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Notes on Economic History (7)

Wealth of Nations

Since England was the first country in which modern large-scale industry developed, it was only to be expected that capitalist political economy would appear and flourish here. The introduction of spinning machinery (Wyatt 1783, Lewis Paul 1741, Arkwright 1769); the steam engine (Watt 1765 and 1770); and later of the power loom (Cartwright 1785, Jacquard 1802); and similar transformations in the methods of industrial production, indicated changes that led to an enormously accelerated growth of large scale industry.

Adam Smith was the man, who, under these conditions, established a new system of economic doctrine. Smith spent three years in France, where he became known personally to the Physiocrats, and was greatly influenced by them. For ten years after his return from France, he devoted himself to economic study and to writing his book Inquiry into the Nature and Causes of the Wealth of Nations published in 1776.

Adam Smith defines the wealth of a nation in the opening of his inquiry.

    "The annual labour of every nation is the fund which originally supplies it with all the necessities and conveniences of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations."

To this he makes an important reservation. Labour which is not devoted to the production of useful things, which have an exchange value is to Smith unproductive. Thus, services of all kinds are unproductive. The wealth of a nation is greater accordingly as a larger proportion of its inhabitants are engaged in useful labour. This in turn depends upon the amount of capital devoted to the employment of workers (the wage fund), but above all, upon the productiveness of labour.

According to Smith the productiveness of labour is increased mainly by the division of labour. Consequently, the division of labour is the chief cause of prosperity. He illustrates this thesis by the many processes required for the manufacture of such a simple thing as a pin. The further the division of labour is carried, the more is production carried on with a view to marketing.

Now for the purpose of the market there must develop an acceptable means of exchange, or instrument of trade—in other words, money. Money, as explained by Smith, arises out of indirect exchange. Commodities are exchanged in the market by means of money as the medium of exchange, and thus originates an exchange-value or price of goods, as distinct from their use-value. We see, then, that the division of labour is the starting point of the economic process and its development; it is the cause of the exchange of goods, for no one can live upon the product of his own activity. But exchange is effected in accordance with exchange-value (price) and the exchange value is therefore decisive (a) for the distribution of the goods, since it settles the question who can buy them; and (b) for their production inasmuch as this is guided by the expectation of the price to be realised.

Upon this premise Adam Smith builds up his economic system, and so do all the capitalist schools that follow him. The laws that regulate the formation of exchange-value are held to be also laws in accordance with which the wealth of nations comes into being; they are, according to Smith, the primary laws of economic motion.

By formulating this conception of the nature of political economy, Smith made an important step forward in capitalist theory. He gave a new turn to economic thought. Whereas both the Mercantilists and the Physiocrats had made productive circulation the basis of their reasoning, now for the first time a study of the laws of exchange-value was undertaken. Thenceforward the theory of value and the theory of prices became the basis of economic theory in general. For since prices are the determinants of the production of goods, the law of prices decides what goods shall be produced; and since prices decide which would-be purchaser has sufficient purchasing power, the laws of prices are also the laws of distribution. In a word, the laws of price are also the laws of distribution. As a result, therefore, the theory of distribution is developed as a theory of particular prices (wages, rent, etc).

Bob Ambridge