sentiments of the name of the celebrated ancestor of the duke, whom he had associated with Mandeville as author of one of the " licentious systems " reviewed in the seventh part of that work. Smith was much influenced by his contact with the members of the physiocratic school, especially with its chief, though Dupont de Nemours probably goes too far in speaking of Smith and himself as having been " con-disciples chez M. Quesnay." Smith afterwards described Quesnay as a man " of the greatest modesty and simplicity," and declared his system of political economy to be, " with all its imperfections, the nearest approximation to truth that had yet been published on the principles of that science." In October 1766 tutor and pupil returned home, and they ever afterwards retained strong feelings of mutual esteem. For the next ten years Smith lived with his mother at Kirkcaldy, only paying occasional visits to Edinburgh and London; he was engaged in close study during most of this time. He describes himself to Hume during this period as being extremely happy. He was occupied on his Inquiry into the Nature and Causes of the Wealth of Nations, which there is some reason for believing he had begun at Toulouse. That great work appeared in 1776." After its publication, and only a few months before his own death, Hume wrote to congratulate his friend " Euge! belle! dear Mr Smith, I am much pleased with your performance, and the perusal of it has taken me from a state of great anxiety. It was a work of so much expectation, by yourself, by your friends, and by the public, that I trembled for its appearance, but am now much relieved. Not but that the reading of it necessarily requires so much attention, and the public is disposed to give so little, that I shall still doubt for some time of its being at first very popular, but it has depth, and solidity, and acuteness, and is so much illustrated by curious facts that it must at last attract the public attention." Smith attended Hume during a part of his last illness, and soon after the death of the philosopher there was published, along with his autobiography a letter from Smith to W. Strahan (Smith's publisher) in which he gave an account of the closing scenes of his friend's life and expressed warm admiration for his character. This letter excited some rancour among the theologians, and Dr George Home, afterwards bishop of Norwich, published in 1777 A Letter to Adam Smith on the Life, Death and Philosophy of his Friend David Hume, by one of the people called Christians. But Smith took no notice of this effusion. 3 He was also attacked by Arch- 1 The duke undertook a translatipn of the Theory of Moral Sentiments, but the Abbé Blavet's version appeared (1774) before his was completed and he then relinquished the design. An earlier French translation had been published (1764) under the title Metaphysique de I'ame; and there is a later one the best by the marquis de Condorcet (1798, 2nd ed., 1830).
1 J. E. Thorold Rogers published in the Academy, 28th February 1885, a letter of Smith to William Pulteney, written in 1772, from which he thought it probable that the work lay " unrevised and unaltered " in the author's desk for four years. A similar conclusion seems to follow from a letter of Hume in Burton's Life, ii. 461.
3 A story was told by Sir Walter Scott, and is also related in the Edinburgh Review, of an " unfortunate rencontre," arising out of the publication of the same letter, between Smith and Dr Johnson, during the visit of the latter to Glasgow. The same story is given in a note in Wilberforce's Correspondence, the scene being somewhat vaguely laid in " Scotland." But it cannot be true; for Johnson bishop W. Magee (1766-1831) for the omission in subsequent editions of a passage of the Moral Sentiments which that prelate had cited with high commendation as among the ablest illustrations of the doctrine of the atonement. Smith had omitted the paragraph in question (an omission which had escaped notice for twenty years) on the ground that it was unnecessary and misplaced; but Magee suspected him of having been influenced by deeper reasons.
