Economic Concepts and Historical Dynamics

In this chapter we return to rather more concrete matters, the aim here being to use the interpretation as so far developed to provide a detailed re-evaluation of Smith’s handling of some specifically ‘economic’ concepts.

It will be convenient to approach these topics by using the distinction developed above, between Smith’s ‘general theory’ of historical evolution and his ‘special theory’ of the development of a commercial market economy. The broad outlines of his approach can be sketched in at the level of the general theory, and the fine detail and institutional content added at the level of the special theory.

We can begin therefore by looking at what he has to say about the first of the ‘four stages’ of historical development; the stage of hunting and gathering.¹

Here the inhabitants ^t... would support themselves by the wild fruits and wild animals which the country afforded.’ (LJ: 1762-63, p. 14.)

In this type of society there is little scope for the division of labour, firstly because it is a subsistence economy with little or no surplus produce, and secondly because the size of the market is extremely limited in that: ‘The precarious subsistence which the chase affords could seldom allow a greater number [than two or three hundred] to keep together for any considerable time.’ (HW, V.I.a.5. See also LJ: 1762-63, p. 213.)

If we recall that the division of labour is limited by the extent of the market, it becomes clear that there is little possibility of specialisation at this stage so that there is a strong tendency for all the inhabitants to perform similar tasks.

There is no capital at this stage of development and no private property in land, so that the only ‘factor income’ is that of the hunter himself who receives the whole produce of his labour with no deductions to cover rent or profit {WN, I.VI.4). In so far as there is any exchange (which of course implies some degree of specialisation) it is by barter, and the ‘prices’ of commodities are directly proportional to the labour embodied in producing them.² There will be no taxation other than the sharing of any small surplus with the chief, who will normally be democratically elected, and there will be virtually no ‘government’ intervention. (LJ: 1762-63, p. 201.)

Given this economic structure, it is not surprising that: ‘Universal poverty establishes there universal equality, and the superiority, either of age, or of personal qualities, are the feeble but sole foundation of authority and subordination.’ (WN, V.I.b.7.)

Because of the effects of their relatively varied occupations within the narrow limits generated by the specific form of economic organisation (seeChapter 6 and also WN, V.I.f.51), its inhabitants will be sharp-witted and well suited to the challenges offered by their precarious way of life. Clearly, ‘tastes’ in such a society will be heavily conditioned by the near subsistence living standards, and there will be little room for any form of discretion as to choice of goods. Whilst Smith does not make the point explicit, from a purely logical point of view we may presume that, because of the binding scarcity constraint, the exchange values of goods will be closely related to the ‘objective’ long-run scale of values. That is to say, that the subjective valuation of goods which permits exchange to take place³ will be biologically based, rather than shaped by the customs and fashions which become important in a more advanced society.

Smith considers that such a society will have institutions and laws, generated by, and appropriate to, its level of economic organisation.

such as bows, quiver etc., were buried along with the deceased’ (LJ: 1762-63, p. 40).

This then is the static depiction of a society in the very early stages of hunting and gathering; it is now necessary to add the dynamic element and to trace (still at the level of the general theory) the evolution of such a society through the stages of pastur­age and agriculture and on into a market economy.

As a first step it should be noted that (unlike Marx), Smith does not postulate a sudden transition from one stage to the next. His model is best regarded as a taxonomic representation of gradual qualitative change in which each static historical stage is an ‘ideal type’ which will be encountered in reality only on rare occasions. The typical society will be in a gradual process of transition from one stage to the next, and to the people living in that society the dynamic process will be almost imperceptible. We must also remember that the model presents us with the natural, or optimal, path of development, but that, because of the presence of social estrangement, and the varying political and legislative responses to it and because of the more or less random effects of fortune which may only be partly countered by wise statesmanship, the actual path followed by any particular society will, typically, diverge from the natural. With this in mind we can introduce the dynamic element by looking at what Smith says about how one stage gradually evolves into the next.

As the age of hunters develops the population will gradually increase until — in what might be called the late hunting stage — the pressure of numbers on limited natural resources becomes too great for subsistence.

... they would be necessitated to contrive some other method whereby to support themselves. (LJ: 1762-63, p. 14—15)

and

The most naturally contrivence [sic] they would think of, would be to tame some of those wild animals they caught, and by affording them better food than what they could get elsewhere they would enduce them about their land them­selves and multiply their kind. Hence would arise the age of shepherds, (ibid.)

The animals chosen for domestication will obviously be those most useful to man and will include sheep, horses, oxen and camels (ZJ: 1762-63, p. 202).

In its early stages such a society would still be nomadic, moving on as the grazing became exhausted, but in its later stages, where some agriculture was being introduced, the shepherds, whilst still primarily dependent upon their flocks, would occupy a more or less fixed area of land.

During the age of shepherds the concept of private property is considerably widened. Previously it referred only to resources actually in one’s possession, the only extension being to animals that were being chased under conditions of hot pursuit. Now, however, the existence of large, domesticated flocks and herds makes an extension of ownership essential and:

They considered, therefore, all animals to remain in the property of him to whom they appertained at first, as long as they retained the habit of returning into his power at certain times. (LJ: 1762-63, p. 20.)

However, the concept of private property was not at this stage extended to land, which was still regarded as being held in common, and Smith explains that this was due to the fact that the shepherds, even when they ceased to be nomadic, moved their flocks from time to time as the pasture became exhausted. For this reason, land tenure, as far as it existed at all, did not extend beyond the actual occupation of a given pasture. No land rent would be paid at this stage of development, but in the natural course of events, some individuals would accumulate large flocks, whilst others would own none.

This inequality of fortune is important in the context of Smith’s overall perspective because, by concentrating the fruits of the increased division of labour, it creates the potential for capital accumulation, but the existence of a wealthy, property-owning class makes it possible. Indeed it is this potentiality that makes Smith regard the inequality of wealth as being socially acceptable in the long run, in that it contains the seeds of progress. For this reason there is no real conflict between his view of the oppressive nature of property laws, and his overall optimism concerning social progress. At this stage, however, the surplus is used unproductiυely, to maintain dependents, rather than to reproduce itself with a surplus. This accumulation in turn makes possible a further extension of the division of labour, for:

As the accumulation of stock must, in the nature of things, be previous to the division of labour, so labour can be more and more subdivided in proportion only as stock is pre­viously more and more accumulated. {WN, Book II, Introduction, Section 3.)

Smith also links the form of government to this system of economic organisation, considering that it will be a democracy, but that the rich, by virtue of their power over their numerous dependents will have effective control.

The legal system will also have been modified to suit the chang­ing needs of the new form of economic organisation in that the right to property will now be firmly reinforced by law for ⁱ...

In addition, laws of inheritance are introduced, although of a somewhat rudimentary nature. As Smith puts it:

In the age of hunters there could be no room for succession as there was no property... In the age of shepherds when property was greatly extended, the goods the deceased had been possessed of were too valuable to be all buried along with him. (LJ: 1762-63, p. 38-9.)

