Skip to Content

Notes on Economic History (9)

What is Economic Life?

Adam Smith's ideas on the development of economic life led him to make a clean sweep of all feudal ties and servitudes. The abolition of serfdom, the introduction of freedom of occupation and industry, freedom of movement, political autonomy; these were the inevitable corollaries of the new doctrine.

A demand heavy with consequences, the demand for free trade, formed a logical and essential part of the demand for the abolition of all restrictions upon production and distribution. Smith's theory of free trade was as follows:—

    "If trade be freed from all restraints, through the working of competition, it will come to pass in the long run that every country will produce those commodities which its natural facilities enable it to produce most cheaply. Thus there will arise a natural international division of labour, which will rebound to the maximum benefit of each nations, for each will be able to buy all it wants in the world market at the lowest possible prices: while selling there to the greatest advantage those things which it is exceptionally fitted to produce. It is the maxim of every prudent master of a family never to make at home what it will cost him more to make than to buy." (Wealth of Nations.)

In regard to the applying of these free trade principles, Smith was prepared to compromise. He agreed to the need of excise duties as a source of revenue, as also to the expediency of retaliatory duties imposed upon imports from countries whose policy was protectionist, and for duties for special purposes, for instance where an industry was judged to be essential for the safety of a country and was in need of protection. Smith, not being the dogmatist, as those who subsequently opposed his doctrines declared, was very cautious in practical matters.

Much of present day opinion of Smith's views is based upon the modifications his teachings underwent at the hands of Ricardo, and later still in the eighteen-thirties by the Manchester School of Free-traders. It is necessary to point out that Smith was not hostile to the landowning class. On the contrary, he considered that the interest of those who lived by rent was "strictly and inseparably connected with the general interest of Society" for their income increased proportionately to an increase in the general welfare.

Of the capitalist class he wrote that its interest had not the same connection with the general interest of Society as that of the landowners and wage-earners. For, he said, the rate of does not, like rent and wages, rise and fall with the booms and slumps that affect society. On the contrary, it is low in times of boom, and high in times of slump. Smith says it is always highest in countries that are going to ruin. To him, the interest of the second order, that of those who live by wages, is as strictly connected with the interest of the society as that of the landowning class. He advocated high wages and freedom of combination, but he deprecated State interference in wage contracts.

Smith's teaching brought about an entirely different way of looking at political economy. It did this, first of all, by showing investigators that the source of wealth is not a simple matter. He regarded labour as the primary source of wealth, but the conditions under which labour had to operate were of vital importance, and especially the increase of productiveness by the division of labour. Smith regarded everything from the outlook of exchange in the market, he conceived of economic phenomena as centering in exchange in the processes of "trade", and his explanation of the motive force of economics was derived from this conception.

Smith's chief contribution to economic doctrines was his neatly rounded and bold notion that economic life was a series of processes of exchange linked to each other. Herein lay such originality as he possessed. He finalised the Physiocratic idea of the natural order, that is the harmonious encounter of numberless individual self-seeking economic activities. In his doctrine, exchange, the trading intercourse of separate economic agents, became the central manifestation of economic life. His system was not a theory of production, but a theory of price and value which he considered determined production just as much as distribution.

Like all economists worth considering, Smith endorsed the Physiocratic concept of the average wage, termed by him the natural price of labour: "a man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more: otherwise it would be impossible for him to bring up a family and the race of such workmen could not last beyond the first generation". The fact that the development of the productive powers of labour brought no benefit to the worker is stressed by Adam Smith. Smith notes that the productive power of labour underwent no really important development until labour was transformed into wage labour, and until the means of production had taken the form of private ownership, either of land or of capital. Thus, labour's productive powers did not begin to develop until the worker was no longer able to take for himself the results of development.

Bob Ambridge