The greater part of the two years which followed the publication of the Wealth of Nations Smith spent in London, enjoying the society of eminent persons, amongst whom were Gibbon, Burke, Reynolds and Topham Beauclerk. In 1778 he was appointed, through the influence of the duke of Buccleuch, one of the commissioners of customs in Scotland, and in consequence of this fixed his residence at Edinburgh. His mother, now in extreme old age, lived with him, as did also his cousin, Miss Jane Douglas, who superintended his household. Much of his now ample income is believed to have been spent in secret charities, and he kept a simple table at which, " without the formality of an invitation, he was always happy to receive his friends." " His Sunday suppers," says M'Culloch, " were long celebrated at Edinburgh." One of his favourite places of resort in these years was a club of which Dr Hutton, Dr Black, Dr Adam Ferguson, John Clerk the naval tactician, Robert Adam the architect, as well as Smith himself, were original members, and to which Dugald Stewart, Professor Playfair and other eminent men were afterwards admitted. Another source of enjoyment was his small but excellent library; it is still preserved in his family. 4 In 1787 he was elected lord rector of the university of Glasgow, an honour which he received with " heartfelt joy." If we can believe a note in Wilberforce's Correspondence, he visited London in the spring of the same year, and was introduced by Dundas 6 to Pitt, Wilberforce and others. From the death of his mother in 1 784, and that of Miss Douglas in 1788, his health declined, and after a painful illness he died on the 17th of July 1790.
Before his decease Smith directed that all his manuscripts except a few selected essays should be destroyed, and they were accordingly committed to the flames. Of the pieces preserved by his desire the ' most valuable is his tract on the history of astronomy, which he himself described as a " fragment of a great work " ; it was doubtless a portion of the " connected history of the liberal sciences and elegant arts " which, we are told, he had projected in early life. Among the papers destroyed were probably, as Stewart suggests, the lectures on natural religion and jurisprudence which formed part of his course at Glasgow, and also the lectures on rhetoric which he delivered at Edinburgh in 1748. To the latter Hugh Blair seems to refer when, in his work on Rhetoric and Belles- Lettres (1783), he acknowledges his obligations to a manuscript treatise on rhetoric by Smith, part of which its author had shown to him many years before, and which he hoped that Smith would give to the public. Smith had promised at the end of his Theory of Moral Sentiments a treatise on jurisprudence from the historical point of view.
As a moral philosopher Smith cannot be said to have won much acceptance for his fundamental doctrine. This doctrine is that all our moral sentiments arise from sympathy, that is, from the principle of our nature " which leads us to enter into the situations of other men and to partake with them in the passions which those situations have a tendency to excite." Our direct sympathy with the agent in the circumstances in which he is placed gives rise, according to this view, to our notion of the propriety of his action, whilst our indirect sympathy with those whom his actions have benefited or injured gives rise to our notions of merit and demerit in the agent himself. It seems justly alleged against this system by Dr Thomas Brown that " the moral sentiments, the origin of which it ascribes to our secondary feelings of mere sympathy, are assumed as previously existing in the original emotions with which the secondary feelings are said to be in unison." A second objection urged, perhaps with less justice, against the theory is that it fails to account for the made his tour in 1773, whilst Hume's death did not take place till 1776. Smith seems not to have met Johnson in Scotland at all. It appears, however, from Boswell's Life, under date of 2gth April 1778, that Johnson had on one occasion quarrelled with Smith at Strahan's house, apparently in London; it is clear that the " unlucky altercation " at Strahan's must have occurred in 1761 or 1763, and could have had nothing to do with the letter on Hume's death.
4 See Catalogue of the Library of Adam Smith, edited with notes and introduction, by James Bonar (1894).
6 An interesting letter of Smith to Dundas (ist November 1779) on free trade for Ireland is printed in the Eng. Hist. Review, No. 2.
authoritative character which is felt to be inherent in our sense of right and wrong for what Butler calls the " supremacy of conscience."