However, despite the relative sophistication of the legal frame­work in the age of shepherds, there would not yet be any written code of laws. Laws would be customary and subject to variation as circumstances made it expedient. He holds that a written system of law requires great authority on the part of the government, in that it lays down absolute standards which must be enforced without regard to particular circumstances. Such authority is lacking in the age of shepherds, and is only to be found after the ‘appropriation of lands’ (LJ: 1762-63, p. 213) — i.e. well into the third stage of historical evolution when agriculture becomes the dominant mode of production.

It is partly because of the need for the enforcement of property laws that government activity becomes much more important at this stage, so that: ‘The age of shepherds is where government properly first commences.’ (LJ: 1762-63, p. 202) — but it is also, in part, a response to the increased interdependence of individuals within society. The division of labour has progressed a little and specialisation implies a degree of dependence upon others, so that the more or less self-sufficient hunter has been replaced by the dependent herdsman or labourer, and the equally dependent property owner, who relies upon the labour of others for his subsistence.

In such a society there is no need for any formal system of taxation; the rich administer the law to suit their own purposes, and defray any incidental expenses out of their own pockets. It is only after the appropriation of land that the expenses of government attain such a magnitude as to make a formal system of taxation necessary (LJ: 1766, p. 309).

At this stage of development tastes still play a minor role in the production and allocation of goods, although they now have more importance in determining which services are to be produced. As Smith puts it:

... in the early periods, when arts and manufactures are not known and there is hardly any luxury amongst mankind, the rich man has no way of spending the produce of his estate but by giving it away to others, and these become in this manner dependent upon him. (LJ: 1762-3, p. 202.)

Further, we see that in the age of shepherds there was no need for the social institution of money. In the absence of any general­ised system of exchange, and given that the division of labour has not progressed so far as to make barter (or the allocation of goods by custom) unwieldy, cattle themselves are an adequate measure of value.

In the development of this dynamic process of social evolution from the late hunting stage to the late pastoral stage, population has again increased, and towards the close of the era is again pressing urgently upon resources. This pressure is alleviated by a further qualitative transition, for when society found

... a difficulty in supporting themselves by herds and flocks... they would naturally turn themselves to the cultivation of land and the raising of such plants and trees as produced nourishment fit for them. (£/: 1762-63, p. 15.)

— in short, society would enter the third stage of historical development; that of agriculture. In this era there are very great extensions to the notion of property (LJ'. 1762-63, p. 20) and, in particular, land comes to be regarded as private property. The inequality of fortune established in the age of shepherds persisted, and indeed was in some cases extended, for even those who owned cattle had to get ‘... liberty to pasture them from some great lord.’ (LJ∙. 1762-63, p. 245.)

This ‘liberty’ would only be granted upon payment of rent, so that for the first time we have a land-owning class living upon the proceeds of their property. One result of this appropriation of land was that there were further changes in the institutional framework of society so that, for example, the laws of inheritance were extended and strengthened, and similar changes took place with the laws of accession, for:

Tho the opportunities of accession are but very few in the age of shepherds, yet they multiply to a number almost infinite when agriculture and private property in land is introduced. (LJ: 1762-63, p. 27.)

Further, at least in the later stages of agricultural society, this extended legal infrastructure becomes formalised into a body of written law, binding upon all irrespective of circumstances (LΓ. 1762-63, p. 213).

The increased division of labour possible in a settled agricutural community resulted in a greater volume of surplus produce, and this in turn led to an extension of the system of exchange, although this was still localised, for the agricultural worker requires

... little more than the custom of one, two, or, at most, of four families as his own, in order to dispose of the whole produce of his own labour. Agriculture, therefore can support itself under the discouragement of a confined market, much better than manufactures. (H^zΛζ IV.IX.45.)

Despite this, however, there are limitations upon how far the division of labour can be pushed in an agricultural society since ^, the seasonal nature of the employment means that each labourer must in turn be ^l... plower of the land, sower, harrower, reaper and thresher of the corn [which] renders it impossible that the improvements in agriculture should ever keep pace with those in the manufactures.’ (LJ: 1762-63, p. 211.)

During this period, despite the greatly increased surplus, capital accumulation is very slow: only towards the end of the era does it accelerate, and then it accumulates, not in the hands of the land-owners, but in those of the new class of capital-owners. Smith holds that land-owners are by nature profligate, this being largely due to the fact that:

They are the only one of the three orders whose revenue costs them neither labour nor care, but comes to them, as it were, of its own accord, and independent of any plan or project of their own. (FWV, I.XI.p.10.)

and since, like all the other members of society they are shaped to a considerable degree by the nature of their labour, they become indolent, ignorant and incapable of‘applying their minds’ (ibid).

Along with these changes we find that the government plays an ever-increasing role in regulating the activities of society. In discussing government expenditure Smith puts it thus:

There are many expenses necessary in a civilised country for which there is no occasion in one that is barbarous. Armies, fleets, fortified places and public buildings must be supplied, and if they be neglected, disorder will ensue. (LJ: 1766, p. 310.)

In the early stages of agriculture the expenses of government could be met by setting aside a proportion of the land for ‘the maintenance of government’ (ibid., p. 309) but Smith considers that such a policy becomes severely inadequate in the later stages of agriculture, since he holds that government-farmed land, lacking the discipline of competition, would be less productive. than that in the hands of private land-owners, and thus ‘one cause of the slow progress of opulence’ (ibid).

As the division of labour is gradually extended in the agricul­tural stage, there is a considerable improvement in productivity so that it is no longer necessary for the majority of the population to work on the land. The workers thus released specialise in various branches of manufacture and construction, becoming ‘... smiths, carpenters, wheel-wrights and plough wrights, masons and bricklayers, tanners, shoemakers and tailors’ (WW, III.1.4) — who enter into reciprocal trading with farmers. In the natural course of events, such artificers tend to collect together, their hamlet becomes a village. Then later: ‘The butcher, and the baker, soon join them, together with many other artificers and retailers necessary or useful for supplying their own occasional wants’ (ibid.) — so that the village becomes a town. We thus have a two-sector economy in which basic subsistence is produced by the country and exchanged for the ‘convenience and luxury’ of manufactured products produced by the towns.

This qualitative transition benefits all, says Smith:

The gains of both are mutual and reciprocal and the division of labour is in this as in all other cases advantageous to all the different persons employed in the various occupations into which it is subdivided. (P1W, III.I.1.)

There is, towards the end of the agricultural stage, a significant quickening in the pace of development; prior to the growth of manufactures the limitations upon the division of labour imposed by the seasonal nature of agriculture constituted a brake upon its progress. But in the manufacturing sector no such check existed and the division of labour could thus proceed at an ever accelerat­ing rate. The products of the towns in turn improved the per capita output of the land, facilitating the further migration of potential craftsmen to the towns, and these, by swelling the market for town-produced goods, enabled specialisation to be pushed still further. The passages describing this whole process are amongst the clearest examples of Smith’s dialectical approach, with the division of labour being shown to be both cause and effect of the dynamic development.

Once the towns are well established we are at the stage of an embryonic market e∞nomy and an analysis of this fourth stage requires a shift of perspective, from the level of the general theory to that of the special theory. Before making that transition however, one task remains, which is to examine the role of demand forces in shaping the pattern of development.

