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The Preindustrial Economics of Adam Smith

Published online by Cambridge University Press:  03 March 2009

Hiram Caton
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Abstract

The Wealth of Nations does not recognize the fact of industrial production, and its analysis of price does not account for the fundamental feature of industrial markets, falling price per output unit based on exponential growth obtained by technological applications. Smith's laissez-faire doctrine contains distinctive value postulates intended to promulgate an egalitarian agrarian capitalism in the spirit of physiocracy. Criticisms of Smith by Alexander Hamilton, J.-B. Say, Andrew Ure, and Friedrich List are instanced to support the present interpretation.

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Articles
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The Journal of Economic History , Volume 45 , Issue 4 , December 1985 , pp. 833 - 853
Copyright
Copyright © The Economic History Association 1985

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References

1 Kindleberger, C. P., “The Historical Background: Adam Smith and the Industrial Revolution,” in Skinner, A. S. and Wilson, Thomas, eds., The Market and the State (Oxford, 1975), p. 1.Google Scholar

2 I have in mind the studies of Clarence Ayers (The Theory of Economic Progress), E. F. Denison (The Sources of Economic Growth), E. E. Hagen (On the Theory of Social Change: How Economic Growth Begins), S. A. Hetzler (Technological Growth and Social Change), W. E. G. Salter (Productivity and Social Change), Simon Kuznets (Six Lectures on Economic Growth), Jacob Schmookler (Invention and Economic Growth), John Jewkes (The Sources of Invention), David Landes (The Unbound Prometheus), Nathan Rosenberg (Inside the Black Box: Technology and Economics),Google Scholar and the writings of W. W. Rostow. Most of this literature is reviewed by Musson, A. E. in his introduction to an edited volume, Science, Technology and Economic Growth in the Eighteenth Century (London, 1972).Google Scholar

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5 Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chapter v, para. 13–21.Google Scholar I cite the Campbell, and Skinner, edition of Wealth (Oxford, 1976). In the Lectures of 1763, Smith estimated the agricultural revenue of Great Britain to be £72 million, of a gross revenue of £100 million. In The Wealth of Nations, this estimate is reduced to £60 million, although the gross is not stated. Hollander suggested that Smith had revised his estimate of the agricultural product to about 50 percent of the total.Google Scholar See Hollander, Samuel, The Economics of Adam Smith (Toronto, 1973), pp. 96f.Google Scholar

6 Wealth II.v.12. Similarly, “The land constitutes by far the greatest, the most important, and the most durable part of the wealth of every extensive country” (Wealth I.xi.n.9).Google Scholar

7 Wealth II.v.1–20; III.1.3–80. The rank order of productivity also established “the three great, original and consistituent orders of every civilized society” (Wealth I.xi.p.7). The absence of mention of government personnel, clergy, and service industries is striking.Google Scholar The primacy of agriculture and order of productivity of sectors is noted by Spengler, Joseph J., “Adam Smith's Theory of Economic Growth-Part II,” Southern Economic Journal, 26 (1959), pp. 1f.CrossRefGoogle Scholar It is not noted in Eltis's, W. A. “Adam Smith's Theory of Economic Growth,” in Essays on Adam Smith, edited by Skinner, A. S. and Wilson, Thomas (Oxford, 1975), pp. 426–54.Google Scholar That the Wealth of Nations contains no recognition of the industrial revolution is unequivocally asserted by Koebner, R. in “Adam Smith and the Industrial Revolution,” Economic History Review, 11 (1959), pp. 381–91.CrossRefGoogle Scholar

8 Wealth II.v.22.Google Scholar

9 Wealth II.v.22;III. iv.19. In colonies, the circumstance of mature economies, high rent and low wages, is reversed (IV.vii.b.2.).Google Scholar

10 Wealth I.x.b; III.i.3,8; IV.vii.c.81–90; V.i.e. Smith's most succinct statement of this development was “that through the greater part of Europe the commerce and manufacture of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country. This order, however, being contrary to the natural course of things, is necessarily both slow and uncertain. Compare the slow progress of those European countries of which the wealth depends very much upon their commerce and manufactures, with the rapid advances of our North American colonies, of which the wealth is founded in agriculture” (Wealth III.iv. 18–19). Elsewhere Smith styles this development “unnatural and retrograde” (III. i.9).Google Scholar

11 Wealth IV. IV.vii.c.80; IV.i.c.33–34.Google Scholar

12 Wealth IV.ix.25–27; IV.ix.48–51.Google Scholar

13 Wealth V. viii.92. IV.ix.25–26; IV.vii. c. 15–46. The latter passage contains Smith's main argument for the inferior capitalization rates in foreign trade to capitalization in agriculture. Jeremy Bentham turned Smith's observations into a political catch-cry in his pamphlet, Emancipate All Your Colonies (1792). For a discussion of the “Little England” stance among classical economists and economic writers such as Josiah Tucker and Richard Price,Google Scholar see Winch, Donald, Classical Political Economy and the Colonies (London, 1965), pp. 9–29.Google Scholar