It is on the Wealth of Nations that Smith's fame rests. But it must at once be said that it is plainly contrary to fact to represent him, as some have done, as the creator of political economy. The subject of social wealth had always in some degree, and increasingly in recent times, engaged the attention of philosophic minds. The study had even indisputably assumed a systematic character, and, from being an assemblage of fragmentary disquisitions on particular questions of national interest, had taken the form, notably in Turgot's Reflexions, of an organized body of doctrine. The truth is that Smith took up the science when it was already considerably advanced; and it was this very circumstance which enabled him, by the production of a classical treatise, to render most of his predecessors obsolete. Even those who do not fall into the error of making Smith the creator of the science, often separate him too broadly from Quesnay and his followers, and represent the history of modern economics as consisting of the successive rise and reign of three doctrines the mercantile, the physiocratic and the Smithian. The last two are, it is true, at variance in some even important respects. But it is evident, and Smith himself felt, that their agreements were much more fundamental than their differences; and, if we regard them as historical forces, they must be considered as working towards identical ends. They both urged society towards the abolition of the previously prevailing industrial policy of European governments; and their arguments against that policy rested essentially on the same grounds.
The history of economic opinion in modern times, down to the third decade of the 19th century, is, in fact, strictly bipjirtite. The first stage is filled with the mercantile system, which was rather a practical policy than a speculative doctrine, and which came into existence as the spontaneous growth of social conditions acting on minds not trained ' to scientific habits. The second stage is occupied with the gradual rise and ultimate ascendancy of another system founded on the idea of the right of the individual to an unimpeded Sphere for the exercise of his economic activity. With the latter, which is best designated as the " system of natural liberty," we ought to associate the memory of the physiocrats as well as that of Smith, without, however, maintaining their services to have been equal to his.
The teaching of political ecomomy was associated in the Scottish universities with that of moral philosophy. Smith conceived the entire subject he had to treat in his public lectures , as divisible into four heads, the first of which was natural theology, the second ethics, the third jurisprudence; whilst in the fourth " he examined those political regulations which are founded upon expediency, and which are calculated to increase the riches, the power, and the prosperity of a state." The last two branches of inquiry are regarded as forming but a single body of doctrine in the well-known passage of the Theory of Moral Sentiments in which the author promises to give in another discourse " an account of the general principles of law and government, and of the different revolutions they have undergone in the different ages and periods of society, not only in what concerns justice, but in what concerns police, revenue and arms, and whatever else is the subject of law." This shows how little it was Smith's habit to separate (except provisionally), in his conceptions or his researches, the economic phenomena of society from all the rest. The words above quoted have, indeed, been not unjustly described as containing " an anticipation, wonderful for his period, of general sociology."
There has been much discussion on the question What is the scientific method followed by Smith in his great work? By some it is considered to have been purely deductive, a view which Buckle has perhaps carried to the greatest extreme. He asserts that in Scotland the inductive method was unknown, and that although Smith spent some of the most important years of his youth in England, where the inductive method was supreme, he yet adopted the deductive method because it was habitually followed in Scotland. That the inductive spirit exercised no influence on Scottish philosophers is certainly not true; Montesquieu, whose method is essentially inductive, was in Smith's time closely studied by Smith's fellow-countrymen. What may justly be said of Smith is that the deductive bent was not the predominant character of his mind, nor did his great excellence lie in the " dialectic skill " which Buckle ascribes to him. What strikes us most in his book is his wide and keen observation of social facts, and his perpetual tendency to dwell on these and elicit their significance, instead of drawing conclusions from abstract principles by elaborate chains of reasoning. That Smith does, however, largely employ the deductive method is certain; and that method is legitimate when the premises from which the deduction sets out are known universal facts of human nature and properties of external objects. But there is another species of deduction which, as Cliffe Leslie has shown, seriously tainted the philosophy of Smith in which the premises are not facts ascertained by observation, but the a priori assumptions which we found in the physiocrats. In his view, Nature has made provision for social wellbeing by the principle of the human constitution which prompts every man to better his condition: the individual aims only at his private gain, but is " led by an invisible hand " to promote the public good; human institutions, by interfering with this principle in the name of the public interest, defeat their own end; but, when all systems of preference or restraint are taken away, " the obvious and simple system of natural liberty establishes itself of its own accord." This theory is, of course, not explicitly presented by Smith as a foundation of his economic doctrines, but it is really the secret substratum on which they rest. Yet, whilst such latent postulates warped his view of things, they did not entirely determine his method. His native bent towards the study of things as they are preserved him from extravagances into which many of his followers have fallen. But besides this, as Leslie has pointed out, the influence of Montesquieu tended to counterbalance the theoretic prepossessions produced by the doctrine of the jus naturae. We are even informed that Smith himself in his later years was occupied in preparing a commentary on the Esprit des lois. He was thus affected by two different and incongruous systems of thought one setting out from an imaginary code of nature intended for the benefit of man, and leading to an optimistic view of the economic constitution founded on enlightened selfinterest; the other following inductive processes, and seeking to explain the several states in which the human societies are found .existing, as results of circumstances or institutions which have Been in actual operation. And we find accordingly in his great work a combination of inductive inquiry with a priori speculation founded on the " Nature "hypothesis.