In the early stages of agriculture surpluses had been used by the land-owners to maintain an ever-growing army of servants, quite literally because there was no other way in which the surplus could be consumed (H7V, III.IV.5). This labour was ‘unproductive’ in Smith’s sense of the word, but served the long- run development of society by establishing a pool of landless wage-earners from which potential artificers could be drawn. With the gradual rise of manufactures, there is an interesting change in the consumption patterns of the wealthy land-owners, for we see a strong shift towards expending surpluses on manufactured goods. Initially, this ⁱ... taste for finer and more improved manufactures’ was developed by their introduction from abroad, but in the natural course of events, domestic products soon developed to rival these imports. It is here that the subjective/ objective dichotomy appears to become important for the land­owners proceed to trade their birthright

... not like Esau for a mess of pottage in time of hunger and necessity, but in the wantonness of plenty, for trinkets and baubles fitter to be the play things of children than the serious pursuits of men. (MW, III.IV.15.)

This gap between the subjectively perceived utility of the land­owner and an implicit long-run scale of values is also clear in a passage which occurs a few pages earlier, where Smith says of the proprietors of land that:

For a pair of diamond buckles perhaps, or something as frivoless and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. (HW, III.IV.10. See also LJ: 1762-63, p. 50.)

The deception theory is clearly important here, for, in seeking to maximise their short-run subjective utility, the land-owners are also, unknowingly, furthering the long-run development of society. Four aspects of this development can be identified in Smith’s discussion. Firstly, there is a shift in the pattern of demand, away from services and towards manufactured goods. Since the division of labour is limited by the extent of the market, specialisation is promoted in the emergent manufacturing sector, where the potential rewards are greatest. Secondly, men who were previously employed as servants become unemployed, and attrac­ted by the possibility of work, join the migration from the land to the developing towns. Thirdly, in order to obtain the money to purchase the useless trinkets they crave the land-owners encourage, or at least permit, improvements in agricultural effi­ciency and there follows a series of legal and institutional changes. For example, in order to persuade the tenant to invest in land improvements, which would permit higher rents, the owners granted longer leases so that there would be time for the capital invested to show a return.

The fourth point is more subtle, but is important. If we remember that Smith regards the basic wants of men as being easily satisfied, then we can see that demand related to a strictly ‘biological’ set of values would be inadequate to create markets for the potentially enormous flows of manufactured commodities, implicit in the growth of the towns. The upward shift in the land-owners’ consumption functions is based upon a severely distorted perception of utility, but this divergence from ‘objective’ values is a vital step in the evolutionary process.

What we see here is in fact an important instance of the qualita­tive change that takes place in Smith’s model as we move to the special theory of market economies. In the earlier stages of society there was little necessity for the various consumption illusions; the need to survive was an adequate spur to eflbrt, and the basic demands of the community could mop up all its output. With increased specialisation, however, the rapidly increasing output of society makes necessary the illusions that will ensure an ade­quate short-run demand, and also motivate people to labour on, once their basic needs are satisfied. This point has been made by Rosenberg, who, writing in 1968, said:

It is worth noting that Smith treats taste itself as a phenomenon which becomes important only in civilised societies where subsistence is easily acquired. His treatment of the conduct of people in savage societies, which are pre­occupied with producing a bare subsistence, suggests that they are controlled by social values and attitudes which provide as little scope as possible for the expression of personal tastes.⁴

Given the present interpretation, we can say that once specialisation is well established, the deception theory becomes a crucial part of Smith’s model; from now on, the long-run evolution of society will depend upon the existence of short-run illusions, which are necessary to motivate the individuals living in any given period.

It is worth noting here that tastes are not exogenous, in the usual sense of the word. Here, as always in Smith’s model, there is a dialectical interaction, in that the progressive division of labour in providing the manufactured ‘trinkets’ calls forth a shift in consumption patterns, but, that shift in turn pushes the division of labour even further. Putting that another way, changes in tastes are both induced and autonomous, depending upon which side of the interaction one focuses. This seems odd, if not indeed contradictory, by the standards of contemporary social science but is fully in accord with Smith’s historical dynamics.

This transition in the nature ofSmith’s model is but one example of a wide range of changes that takes place as his analysis begins to focus on the market economy. As suggested above, what in effect happens is that the division of labour concept picks up a lot more institutional content, so that, what has hitherto been a somewhat skeletal treatment, now takes on a much richer, but correspondingly more complex, form. This I interpret as being quite deliberate; Smith is seeking to depict a qualitative transition to a society which has itself become more complex, and given the nature of his model, it too must change to reflect this fact.

One consequence of this enrichment of context is that the range of individual responses is widened, so that any tendency towards economic determinism that has been present in the general theory is dispelled, and the model takes on the full richness of a dialectical interaction. Putting that another way, the constraints implicit in a near subsistence society are removed, and in the process the range of possible responses which is ‘appropriate’ to a given contextually located situation is correspondingly greater. The political dimension thus takes on an increased importance, as the science of legislation grows in complexity.

We can begin our examination of the special theory with an examination of the concept of ‘capital’ as it functions at this level of the model. As mentioned above (Chapter 5) Smith holds that the accumulation of capital is a precondition for extending the division of labour, and we have seen that a precondition of such accumulation is the existence of an agricultural surplus.⁵ Initially this surplus was in the hands of the land-owners who used it to maintain unproductive labour, but they gradually modified their expenditure pattern, to create effective demand in the new manu­facturing sector. The problem with this arrangement was that land-owners are by nature profligate and wasteful, being formed in this somewhat disreputable mould, by the inadequacies of their pattern of labour. It follows that, although they served a useful purpose in stimulating manufacture, they were less than adequate custodians when it came to the long-run accumulation of capital, for:

Parsimony, and not industry, is the immediate cause of the increase of capital. Industry indeed, provides the subject which parsimony accumulates. But whatever industry might acquire, if parsimony did not save and store it up, the capital would never be the greater. (P½V, II.III.16.)

Fortunately, as the growth of the manufacturing sector proceeds, we find a new breed of wealth-owners emerging; the abstemious and industrious owner of capital. His emergence is itself an effect of the division of labour, for specialisation in the employment of stock becomes a discrete trade, like any other,⁶ and his thrift, astuteness, and industry are the inevitable results of the nature of his employment. In short, once the division of labour has proceeded far enough, it not only brings into existence the entrepreneur, but also broadly defines his characteristics; classic Smithian dialectics.

In turn, the new class of wealth-owners was to have a marked effect in increasing the speed at which the division of labour could proceed, since accumulation was accelerated by the frugality of the capital-owner, who also ensures, by his astuteness and frugality, that capital was employed where it was most productive.

Interestingly, we have here a further instance of the distorting effects of monopoly on the progress of the division of labour, for Smith says that monopoly results in a high rate of profit, and this is ‘fatal’, for:

The high rate of profit seems everywhere to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems to be superfluous, and expensive luxury to suit better the affluence of this situation. (H^rN, IV.VII.c.61. See also I.IX.24.)