14 Wealth IV.vii.b.19–23. Smith particularly emphasized the republican equality of American government (Wealth IV.vii.b.51).Google Scholar

15 Wealth IV.vii.b.44.Google Scholar

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17 Wealth IV.vii.b.61. “The policy of Europe, therefore, has little to boast of, either in the original establishment, or, so far as concerns their internal government, in the subsequent prosperity of the colonies of America” (Wealth IV.vii.b.59). The one thing the colonies owed to Britain was men of “education and great views” (Wealth IV.vii.b. 64).Google Scholar

18 Wealth IV.ix.38.Google Scholar

19 Wealth IV.ix.23–24.Google Scholar

20 The Wealth of Nations may be read as a sermon against inequality preached in the idiom of economics. In this Smith imitated the physiocrats, whose agrarianism supported a populist sentiment of resentment against commercial and financial fortunes;Google Scholar see Weulersse, Georges, Le Mouvement physiocratique en France de 1756 à 1770 (Paris, 1910), vol. 2, pp. 36–119;Google Scholar and Fox-Genovese, Elizabeth, The Origins of Physiocracy (Ithaca, 1976), pp. 129, 152–66.Google Scholar Smith'ss populism commences with the labor theory of value (Wealth I.v.p.47); continues with the explanation of how laborers were separated from “the whole produce of labour” that in the “rude state of things” belonged to them—this occurred by the establishment of private property and rent (Wealth I.vi.7; I.viii.3–13); and culminates in the Rousseauvian assertion that “civil government … is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all” (Wealth V.i.b.12). Smith's critique of mercantilism and colonialism describes how the rich used force, privilege, and deception to establish and advance their position. The great economic engine of inequality is monopoly; the great political engine of inequality is the monopoly on the use of force. Thus Smith painted a picture of the idle rich riding on the backs of the poor: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that those who feed, clothe, and lodge the whole body of the people should have a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged” (Wealth I.viii.36). The crucial argument of policy is that equality occurs naturally if only things are left alone (IV.ix.51). In drawing attention to Smith's attack on mercantilism, A. W. Coats noted that it is “too often … considered only en passant” (p. 219), yet he judges the opinions cited in this note to be only “occasional outbursts” (p. 226). See his “Adam Smith and the Mercantile System,” in Essays on Adam Smith, pp. 219–36. One of the foremost students of Smith's politics, Donald Winch, also hesitates to give this attack its full due. Winch denigrated the “stereotype” of Smith as an advocate of laissez faire and limited government because this picture, in his view, fails to make room for Smith's insistence upon political economy as science subordinate to legislative science; this he illustrates by referring to Smith's attack on mercantilism (pp. 259f.). According to the analysis I propose, the attack on mercantilism was strictly complementary to advocacy of laissez faire. Winch's characterization of legislative science as consisting of “clinical analysis” of commercial society (p. 266) does not seem consistent with his instancing Smith's attack on mercantilism as an index of legislative science. See his “Adam Smith's ‘Enduring Particular Result’: A Political and Cosmopolitan Perspective,” in Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment, edited by Hont, Istvan and Ignatieff, Michael (Cambridge, 1983), pp. 253–69.CrossRefGoogle Scholar

21 The seminal essay on Smith's concept of the progress of society is Forbes's, Duncan “Scientific Whiggism: Adam Smith and John Miller,” (Cambridge Journal, 7 [1954], pp. 643–69). Forbes mentions Turgot and Mandeville as sources for concepts of progress, but notices the Encyclopédie only in passing. For overviews of the Encyclopédie,Google Scholar see Hubert, René, Les Sciences sociales dans l'Encyclopédie: La philosophie d'histoire et le probleme des origines sociales (Geneva, 1970);Google ScholarLough, John, The Encyclopédie (London, 1971);Google ScholarProust, Jacques, Diderot et l'Encyclopédie (Paris, 1962).Google Scholar

22 The Encyclopédie's documentation of science and its linkage with the useful arts was massive; it included ten quarto volumes of illustrations of machines, tools, and fabrication processes. Some of the more important articles are Agriculture, Equilibre, Force, Hydrodynamique, Industrie, Laboureur, Levier, Machine, Manufacture, Mécanique, Metallurgie, Métiers, Mouvement, Navigation, and Puissance.Google Scholar

