THE DEFINITIONAL BASIS OF THE WEALTH OF NATIONS
The central focus of Smith's analysis was stated clearly in the full title of his work - An Inquiry into the Nature and Causes of the Wealth of Nations. Put in more modern terms, he was concerned with developing a theory of economic growth.
Smith announced his major explanation for economic growth in the early pages of his work with a phrase that has since become the stock-in-trade of economists - 'the division of labour'. This expression has a deceptive simplicity. Smith employed it in two quite distinct senses. The first referred to the specialization of the labour force accompanying economic advance that brought with it the 'greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied....'8 The full benefits of the progressive sub-division of tasks were available, however, only to a society in which production for exchange could take place. The capacity of a subsistence economy to generate these output-raising innovations and adaptations was severely restricted. From these considerations it followed that the division of labour was limited by the 'extent of the market'9 and that measures widening the market - whether geographically (e.g. through improvements in transport and communication) or economically (e.g. through the removal of restraints on trade) - were in the general interest.
Smith's interpretation of 'the division of labour' was not confined to job specialization. It also referred to the division of the labour force between those 'employed in useful labour...
and those not so employed'.IO The 'division of labour' in this second sense - which referred to the allocation of the labour force between various lines of employment - played an important role in his analysis of capital accumulation and of the 'progress of improvement' (as Smith was often to describe economic growth).
The distinction he had in mind is one which modern readers are likely to find perplexing. Nowadays economists are reluctant to stand in judgement over particular types of jobs, declaring some to be 'productive' and others to be 'unproductive'. They prefer to follow the market's guidelines by regarding labour as productively employed whenever there is a buyer for its services; in short, the gainfully employed population is by definition productive.Smith, on the other hand, was prepared to divide the working population into two distinct categories. The basis for this segregation can only be understood in relation to his preoccupation with the process of economic expansion over a prolonged period of time. From such a perspective it can be argued - though it is by no means as self-evident as Smith appeared to believe - that differing allocations of the labour force have quite different implications for economic expansion. As he viewed the matter, workers engaged in certain occupations were more likely to promote the advancement of output in the future than those employed in others. He developed the point by asserting that the 'productive' employments must meet two tests: (1) that they led to the production of tangible objects, a condition prerequisite to accumulation; and (2) that they gave rise to a 'surplus' that could be made available for future re-investment. For most practical purposes he equated the 'productive' employments with those in which labour worked with capital.
In Smith's scheme of things the line dividing 'productive' from 'unproductive' employments was not regarded as a value judgement but as an analytical distinction of fundamental importance to the study of long-period economic change. He was, in effect, giving a fresh twist to the distinction used by the Physiocrats before him who had maintained that agriculture was the only 'productive' (or surplus-generating) economic activity. It is worth noting that some modern economists, despite an uneasiness when doing so, have adopted a similar practice when examining the problems of underdeveloped economies.
They often describe part of the working population in these areas (most particularly persons engaged in traditional agriculture, but often also in certain services) as 'disguisedly unemployed' - i.e., though working, they make no contribution to the social product.The implications of Smith's definition of 'productive' also found their way into his interpretation of the national product. Concerned as he was with analysing the changes in an economy's output over extended time periods, he was obliged to operate with a concept that could serve the function now performed by calculations of the national income. In fact, Smith's usage of the term 'wealth' can, with one important qualification, be translated into modern terminology as 'national income'. The point at which Smith and today's national income accountants in Western countries part company turns on the definition of 'productive' activity. In Smith's view, only the outputs of the productive employments of labour should count in calculations of the social product. Virtually all 'service' activities were excluded, on the grounds that they failed to yield either tangible products or reinvestable surpluses.11 This definition also reinforced Smith's general attitude towards a wide range of policy issues. It
followed that all activities of governments were unproductive as well as:
... some both of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, opera-dancers, etc. 12
Smith would not deny these groups an income for services rendered. He merely wished to insist that their efforts did not help to make society richer tomorrow.
It would be tempting to dismiss this scheme of classification as nothing more than an expression of a misguided 'materialist' bias. This view, however, was not unique to Smith. All of the major figures of classicism worked with a similar notion. In the modern world it survives in Soviet bloc countries, where it influences the preparation of national income statistics - a phenomenon bearing witness to the classical mould of much of Marxian thought.
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