Smith makes a distinction between fixed and circulating capital, and between both of these and capital reserved for consumption, which yields no profit. Of circulating capital he says:

... it may be employed in raising, manufacturing or purchasing goods, and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession or continues in the same shape... His capital is continually going from him in one shape, and returning to him in another, and it is only by means of such circulation, or successive exchanges, that it can yield him any profit. Such capitals, therefore, may very properly be called circulating capitals. (WN, II.I.4.)

Included here are capital employed in distribution, and inventories of input materials, intermediate goods and finished stock. But the most important point is that it also includes the wages fund set aside to maintain productive workers in agriculture and industry, but not any funds used to maintain servants.⁷ This type of capital is to be contrasted with fixed capital which is used for:

... the improvement of land, in the purchase of useful machines and instruments of trade, or in suchlike things as yield a revenue or profit without changing masters, or circulating any further. (HW, II.1.5.)

— and, as Smith makes clear later in the chapter, this category includes commercial buildings (but not dwelling houses, which count as consumption) and what could fairly be called ‘human capital’ in the form of education and training.⁸

The third category, which is not of direct relevance to our present purpose, is that of consumption capital and is somewhat heterogeneous, comprising items like clothing, furniture, food and housing. Smith’s presentation is somewhat marred by the lack of a clear distinction between stocks and flows, but that need not detain us here.

His discussion of the way in which circulating capital interacts with fixed capital in the production of the national product (HW, II.1.23 et seq) is a good illustration of the richness of content possessed by the division of labour model at this level; great stress is laid upon the generalisation of exchange in the market economy (WN, II.I.28) and on the interdependence of the specialised producers.

It should be noted at this stage, that whilst Smith makes numerous explicit references to possible variations in the ratio of fixed to circulating capital between industries and between individual firms, he does not employ this distinction as part of his formal analysis. As Hollander puts it:

... in the formal treatment of the employment generating capacity of alternative investments, Smith neglects to make use of his recognition of empirical differences between fixed- circulating capital ratios from product to product within industry, or differences in factor proportions generally within agriculture.⁹

The reasons for this apparent ‘neglect’ are complex, and are bound up with the fact that Smith’s perspective is that of long-run historical dynamics, rather than short-run general equilibrium. As a first approximation it can be said that he behaves as if the social average ‘organic composition’ of capital was more or less fixed in the long run, so that in concentrating on the growth of the (productive) wages fund of circulating capital, a given quantity of fixed capital could be assumed.¹⁰ There may be qualitative improvements in fixed capital, through the process of simplifica­tion, but its quantity will still be roughly constant per worker employed.

The central point to grasp here is that the general perspective of Smith’s division of labour model (what was above called his labour theory of value in dynamic presentation) sees the produc­tivity implicit in specialisation as being embodied in labour not in capital, be it circulating or fixed. It follows directly from this that the main function of capital is to permit more labour to be set to productive work; we have seen this already in the link between capital accumulated and the extent of the division of labour. Further, the purpose of short-run variations in the return to capital in specific industries is to encourage the owners of capital to put labour to work where the rewards from its specialisation are greatest.¹¹ It is thus the entrepreneur who controls the allocation of resources, but it is not the productivity of capital that he is regulating at the margin, but the productivity of labour.

This can be illustrated by following the progress of this labour ‘transfer mechanism’, beginning at the point where there has been an increase in the extent of the market. Let us assume that in a growing town, population moving in from the country has created the potential for a further division of labour. Existing workers cannot take advantage of this situation since they do not have the requisite (fixed and circulating) capital. The entrepreneur however has a flow of new capital, which he saves, as a result of his frugal consumption patterns, from the profits on his existing stock of capital, which is invested at the ‘social average’ rate of profit. Since Smith assumes diminishing returns to capital in any specific branch of trade, the opening of a new specialisation will create the opportunity for profits higher than the average, and the entrepreneur will, therefore, direct his newly accumulated capital into this new channel.

In order to attract the necessary labour the ‘projector’

... must at first entice his workmen from other employments by higher wages than they can either earn in their own trades, or than the nature of his work would otherwise require, and a considerable time must pass away before he can venture to reduce them to the common level. (MW, I.X.b.42.)

Once specialisation in the new trade has proceeded as far as the extent of the market will allow, profits and wages fall to roughly the social average. However, in the course of this extension of the division of labour an increase in productivity has taken place and effective demand has increased, so that the cycle can begin again.

In the course of his discussions of this topic, Smith makes frequent warnings against the distorting effects of partial interests; in this as in the other processes of the division of labour model, there is a danger of disturbing or shortcutting the mechanism. Thus, for example, he says:

The statesmen, who should attempt to direct private people in what manner they ought to employ their capitals would... assume an authority which could be safely trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. (WN, IV.II.10.)

and he goes on to suggest that monopoly has similar ill effects and is indeed a very similar distortion. He is against duties on imports for precisely the same reason, considering that ^l... the natural balance of industry, the natural division and distribution of labour... is always more or less disturbed by such duties’ (WN, IV.IV. 14) and holds that the United Kingdom should be a free port. Indeed it is the pressure of partial interests that distorts the relationship between the rate of profit in the country and that in the town. This should normally be about the same, except for a slight increase in the towns due to the existence of new opportunities for specialisation, but in fact the close proximity of individuals in the same trade in the towns makes restrictive prac­tices easy to arrange. As a consequence, says Smith, there has been a significant distortion in the actual development of town and country, with the former having gained at the expense of the latter, to the detriment of both. In other words, social estrange­ment has resulted in the actual progress of development being suboptimal in that it has diverged from its natural path (see Chapter 7). Smith has a very similar view of the ill effects of restrictive practices in respect of trade with the colonies, and his discussions of this issue prompted Governor Pownall to remon­strate that Smith had given only ‘probable reasons’ for his belief whilst presenting it as if it were backed by ‘absolute proof’.¹²

It is frequently claimed by modern commentators on Smith that his handling of the productivity of capital (and the associated concept of profit) was inadequate, in that, he either failed to recognise its existence entirely, or, if he recognised it at all, failed to deal with it consistently. Schumpeter, for example, says that: ‘So far as Smith can be credited with having a theory of “profit” at all, it must be pieced together from the indications, mostly vague and even contradictory, that are scattered over the first two Books.’¹³ whilst Hollander takes a very similar line when he discusses Smith’s ‘neglect’ of capital.¹⁴

Certainly, if we are seeking an explanation of profit in terms of a rudimentary theory of marginal productivity, we will be

Economic Concepts and Historical Dynamics disappointed, for Smith’s presentation does not contain the concept even in embryonic form. Further, he is quite explicit in denying that profit is a return for bearing risk, for, whilst holding that the profits of stock tend to rise with the degree of risk, he also claims that ^l... the ordinary profit of stock, though it rises with the risk, does not always seem to rise in proportion to it’ (WN, LX.b.34).

Clearly we are left here with the basic problem as to what determines the ‘ordinary’ profits of stock, that are then varied disproportionately with the degree of risk.