Some have represented Smith's work as of so loose a texture and so defective in arrangement that it may be justly described as consisting of a series of monographs. But this is certainly an exaggeration. The book, it is true, is not framed on a rigid mould, nor is there any parade of systematic divisions and subdivisions. But, as a body of exposition, it has the real unity which results from a mode of thinking homogeneous throughout and the general absence of such contradictions as would arise from an imperfect digestion of the subject.
Smith sets out from the thought that the annual labour of a nation is the source from which it derives its supply of the necessaries and conveniences of life. He does not of course contemplate labour as the only factor in production; but it has been supposed that by emphasizing it at the outset he at once strikes the note of difference between himself on the one hand, and both the mercantilists and the physiocrats on the other. The improvement in the productiveness of labour depends largely on its division ; and he proceeds accordingly to give his unrivalled exposition of that principle, of the grounds on which it rests, and of its greater applicability to manufactures than to agriculture, in consequence of which the latter relatively lags behind in the course of economic development. The origin of the division of labour he finds in the propensity of human nature " to truck, barter or exchange one thing for another." He shows that a certain accumulation of capital is a condition precedent of this division, and that the degree to which it can be carried is dependent on the extent of the market. When the division of labour has been established, each member of the society must have recourse to the others for the supply of most of his wants; a medium of exchange is thus found to DC necessary, and money comes into use. The exchange of goods against each other or against money gives rise to the notion of value. This word has two meanings that of utility, and that of purchasing power; the one may be called value in use, the other value in exchange. Merely mentioning the former, Smith goes on to study the latter. What, he asks, is the measure of value? what regulates the amount of one thing which will be given for another? " Labour," Smith answers, " is the real measure of the exchangeable value of all commodities." " Equal quantities of labour at all times and places, are of equal value to the labourer." " Labour alone, therefore, never varying in its own value, is alone the ultimate and real standard by which the value of all commodities can at all times and places be estimated and compared. It is their real price; money is their nominal price only." Money, however, is in men's actual transactions the measure of value, as well as the vehicle of exchange; and the precious metals are best suited for this function, as varying little in their own value for periods of moderate length ; for distant times, corn is a better standard of comparison. In relation to the earliest social stage, we need consider nothing but the amount of labour employed in the production of an article as determining its exchange value; but in more advanced periods price is complex, and consists in the most general case of three elements wages, profit and rent. Wages are the reward of labour. Profit arises as soon as stock, being accumulated in the hands of one person, is employed by him in setting others to work, and supplying them with materials and subsistence, in order to make a gain by what they produce. Rent arises as soon as the land of a 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." In every improved society, then, these three elements enter more or less into the price of the far greater part of commodities. There is in every society or neighbourhood, an ordinary or average rate of wages and profit in every different employment of labour and stock, regulated by principles to be explained hereafter, as also an ordinary or average rate of rent. These may be called the natural rates at the time when and the place where they prevail; and the natural price of a commodity is what is sufficient to pay for the rent of the land, the wages of the labour, and the profit of the stock necessary for bringing the commodity to market. The market price may rise above or fall below the amount so fixed, being determined by the proportion between the quantity brought to market and the demand of those who are willing to pay the natural price. Towards the natural price as a centre the market-price, regulated by competition, constantly gravitates. Some commodities, however, are subject ts a monopoly of production, whether from the peculiarities of a locality or from legal privilege: their price is always the highest that can be got; the natural price of other commodities is the lowest which can be taken for any length of time together. The three component parts or factors of price vary with the circumstances of the society. The rate of wages is determined by a " dispute " or struggle of opposite interests between the employer and the workman. A minimum rate is fixed by the condition that they must be at least sufficient to enable a man and his wife to maintain themselves and, in general, bring up a