23 See the articles Colbert, Manufacture, Commerce, and Oeconomy Politique.Google Scholar

24 Wealth IV.xi.51; see also the explanation of why the undirected aggregate investments of the mass of people are economically more sound than any strategy devised by policy (Wealth IV.ii.4–6).Google Scholar

25 Wealth II.iii.31.Google Scholar

26 Forbes's, Duncan “Scientific Whiggism: Adam Smith and John Miller,” (Cambridge Journal, 7 [1954], pp. 643–69).Google Scholar

27 Smith held that capital was formed from savings on profits. To money sequestered into financial institutions he denied any productive function, holding that its sole function was to drive trade (Wealth II.ii.86). Smith remained consistent with this restricted view when he advised that banks should not lend for investment in fixed capital and machines (Wealth II.i.64).Google Scholar

28 Wealth V.iii.10.Google Scholar

29 This point has been stressed by Nathan Rosenberg. Noting Smith's vigorous strictures against capitalists and capitalism in its mercantilist form, he proposed that Smith's vision of the consequences of laissez faire was quite different from its subsequent outcome: “the supreme and essential virtue of competition is that, while it permits the attainment of modest wealth, it places the easy amassing of great wealth virtually beyond reach. It may fairly be said, therefore, that although Adam Smith does not celebrate the social role of the individual capitalist, he does indeed celebrate the role of the capitalist system—or, more precisely, the role of competitive capitalism.” Rosenberg, “Adam Smith on Profits—Paradox Lost and Regained,” in Essays on Adam Smith, p. 388. On my view, Smith does indeed celebrate the role of individual capitalists, namely, the great achievements of the uniform and constant striving of everyman.Google Scholar

30 Wealth I.ii.2; II.iii.32.Google Scholar See the discussion of this point in Skinner, A. S., A System of Social Science: Papers Relating to Adam Smith (Oxford, 1979), pp. 133–38. Smith's sociological derivation of innovation continues to be advocated by Talcott Parsons, Robert Merton, S. C. Gilfillan, Paul Mantoux, Barry Supple, and H. J. Habakkuk. Expressly endorsing Smith's view, Habakkuk wrote: “Most of the economically important inventions of the Industrial Revolution period can more plausibly be ascribed to the pressure of increasing demand rather than to the random operation of the human instinct of contrivance, change of factor prices, or the Schumpeterian innovator” (quoted in Musson, Science, pp. 40f.). Students of innovation argue that this assessment overlooks demand-creating inventions for which there is no market measure because there is no basis of comparison with previous cost-outlays. Such indeed was the case with the Boulton and Watt engine. It is also argued that the demand explanation is not consistent with R&D experience, which is marked by high uncertainty and lags behind discernible markets as well as leaps ahead.Google Scholar See Blaug, Mark, “Technical Change and Marxian Economics,” Kyklos, 13 (1960);CrossRefGoogle ScholarSchon, D. A., Technology and Change; Jewkes, Sawer, and Tillerman, The Sources of Invention.Google Scholar

31 The core of Smith's anthropology is the conformist principle that “nature when she formed man for society, endowed him with an original desire to please, and an original aversion to offend his brethren” (Theory of Moral Sentiments, III.2.6). Consequently, “it is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty. For to what purpose is all the toil and bustle of this world? … To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation” (Theory, I.iii.2.1). This is why public dis-esteem is effective restraint upon most individuals.Google Scholar

32 See footnote 27 and pp. 850–51 of this article.Google Scholar

33 Encyclopédie, I, Discourse Préliminaire, especially pp. xv–xxiv. The Encyclopédie's version of the “four stages” held that government was founded on contract (hence, political institutions are artifacts) and that inequality was incident to the specialization of function (not division of labor) requisite to civil society. See Agriculture, Authorité, Barbarie, Commerce, Droit naturel, État de nature, Gouvernement, Juifs, Legislateur, Oeconomie politique, Prix, Propriété, Raison, Religion, Sociabilité, Société, Théocratie; and Hubert, Les Sciences sociales, pp. 201ff., 216f., 256ff., 289ff.Google Scholar

34 Smith's silence about the mercantilist program for liberty, enlightenment, and progress is striking, perhaps nowhere more spectacularly than in his failure to mention mercantilist critiques of physiocracy, for example, by the chief economic writer of the Encyclopédie, Forbonnais. In his discussion of physiocracy, Smith refrained from mentioning that the two trials of free trade in grains were failures. For a discussion of the mercantilist program, and the failure of physiocratic policy in particular, see Hiram Caton, The Politics of Progress: The Origins and Development of the Commercial Republic (forthcoming).Google Scholar