Koebner¹⁵ has suggested that Smith was lacking in an under­standing of the entrepreneurial spirit and its role in stimulating innovation, and thus under-estimated the role of risk in the formation of the return to capital. It is true that Smith does not regard the owner of stock as being particularly enterprising; his predominant characteristics are frugality, prudence and caution and these are traits that fit in badly with the more usual picture of aggressive business dynamics. What Koebner has missed, however, is the fact that the owner of stock has a much more passive role in Smith’s model. It is the advancing division of labour that creates the openings for the profitable employment of capital, and capital’s role does not extend beyond moving labour, the one creative and innovative factor, into the appropriate employment. The owner of stock must be shrewd enough to see an opportunity for the profitable employment of capital, but that is all.

Interestingly, Smith says rather more about what does not determine profit. For example, in Book I of the Wealth of Nations (in a passage that clearly displays the passive role of the entrepreneur), he writes:

The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular form of labour, the labour of inspection and direction. They are however altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship or the ingenuity of this supposed labour of inspec­tion and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. (BW, I.VI.6.)

Marx, interpreting this passage from his own perspective, was

to write

... the law of profit, that it is in proportion to the magnitude of the capital advanced — this prima facie contradicts the law of surplus value or of profit (since Adam Smith treats the two as identical) that it consists purely of the unpaid surplus labour of the workman. Adam Smith puts this down with quite naive thoughtlessness, without the faintest suspicion of the contradiction it presents.¹⁶

However, Marx is wrong here; given the implicit Smithian assumption of a more or less fixed ratio of capital to labour, there is no contradiction, even on a Marxist interpretation, for the ‘unpaid surplus labour’ will then be shared out pro rata to the quantity of capital employed by the entrepreneur. Only when the ‘organic composition’ of capital varies between trades or industries — a fact which Smith recognises at an empirical level, but excluded from his long-run theoretical dynamics — is there a problem in explaining how surplus value is allocated to each unit of capital.

In fact, once we put the ‘problem’ of profit into the context of Smith’s theoretical model, it ceases to be a problem at all. Seen from Smith’s perspective, labour is the one productive ‘factor’, and the way that labour is organised and sub-divided determines overall productivity. Capital is, therefore, treated as stored up labour that facilitates the employment of the productive factor. It is an essential coefficient in the transformation of labour into profit, but it does not have for Smith anything akin to a ‘marginal productivity’ of its own. It is for this reason that Smith always speaks of capital as ‘putting into motion’ a quantity of labour — that is, releasing the potential productivity inherent in the labour process.¹⁷

Given this perspective, his view that profit is a legitimate deduction from the produce of labour is quite consistent, and more importantly, we can see that the size of the return to capital is not of any real relevance to the overall dynamic process. All that is necessary is that there should be a ‘normal’, socially defined, rate of profit, and that the opening up of new areas of specialisation should offer a rate slightly above this, in order to attract new capital which will make the necessary transfer of labour. In the absence of monopoly, or other restrictive practices, competition will keep the normal rate of profit relatively low, and since entrepreneurs, like workers, suffer from risk-illusion, this rate will be perfectly adequate to induce them to employ their capital to the full. In fact, his treatment of capital is closely analogous to his treatment of wages, which, since they contain a progressively increasing, socially defined component, are fixed by reference to the social nexus, rather than in terms of any simple ‘economic’ mechanism. This, of course, is fully consistent with his underlying epistemological perspective. Given this interpretation, Smith’s ‘wages fund’ view of capital becomes much more cogent, as does his emphasis on circulating capital, from which the subsistence oflabour is drawn, and his corresponding neglect offixed capital.

Smith’s handling of interest follows a similar pattern, in that he treats it as socially defined, rather than trying to explain it in terms of abstinence. As Hollander says:

... interest was not regarded by Smith as a ‘necessary’ payment; in particular there is litde to suggest a conception of interest as a reward for abstinence from present consump­tion.¹⁸

Indeed, we find a statement within the Wealth of Nations to the effect that the disposition to save is, of itself, as powerful (if not more so) as the disposition to consume (WW, II.III.25 et seq).

It was this perspective that led Smith, despite his dislike of unnecessary state regulation, to advocate an upper limit for interest rates — a view that was to prompt Bentham to strong disagreement.¹⁹

It is also worthy of note that this treatment of capital as a merely passive agent in the transformation of labour into output, neatly avoids the problem which has caused much debate within the Neo-classical tradition, of how to find a unit which will simultaneously measure capital seen as physical goods, and also capital seen as a value to which income in the form of profit can accrue.²⁰

Spengler,²¹ seeing the lack of emphasis that Smith places upon fixed capital, has suggested that it was this that led him to under­estimate the role of innovation in developing the productive forces of an economy. Since innovation tends to be embodied in fixed, rather than circulating capital, Smith’s emphasis on the latter prevented him from seeing its importance. In similar vein, Mitchell²² has claimed that Smith’s apparent neglect ofinnovation as being embodied in fixed capital was due to his own historical situation. Living in a ‘pre-factory’ age, he naturally tended to under-estimate the role of engineering technology.

This, however, does not square with the facts. One could argue at considerable length about the appropriate dates to use when defining the industrial revolution,²³ but it is beyond dispute that it was clearly in evidence by 1776 when the Wealth of Nations was published. Indeed, the period 1760 to 1776 had seen major techno­logical innovations introduced by men like Watt, Hargreaves, Arkwright and Brindley.²⁴ Further, the curious link between non­conformism and industrial innovation had resulted in much of this work being done in, and around, the Scottish universities. For instance, much of the development of the steam engine took place at Glasgow University in the mid-1760s,²⁵ where James Watt was working with university members like Joseph Black and, by 1774, Watt had entered into his world-famous partnership with Matthew Boulton. Given this background,²⁶ is it probable that Smith was unaware of the role of technological innovation in the progress of the division of labour?²⁷

Such evidence is, of course, largely biographical but there is also textual support for the argument, for, as even a casual reading of the Wealth of Nations will confirm, he makes frequent reference to the topic; what he does not do is link it explicidy to the formation of fixed capital. Again, however, the application of the present interpretation dissolves the problem for, seen in terms of Smith’s division of labour model, innovation is not embodied in capital but in the productive factor, labour. Innovation is a function of human knowledge, not of the machinery which that knowledge creates. This is one reason why Smith sees machinery as becoming simpler as it develops; increasing knowledge can render a machine more fit for its purpose by improving the economy of its design (Chapter 5). Put more abstractly, in the dialectical interaction between man and nature, it is human rationality that evolves, and the improvements to machinery are merely reflections of that evolution. This is surely why Smith nearly always discusses inno­vation in terms of what people know, rather than what machines can do. For example, writing on improvements in dyeing tech­niques, he speaks of: ‘A dyer who has found the means of producing colour with materials which cost only half the price of those commonly made use of...’

Here:

His extraordinary gains arise from the high price which is paid for his productive labour. They properly consist of the high wages of that labour. But as they are repeated upon every part of his stock, and as the whole amount bears, upon that account, a regular proportion to it, they are commonly considered as extraordinary profits of stock. ( B^zjV, I.VII.22.