family. The excess above this will depend on the circumstances ol the country, and the consequent demand for labour wages being high when national wealth is increasing, low when it is declining. The same circumstances determine the variation of profits, but in an opposite direction; the increase of stock, which raises wages, tending" to lower profit through the mutual competition of capitalists. " The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality "; if one had greatly the advantage over the others, people would crowd into it, and the level would soon be restored. Yet pecuniary wages and profits are very different in different employments either from certain circumstances affecting the employments, which recommend or disparage them in men's notions, or from national policy, " which nowhere leaves things at perfect liberty." Here follows Smith's admirable exposition of the causes which produce the inequalities in wages and profits just referred to, a passage affording ample evidence of his habits of nice observation of the less obvious traits in human nature, and also of the operation both of these and of social institutions on economic facts. The rent of land comes next to be considered, as the last of the three elements of price. Rent is a monopoly price, equal, not to what the landlord could afford to take, but to what the farmer can afford to give. " Such parts only of the produce of land can commonly be brought to market, of which the ordinary price is sufficient to replace the stock which must be employed in bringing them thither, together with the ordinary profits. If the ordinary price is more than this, the surplus part will naturally go to the rent of the land. If it is not more, though the commodity may be brought to market, it can afford no rent to the landlord. Whether the price is or is not more depends on the demand." " Rent, therefore, enters into the price of commodities in a different way from wages and profits. High or low wages and profit are the causes of high or low price; high or low rent is the effect of it" Rent, wages and profits, as they are the elements of price, are also the constituents of income; and the three great orders of every civilized society, from whose revenues that of every other order is ultimately derived, are the landlords, the labourers and the capital- XXV. 9 ists. The relation of the interests of these three classes to those of society at large is different. The interest of the landlord always coincides with the general interest : whatever promotes or obstructs the one has the same effect on the other. So also does that of the labourer: when the wealth of the nation is progressive, his wages are high; they are low when it is stationary or retrogressive. " The interest of the third order has not the same connexion with the general interest of the society as that of the other two; ... it is always in some respects different from and opposite to that of the public."
The subject of the second book is " the nature, accumulation and improvement of stock." A man's whole stock consists of two portions that which is reserved for his immediate consumption, and that which is employed so as to yield a revenue to its owner. This latter, which is his " capital," is divisible into the two classes of " fixed " and " circulating." The first is such as yields a profit without passing into other hands. The second consists of such goods, raised, manufactured or purchased, as are sold for a profit and replaced by other goods; this sort of capital is therefore constantly going from and returning to the hands of its owner. The whole capital of a society falls under the same two heads. Its fixed capital consists chiefly of (i) machines, (2) buildings which are the means of procuring a revenue, (3) agricultural improvements and (4) the acquired and useful abilities of all members of the society (since sometimes known as " personal capital "). Its circulating capital is also composed of four parts (i) money, (2) provisions in the hands of the dealers, (3) materials and (4) completed work in the hands of the manufacturer or merchant. Next comes the distinction of the gross national revenue from the net the first being the whole produce of the land and labour of a country, the second what remains after deducting the expense of maintaining the fixed capital of the country and that part of its circulating capital which consists of money. Money, " the gr.eat wheel of circulation," is altogether different from the goods which are circulated by means of it; it is a costly instrument by means of which all that each individual receives is distributed to him; and the expenditure required, first to provide it, and afterwards to maintain it, is a deduction from the net revenue of the society. In development of this consideration, Smith goes on to explain the gain to the community arising from the substitution of paper money for that composed of the precious metals; and here occurs the remarkable illustration in which the use of gold and silver money is compared to a highway on the ground, that of paper money to a wagon way through the air. In proceeding to consider the accumulation of capital, he is led to the distinction between productive and unproductive labour the former being