Marian Bowley has noted this tendency to discuss innovation as being embodied in labour, rather than capital, but has inter­preted this as evidence of confusion on Smith’s part, and criticised

... his continuation of writing in terms of changes in the productivity of labour when he really meant the productivity of labour and capital combined [but this] was however, a natural consequence of his approaching the theory of capital via the division of labour.²⁸

However, she is here tending to view Smith’s approach from the standpoint of standard economics, and thus, whilst, in my view, correctly identifying his position, she sees it as ‘confused’ rather than as being a logical entailment of his dynamic model.

A further aspect of Smith’s treatment of innovation is that its development is linked to the division of labour (see Chapter 5), for as specialisation increases, attention can be given to each aspect of manufacture. This is true of each factory, but also:

What takes place among the labourers in a particular workforce, takes place, for the same reason, among those of a great society. The greater the number, the more they naturally divide themselves into different classes and subdivisions of employment. More heads are occupied in inventing the most proper machinery for executing the work of each, and it is, therefore, more likely to be invented. (B^zjV, I.VIII.57. See also I.I.8.)

In short, innovation is yet another example of the dialectical interaction between the division of labour, and purposive human activity, in that, as the division of labour proceeds, innovation increases and this in turn drives forward the further division of labour. Indeed, once specialisation has progressed far enough, innovation can itself become a separate trade, with all that this implies for productivity.

There are interesting parallels with Schumpeter here, for he too sees innovation as being in ‘dialectical’ interaction with the level of economic development,²⁹ and suggests that the progress of this interaction will bring about a qualitative change in the economic organisation of society. True there is a difference of emphasis, in that Schumpeter tends to treat innovation as the dynamic force, whilst Smith lays most stress on the level of specialisation attained, but there are substantial formal similari­ties between the two models. The crucial difference is, of course, to be found in their respective treatments of monopoly, with Schumpeter seeing its formation as a precondition of the process of ‘creative destruction’, whilst Smith in general regards it as a distortion which will impede the process of innovation. In fact, even here, Smith on occasion departs from his usual condemnation of monopoly, to concede that it may be of value under certain circumstances. Such departures are rare, but they are perhaps worthy of illustration; a passage from Wealth of Nations (V.I.e.30) will suffice. Here Smith says:

When a company of merchants undertake, at their own risk and expense, to establish a new trade with some remote and barbarous nation, it may not be unreasonable to incorporate them into a joint stock company, and to grant them, in case of their success, a monopoly of the trade for a certain number of years.

and

A temporary monopoly of this kind may be vindicated upon the same principles upon which a like monopoly of a new machine is granted to the inventor, and that of a new book to its author. (Ibid.)

Such passages, however, are merely incidental qualifications to Smith’s general approach to both innovation and monopoly.

A further example of the institutional content picked up by the special theory version of the division of labour concept, is to be found in Smith’s handling of ‘tastes’ at this level. For the first time, he draws an explicit distinction between different classes in society; between the ‘lower orders’ and the ‘higher ranks’. As we saw in Chapter 6 the sympathy mechanism tends to create two distinct groups in society, with different moral codes, and, more importantly for the present purpose, different scales of value and consumption patterns. It is here that the subjective/objective dichotomy really comes into its own, for there is a clear supposition that the utility functions of the lower orders are close to the objective scale, whilst the higher ranks are much more affected by the various illusions. Further, to the extent that the rich do achieve the expected utility from a particular commodity or service, much of it is in the form of ‘attention’, of ‘approbation’, which appeal to the vanity of the consumer.

Why, asks Smith

... should those who have been educated in the higher ranks of life, regard it as worse than death, to be reduced to be, even without labour, upon the same simple fare with [the labourer]... to dwell under the same lowly roof, and to be clothed in the same humble attire? Do they imagine that their stomach is better, or that they sleep sounder in a palace than in a cottage? (TMS, I.iii.2.1.)

Smith thinks otherwise — it is the admiration of the world that the rich man seeks, and obtains, and ‘... at the thought of this...’ says Smith, rather poetically ‘... his heart seems to swell and dilate itself within him, and he is fonder of his wealth, upon this account, than for all the other advantages that it affords him.’ (Ibid.)

In as far as the lower ranks share in this somewhat ephemeral scale of values, it is in that they provide the necessary admiration, and look with longing at the possessions of the rich. Here, however, there is again a strong element of illusion, for they regard the consumption patterns of the wealthy as providing much more utility than is in fact the case:

When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it, it seems to be almost the abstract idea of a perfect and happy state. (TMS, I.iii.2.2.)

In reality of course, it is nothing of the sort, and excepting the gratification of the vanity by ‘conspicuous consumption’, much of the apparent utility proves to be illusion once the goods are obtained. This delusion is necessary ‘... both to establish and to maintain the distinction of ranks and the order of society’ {TMS, I.iii.3)... and is in fact a clear example of the ‘deception theory’ at work; the illusion maintains social stability thus permitting the long-run evolution of society to stay somewhere near its optimum path. Short-run delusion results in long-run optimisation.

Despite this disposition on the part of the lower orders to over­estimate the condition of the rich, and despite the risk-illusions to which they are prone, Smith clearly believes that they are a great deal closer to the objective scale of values than are the higher orders. The position is, however, somewhat complicated by the fact that, in the standard case of an ‘advancing’ state of society (where the division of labour is increasing faster than population growth) working-class living standards will rise (WN, I.VIII.22) as the socially determined component of the basic wage increases. Smith goes to considerable length in both the Lectures and the Wealth of Nations, to show that in such a society, wages will be well above bare subsistence (see for example, WN, I.VIII.27 et seq.), and is also explicit in showing how improved living standards will ‘filter down’ from the rich to the poor.

The subjective/objective dichotomy is very clear in Smith’s presentation of this topic so that, for example, clothing and furniture bought by the wealthy for the purpose of conspicuous consumption so as to gratify their vanity, are purchased secondhand by the poor, when they have lost their novelty, even though they are still serviceable and can, therefore, satisfy the needs of the labourer. Smith clearly believes that the ‘objective’ definition of ‘subsistence’ changes as society advances. This is quite explicit in Wealth of Nations, Book V, where, in his treatment of taxation, he writes:

By necessities I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the customs of the country renders it indecent for creditable people, even of the lowest orders, to be without. (WN, V.II.k.3.)

and he goes on to illustrate by reference to linen shirts and leather shoes. This increase in living standards, together with the population increase that it helps to stimulate, will ensure that effective demand tends to keep pace with the increased output generated by specialisation, the discrepancy implicit in the dynamic nature of the model being made up by the conspicuous consumption of the rich. Given such an assumption, it is not surprising that Smith virtually ignores the possibility of cyclic und er-consumption.