that which is fixed or realized in a particular abject or vendible article, the latter that which is not so realized. The former is exemplified in the labour of the manufacturing workman, the latter in that of the menial servant. A broad line of demarcation is thus drawn between the labour which results in commodities or increased value of commodities, and that which does no more than render services: the former is productive, the latter unproductive. " Productive " is by no means equivalent to " useful ": the labours of the magistrate, the soldier, the churchman, lawyer and physician, are, in Smith's sense, unproductive. Productive labourers alone are employed out of capital; unproductive labourers, as well as those who do not labour at all, are all maintained by revenue. In advancing industrial communities, the portion of annual produce set apart as capital, bears an increasing proportion to that which is immediately destined to constitute a revenue, either as rent or as profit. Parsimony is the source of the increase of capital; by augmenting the fund devoted to the maintenance of productive hands, it puts in motion an additional quantity of industry, which adds to the value of the annual produce. What is annually saved is as regularly consumed as what is spent, but by a different set of persons, by productive labourers instead of idlers or unproductive labourers; and the former reproduce with a profit the value of their consumption. The prodigal, encroaching on his capital, diminishes, as far as in him lies, the amount of productive labour, and so the wealth of the country; nor is this result affected by his expenditure being on home-made, as distinct from foreign commodities. Every prodigal, therefore, is a public enemy; every frugal man a public benefactor. The only mode of increasing the annual produce of the land and labour is to increase either the number of productive labourers or the productive powers of those labourers. Either process will in general require additional capital, the former to maintain the new labourers, the latter to provide improved machinery or to enable the employer to introduce a more complete division of labour. In what are commonly called loans of money, it is not really the money, but the money's worth, that the borrower wants; and the lender really assigns to him the right to a certain portion of the annual produce of the land and labour of the country. As the general capital of a country increases, so also does the particular portion of it from which the possessors wish to derive a revenue without being at the trouble of employing it themselves, and, as the quantity of stock thus available for loans is augmented, the interest diminishes, not merely " from the general causes which make the market price of things commonly diminish as their quantity increases," but because, with the increase of capital, " it becomes gradually more and more difficult to find within the country a profitable method of employing any new capital " whence arises a competition between different capitals, and a lowering of profits, which must diminish the price which can be paid for the use of capital, or in other words the rate of interest. It was formerly wrongly supposed, and even Locke and Montesquieu did not escape this error, that the fall in the value of the precious metals consequent on the discovery of the American mines was the real cause of the general lowering of the rate of interest in Europe. But this view, already refuted by Hume, is easily seen to be erroneous. " In some countries the interest of money has been prohibited by law. But, as something can everywhere be made by the use of money, something ought everywhere to be paid for the use of it," and will in fact be paid for it; and the prohibition will only heighten the evil of usury by increasing the risk to the lender. The legal rate should be a very little above the lowest market rate; sober people will then be preferred as borrowers to prodigals and projectors, who at a higher legal rate would have an advantage over them, being alone willing to offer that higher rate.
As to the different employments of capital, the quantity of productive labour put in motion by an equal amount varies extremely according as that amount is employed (i) in the improvement of lands, mines or fisheries, (2) in manufactures, (3) in wholesale or (4) retail trade. In agriculture " Nature labours along with man," and not only the capital of the farmer is reproduced with his profits, but also the rent of the landlord. It is therefore the employment of a given capital which is most advantageous to society. Next in order come manufactures; then wholesale trade first the home trade, secondly the foreign trade of consumption, last the carrying trade. All these employments of capital, however, are not only advantageous, but necessary, and will introduce themselves in the due degree if left to individual enterprise. / These first two books contain Smith's general economic scheme; and we have stated it as fully as was consistent with the brevity here necessary, because from this formulation of doctrine the English classical school set out, and round it the discussions of more modern times in different countries have in a great measure revolved.