Indeed, this optimal utilisation of resources is not even disturbed by the long-run secular decline in the rate of profit, for whilst Smith holds that as capital accumulates its average return will decrease, he does not see any problem with capital investment. In fact, it is difficult to see why he believes that the rate of profit will decline. Since his model implies that new openings for investment will constantly occur, one might well assume that the long-run rate of profit would stay constant. Smith is notoriously vague on this point, seeming to imply on occasions that the increase in real wages will ‘eat up’ the profits of stock, whilst on other occasions it is competition by the owners of stock in commodity markets that pushes down profits.³⁰

Although it is true that a secular decline in profit is fully consistent with his dynamic model, it is certainly not a necessary implication of it, so that it is not easy to see why Smith was insistent on this point. The difficulty is in fact compounded in that he frequently speaks of total profit increasing as the division of labour proceeds. Again, it is not that there is any fundamental inconsistency — a declining rate of profit could occur even though total profits were increasing — it is rather that his treatment seems somewhat arbitrary in the context of his overall model. It is, of course, possible that this aspect of Smith’s work is ‘merely’ empirical, in that it is not an implication of the model which he uses to depict society, but rather an observation that is consistent with it. If we accept the interpretation of Smith’s epistemological position (presented in Chapter 3), and also that it applies to his own work, then he is doing ‘real’ empirical history within the perspective of a particular world-view. That is to say, his ‘system’, like any other, is a taxonomic framework within which empirical observation is interpreted and rendered coherent, not a substitute for such observation.

Returning to the theme of the subjective/objective dichotomy, the application of the present interpretation to the Wealth ofNations would seem to reveal a fascinating (although unsuccessful) attempt to construct a numeraire upon which the objective scale of values can be based. We can begin to ‘reconstruct’ this attempt by recalling that, for Smith, labour, which is productive of all value, has a more or less constant disutility. However, because of the deductions made from its product by rent and profit, and because of the socially defined component in the subsistence wage (not to mention the possibility of market distortions), labour embodied, although the theoretical determinant of value, is not acceptable as a practical numeraire. It is possible that Smith was very well aware of this, and, therefore, attempted to use com as the numeraire upon which an objective scale of values could be constructed. This seems in fact to be quite explicit in the following passage:

The nature of things has stamped upon a corn a real value which cannot be altered by merely altering its money price... Through the world in general that value is equal to the quantity of labour which it can maintain in the way, whether liberal, moderate or scanty, in which labour is commonly maintained in that place. Woollen or linen cloth are not the regulating commodities by which the real value of all other commodities must be finally measured and determined. Corn is. The real value of every other commodity is finally measured and determined by the proportion which its average money price bears to the average money price of corn. (WN, IV.V.a.23)

add to this his view that

... equal quantities of corn will, in every state of society, in every stage of improvement, more nearly represent, or be equivalent to, equal quantities of labour, than equal quan­tities of any other part of the rude produce of the land. (HW, I.XI.e.28)

and we have our numeraire.

The transformation of labour into corn requires (more or less) constant inputs of labour (of equal disutility) per unit of output, and this is reflected in its ‘real’ value, independent of money prices, and automatically adjusted to allow for the socially determined margin between bare subsistence and the actual standard of living enjoyed. Given that capital and land are only passive agents in this transformation we can assume away the problem of profit and rent by postulating a ‘normal’ rate for each, and this together with the assumption of a fixed labour/capital ratio avoids most of the problems inherent in expressing ‘real’ commodity values in terms of corn equivalents. Corn can thus be used as a basis for the objective comparison of values, and is a real numeraire, independent of money prices.

If this was indeed Smith’s objective, it explains why he spent so much time in the Wealth of Nations discussing the production and exchange of corn, and it also explains the otherwise rather odd ‘digression concerning the variations in the value of silver’ which occupies 67 pages of Book I. Upon close examination, it turns out to be nothing less than an attempt to establish the objectivity of the corn measure, and to provide a theoretical explanation of the corn-silver exchange rate, thus linking his numeraire to money prices.

It goes without saying that this whole edifice is fundamentally unsound; quite apart from the fact that the long-run price of corn in terms of labour embodied does vary considerably with agri­cultural improvement, the existence of different capital/labour ratios, and different degrees of‘roundaboutness’ in the productive process are fatal to any attempt to construct such a numeraire, at anything other than the most abstract theoretical level.

As Ricardo was to put it:

Adam Smith, who so accurately defined the original source of exchangeable value, and who was bound in consistency to maintain, that all things became more or less valuable in proportion as more or less labour was bestowed upon their production, has himself erected another standard of value...³¹

This of course being corn, but

....after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of deter­mining the value of other things [he] has himself, by fixing upon corn or labour, chosen a medium no less variable. (Ibid., p. 58.)

Smith himself was apparently uneasy about the adequacy of his numeraire, for he makes numerous attempts to shore it up, most of which have a distinct tinge of ‘ad hoceιy^, about them. For example, when discussing the tendency of raw materials to get dearer as the pressure of population increases their relative scarcity, he makes the following qualification:

If we except corn and such other vegetables as are raised altogether by human industry... all other sorts of rude produce, cattle, poultry, game of all kinds, the useful fossils and minerals of the earth etc., naturally grow dearer as society advances... (Π^zA, I.XI.i.3.)

Fortunately, however, the failure of his numeraire does not detract a great deal from the overall adequacy of his model. The division of labour interaction provides a theoretical explanation of qualitative social evolution, and does so adequately at both the general level of the ‘four stages’, and at the special theory level of the market economy. It is true that the implicit postulation of a long-run objective scale of values is, in the absence ofa definition of such a scale, less than satisfactory. Smith is left in the ultimate analysis with only his own scale of values against which to measure the degree of ‘subjective’ illusion. His best defence of its objectivity would thus be to claim that the dispassionate analysis of a social scientist can best reveal the pattern of a long-run scale of values; a position which he seems on occasion to take.

This chapter has not attempted to provide a comprehensive discussion of Smith’s economics. Its purpose has been the much more limited one of showing that the somewhat abstract recon­struction of Smith’s methodology presented in the early chapters can be ‘brought down to earth’ and used to illustrate the workings of some of his more concrete economic concepts.

In doing so, it has been a central objective to show that there are fundamental differences between the meanings and functions of Smith’s economic categories and those of contemporary theory. Because terms such as ‘labour’ or ‘capital’ are common to both Smith’s world-view and our own, it is easy to make the false assumption that they mean much the same thing to us, as they did to him. Any interpretation of Smith which proceeds from such an assumption runs serious risks of an anachronistic ‘reading backwards’ of meaning, and thus of significant misinterpretation.

The main conclusion of this chapter is that Smith’s economic concepts function only in the context of his dynamic perspective, and their meaning is only comprehensible if interpreted within that framework. This is another way of saying that his use of economic concepts is fully consistent with his epistemology, in that their meaning is contextually defined. They cannot stand in isolation from his dynamic scientific world-view, and cannot be interpreted from the perspective of a different world-view without serious loss of richness, and distortion of meaning. An obvious example of such systematic misreading is to be found in the mainstream of Marxist interpretation, which tends to analyse Smithian concepts, in the context of Marxian dynamics, finding in the process both confusion and ‘bourgeois’ apologia.

If we are seeking to understand the meanings that Smith’s concepts had for Smith, as opposed to seeking anticipations of meanings implicit in later scientific perspectives, then we can only recover such meanings by locating his concepts in the context of the world-view which generated them.