The critical philosophers of the 18th century were often destitute of the historical spirit, which was no part of the endowment needed for their principal social office. But some of the most eminent of them, especially in Scotland, showed a marked capacity and predilection for historical studies. Smith was among the latter; Karl Knies and others justly remark on the masterly sketches of this kind which occur in the Wealth of Nations. The longest and most elaborate of these occupies the third book; it is an account of the course followed by the nations of modern Europe in the successive development of the several forms of industry. It affords a curious example of the effect of doctrinal prepossessions in obscuring the results of historical inquiry. Whilst he correctly describes the European movement of industry, and explains it as arising out of adequate social causes, he yet, in accordance with the absolute principles which tainted his philosophy, protests against it as involving an entire inversion of the " natural order of things." First agriculture, then manufactures, lastly foreign commerce; any other order than this he considers " unnatural and retrograde."
The fourth book is principally devoted to the elaborate and exhaustive polemic against the mercantile system which finally drove it from the field of science, and has exercised a powerful influence on economic legislation. When protection is now advocated, it is commonly on different grounds from those which were in current use before the time of Smith. He believed that to look for the restoration of freedom of foreign trade in Great Britain would have been " as absurd as to expect that an Oceana or Utopia should be established in it." His teaching on the subject is not altogether unqualified; but, on the whole, with respect to exchanges of every kind, where economic motives alone enter, his voice is in favour of freedom. He has regard, however, to political as well as economic interests, and on the ground that " defence is of much more importance than opulence " pronounces the Navigation Act to have been " perhaps the wisest of all the commercial regulations of England." Whilst objecting to the prevention of the export of wool, he proposes a tax on that export as somewhat less injurious to the interest of growers than the prohibition, whilst it would "afford a sufficient advantage" to the domestic over the foreign manufacturer. This is, perhaps, his most marked deviation from the rigour of principle ; it was doubtless a concession to popular opinion with a view to an attainable practical improvement The wisdom of retaliation in order to procure the repeal of high duties or prohibitions imposed by foreign governments depends, he says, altogether on the likelihood of its success in effecting the object aimed at, but he does not conceal his contempt for the practice of such expedients. The restoration of freedom in any manufacture, when it has grown to considerable dimensions by means of high duties, should, he thinks, from motives of humanity, be brought about only by degrees and with circumspection though the amount of evil which would be caused by the immediate abolition of the duties is, in his opinion, commonly exaggerated The case in which J. S. Mill justified protection that, namely, in which an industry well adapted to a country is kept down by the acquired ascendancy of foreign producers is referred to by Smith ; but he is opposed to the admission of this exception for reasons which do not appear to be conclusive. He is perhaps scarcely consistent in ap- proving the concession of temporary monopolies to joint-stock companies undertaking risky enterprises " of which the public is afterwards to reap the benefit." 1 He is less absolute in his doctrine of governmental non-interference when he comes to consider in his fifth book the " expenses of the sovereign or the commonwealth." He recognizes as coming within the functions of the state the erection and maintenance of those public institutions and public works which, though advantageous to the society, could not repay, and therefore must not be thrown upon, individuals or small groups of individuals. He remarks in a just historical spirit that the performance of these functions requires very different degrees of expense in the different periods of society. Besides the institutions and works intended for public defence and the administration of justice, and those required for facilitating the commerce of the society, he considers those necessary for promoting the instruction of the people. He thinks the public at large may with propriety not only facilitate and encourage, but even impose upon almost the whole body of the people, the acquisition in youth of the most essential elements of education. He suggests as the mode of enforcing this obligation the requirement of submission to a test examination " before any one could obtain the freedom in any corporation, or be allowed to set up a trade in any village or town corporate." Similarly, he is of opinion that some probation, even in the higher and more difficult sciences, might be enforced as a condition of exercising any liberal profession, or becoming a candidate for any honourable office. The expense of the institutions for religious instruction as well as for general education, he holds, may without injustice be defrayed out of the funds of the whole society, though he would apparently prefer that it should be met by the voluntary contributions of those who think they have occasion for such education or instruction.
To sum up, it may be said that the Wealth of Nations certainly operated powerfully through the harmony of its critical side with the tendencies of the half-century which followed its publication to the assertion of personal freedom and " natural rights." It discredited the economic policy of the past, and promoted the overthrow of institutions which had come down from earlier times, but were unsuited to modern society. As a theoretic treatment of social economy, and therefore as a guide to social reconstruction and practice in the future, it is provisional, not definitive. But when the study of its subject comes to be systematized on the basis of a general social philosophy more complete and durable than Smith's, no contributions to that final construction will be found so valuable as his.
Buckle has the idea that the two principal works of Smith, the Theory of Moral Sentiments and the Wealth of Nations, are mutually complementary parts of one great scheme, in which human nature is intended to be dealt with as a whole the former exhibiting the operation of the benevolent feelings, the latter of what, by a singular nomenclature, inadmissible since Butler wrote, he calls " the passion of selfishness." In each division the motive contemplated is regarded as acting singly, without any interference of the opposite principle. This appears to be an artificial and misleading notion. Neither in the plan of Smith's university course nor in the wellknown passage at the end of his Moral Sentiments is there any indication of his having conceived such a bipartite scheme. The object of the Wealth of Nations is surely in no sense psychological, us is that of the Moral Sentiments. The purpose of the work is to exhibit social phenomena, not to demonstrate their source in the mental constitution of the individual.
The following may be referred to for biographical details : Dugald Stewart, Biographical Memoir of Adam Smith, originally read (1793) before the Royal Society of Edinburgh, and afterwards prefixed to Smith's Essays on Philosophical Subjects; J. A. Farrer, Adam Smith (1881); R. B. Haldane, Life of Smith (1887), and the very full and excellent Life of Adam Smith by John Rae (1895). Additional particulars are given in Brougham's Men of Letters and Science, Burton's Life of Hume and Alexander Carlyle's Autobiography; and some characteristic anecdotes of him will be found in Memoirs of the Life and Works of Sir John Sinclair (1837). For comments on his Theory of Moral Sentiments, see, besides Stewart, as cited above, Dr T. Brown's Philosophy of the Human Mind, lects. 80 and 81 ; Sir J. Mackintosh's Dissertation on the Progress of Ethical Philosophy; and the art. ETHICS in the present work. On the Wealth of Nations, see the prefaces to M'Culloch's, Rogers's, Shield Nicholson's and Cannan's editions of that work; Rogers's Historical Gleanings (1869); the art. " Smith " in Coquelin and Guillaumin's Dictionnaire de I' economie politique; Bagehot's Economic Studies (1880); and Cossa's Guide to the Study of Political Economy (Eng. trans., 1880), chap. v. See also Professor Shield Nicholson's Project of Empire (1909), which is a critical study of the Economics of Imperialism, with special reference to the ideas of Adam Smith; and Professor W. J. Ashley's essay in Compatriots Club Lectures (1905) on " Political Economy and the Tariff Problem." See also Professor W. J. Ashley's Select Chapters and Passages from the " Wealth of Nations " (1895). (I. K. I.,- X.)
1 Professor Bastable calls attention to the interesting fact that the proposal of an export duty on wool and the justification of a temporary monopoly to joint-stock companies both appear for the first time in the edition of 1784.
Note - this article incorporates content from Encyclopaedia Britannica, Eleventh Edition, (1910-1911)