Notes

1. It is worth noting here that the 1762-63 student’s notes of Smith lectures on jurisprudence, which are much fuller than those dated 1766, also reveal the dynamics of his model much more clearly. The 1762-63 notes were not discovered until 1958, and were not generally available until first published in 1978, so they have yet to be fully assimilated into the mainstream of Smithian scholarship. Since their stress on historical dynamics has direct relevance to the present study, considerable use has been made of them in this chapter. We should, however, keep in mind the point made by Donald Winch, which is that the subject of both sets of lecture notes is law and government, not the four stages theory. D. Winch, Adam Smith’s Politics (Cambridge University Press, Cambridge, 1978), p. 57.

2. Cf. WN, I.VI.1 for the famous deer and beaver example. Note that Smith qualifies this (at WN, I.VI.2) to allow for the severity of labour; in other words, he is working with ‘standard labour-hours^,.

3. The actual exchange value will be proportional to the standard man-hours embodied in the production of the goods, but a precondition of any exchange taking place will be an adequate subjective valuation of the goods in question — to expand Smith’s example, if the subjective appraisal of 2 deer was less than that of 1 beaver then (given the labour embodied equivalence and assuming that the marginal cost of catching beaver remains unchanged with an increased cull) deer would not be caught at all.

4. N. Rosenberg, ‘Adam Smith — consumer tastes and economic growth’, Journal of Political Economy (1968), p. 372.

5. See LJ∙. 1766, p. 287, for an illustration of this process which well displays the implicit dialectical tension: ‘... till some stock be produced there can be no division of labour, and before a division of labour takes place there can be very little accumulation of stock.’

6. There is of course more to it than this, for what we have here is not just the emergence of a new ‘trade’ but also of a new ‘class’, and of a new class-income in the shape of profit. Despite some partial anticipations, Smith is the first to see this clearly.

7. Cf. C. Napoleoni, Smith, Ricardo, Marx (Wiley, London, 1975) for a good discussion of Smith’s distinction between productive and unproductive labour. To be productive, says Napoleoni, labour must produce a value over and above the cost of subsistence (p. 40 et seq.). However, this should perhaps be qualified by adding that ‘subsistence’ is a dynamic concept and as such is, in part, socially determined.

8. Smith of course sees that dwelling houses may yield a rent to the owner, but he regards this as being derivative from some other source of revenue, so that ‘... the revenue of the whole body of the people can never be in the smallest degree increased by it’ (WW, II.1.12.)

9. S. Hollander, The Economics of Adam Smith (Heinemann, London, 1973).

10. For example, he says: ‘Whatever obstructs the free circulation of labour from one employment to another, obstructs that of stock likewise; the quantity of stock which can be employed in any branch of business depending very much upon that of the labour which can be employed in it.’ (JWV, I.X.c.44.)

11. It is this same perspective that prompts Smith to assume away the possibility of idle capital: ‘A man must be perfectly crazy who, where there is tolerable security does not employ all the stock which he commands’. (WW, II.1.30.)

12. Letter, 25 September 1776, Richmond. (Correspondence, edited Mossner and Ross, op cit, Letter No. 338). Interestingly Pownall clearly recognised the dialectical nature of Smith’s division of labour model, for he speaks of his work as analysing ^,... those laws of motion, which are the source of, and give direction to, the labour of man in the individual; which form that reciprocation of wants and interconnection of mutual supply that becomes the creating cause of community, which give energy, motion, and that organised form to the compound labour and operations of that community, which is government...’

13. J.A. Schumpeter, History of Economic Analysis (Allen & Unwin, London, 1954), p. 190.

14. S. Hollander, The Economics of Adam Smith (Heinemann, London, 1973), p. 196 et seq.

15. R. Koebner, ‘Adam Smith and the industrial revolution’, Economic History Review (1959).

16. K. Marx, Theories of Surplus Value (Lawrence & Wishart, London, 1971), p. 92.

17. See for example, WN, I.IX.10: ‘It is the stock that is employed for the sake of profit, which puts into motion the greater part of the useful labour of every society. The plans and projects of the employers of stock regulate and direct all the most important operations of labour...’

18. S. Hollander, The Economics of Adam Smith (Heinemann, London, 1973), p. 168-9.

19. See Correspondence, edited Mossner and Ross, op cit, intro, p. 7.

20. Cf. J. Robinson, ‘The production function and the theory of capital’, in his Collected Economic Papers (Blackwell, London, 1965) and also K.R. Bharadwaj, ‘Value through exogenous distribution’, reprinted in Harcourt and Laing (eds), (1971) op cit.

21. J.J. Spengler, ‘Adam Smith’s theory of economic growth’, Southern Economic foumal (1959).

22. W.C. Mitchell, Types of Economic Theory (2 vols., Norton, New York, N.Y., 1967), vol. 1.

23. There is a considerable literature on this topic. See for example, P. Mantoux, The Industrial Revolution (Routledge & Kegan Paul, London, 1961) and T.S. Ashton, The Industrial Revolution (1760-1830) (Oxford University Press, Oxford, 1968).

24. Cf. D.C. Coleman, ‘Technology and Economic History’, Economic History Review (1959).

25. Cf. H.W. Dickinson and R. Jenkins, James Watt and the Steam Engine (Kegan Paul, London, 1927).

26. As further evidence, one has only to look at the statistics for agricultural enclosure, to see how rapidly the old feudal structures were breaking down. In the ten years from 1740 there were 38 major acts of enclosure, from 1750 to 1760 there were 156, whilst from 1760 to 1770 there were 480. Cf. T.S. Ashton, The Industrial Revolution (1760-1830), (Oxford University Press, Oxford, 1968).

27. Indeed his knowledge in this field was such that in 1782 he was adviser to the Earl of Dundonald who built a factory at Culross to produce coal by-products.

28. M. Bowley, ‘Some Aspects ofthe Treatment ofCapital in the Wealth of Nations’, in Essays on Adam Smith, edited A.S. Skinner and T. Wilson (Clarendon Press, Oxford, 1976).

29. J. Schumpeter, Capitalism, Socialism and Democracy (Allen & Unwin, London, 1954). Schumpeter describes his own perspective very clearly when he says of Marx: ‘Through all that is faulty or even unscientific in his analysis runs a fundamental idea that is neither — the idea of a theory, not merely of an indefinite number of disjointed individual patterns or of the logic of economic quantities in general, but of the actual sequence of those patterns or of the economic process as it goes on, under its own steam, in historic time producing at every instant that state which will of itself determine the next one.’ (p. 43.)

30. Hollander correctly points out that: ‘While rising wages are a probable concomitant of the process of expansion they do not represent a necessary condition for the decline in profits.’ S. Hollander, Die Economics of Adam Smith (Heinemann, London, 1973), p. 182. Indeed as we have seen, Smith’s formal model implies that rising real wages are provided by increased productivity.

31. D. Ricardo, Principles of Political Economy and Taxation (Penguin, Harmondsworth, 1971), p. 57.