35 Wealth V.i.g.25–30; III.iv.10–17.Google Scholar

36 Wealth I.ix.14.Google Scholar

37 Wealth I.viii.43.Google Scholar

38 Wealth I.viii.22–45.Google Scholar

39 Wealth I.i.Google Scholar

40 Wealth I.ix.m. 1–8; I. ix. o. 1.Google Scholar

41 The growth formula given by Joseph Spengler is A = W + R + C + ΔF, when A is annual produce; W, wage goods; R, production costs; C, annual output of consumer goods; and ΔF, the increase of fixed capital Spengler, F., “Adam Smith's Theory of Economic Growth—Part I,” Southern Economic Journal, 25 (1959), p. 407. Eltis, “Adam Smith's Theory,” in Essays on Adam Smith, develops a much more elaborate model.CrossRefGoogle Scholar

42 In addition to the literature cited by Spengler (“Adam Smith's Theory of Economic Growth— Part II,” n. 119), one may add Adolphe Lowe's “Adam Smith's System of Equilibrium Growth,” in Essays on Adam Smith, pp. 415–25.Google Scholar

43 Eltis, “Adam Smith's Theory,” in Essays on Adam Smith, p. 428.Google Scholar

44 pp. 445f.; Spengler, “Adam Smith's Theory … Part II,” p. 6.Google Scholar

45 Wealth I. i.4.Google Scholar

46 Wealth. I. i.6.Google Scholar

47 Wealth I. viii.42; I x.c.26.Google Scholar

48 Wealth I. ix.2; I.x.c.26; II.iv.8.Google Scholar

49 Wealth I.x.c.26; Eltis, “Adam Smith's Theory,” in Essays on Adam Smith, pp. 445f. Ricardo noted that “Adam Smith … uniformly ascribes the fall of profits to accumulation of capital…” (Works, vol. I, p. 289). Ricardo believed that this effect was due to rising wages; for a discussion, see Hollander, Economics of Adam Smith, pp. 179–87. On my analysis, not rising wages, but rising capital costs per laborer increase the demand on proportion of profit to capital that cannot be met by price increases (Wealth I.vi.14). For a contemporary statement of the Ricardian decline scenario, see R. L. Heilbroner, “The Paradox of Progress: Decline and Decay in The Wealth of Nations,” in Essays on Adam Smith, pp. 524–39.Google Scholar

50 Wealth II.iii.36; V.i.d.19.Google Scholar

51 See pp. 836–37 of this article.Google Scholar

52 Wealth III.i.3, 5.Google Scholar

53 The Works of Jeremy Bentham, vol. 1, p. 563.Google Scholar

54 List, Friedrich, The National System of Political Economy (London, 1909), pp. 97–103.Google Scholar

55 Bailyn, Bernard, The Ideological Origin of the American Revolution (Cambridge, Mass., 1967);Google ScholarShallhope, Robert E., “Towards a Republican Synthesis: The Emergence of an Understanding of Republicanism in American Historiography,” William and Mary Quarterly, 29 (1972), Pp. 49–80;CrossRefGoogle ScholarBuel, Richard, Securing the Revolution: Ideology in American Politics, 1789–1815 (Ithaca, 1972);Google ScholarMain, Jackson Turner, The Anti-federalists: Critics of the Constitution. 1781–1788 (Chapel Hill, 1961);Google ScholarMcCoy, Drew, The Elusive Republic: Political Economy in Jeffersonian America (Chapel Hill, 1980).Google Scholar

56 The Federalist, nos. 4–6, 9, 14.Google Scholar

57 See pp. 837–39 of this article. For a discussion, see Levy, David, “Adam Smith's ‘Natural Law’ and ‘Contractual Society’,” Journal of the History of Ideas, 49 (1978), pp. 665–74, and his “Adam Smith's Utility-Theoretic Model of Human Nature” (manuscript).CrossRefGoogle Scholar

58 The Federalist, no. 6.Google Scholar

59 Levy, David, “Adam Smith's ‘Natural Law’ and ‘Contractual Society’,” Journal of the History of Ideas, 49 (1978), pp. 665–74.CrossRefGoogle Scholar

60 In view of Smith's extensive indications that America bid fair to become the first nation to link laissez faire with republican equality, it is surprising that so little has been written on this important aspect of Smith's thought. See Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 67–96;CrossRefGoogle ScholarStevens, David, “Adam Smith and the Colonial Disturbances,” in Essays on Adam Smith, pp. 202–17; and Hiram Caton, “The Second American Revolution,” Eighteenth Century Studies (forthcoming). The American gambit, like the opposition to colonies, was very much a French intellectual enthusiasm.Google Scholar See Echeverra, Durand, Mirage in the West: A History of the French image of American Society to 1815 (Princeton, 1957), pp. 31–35, 39, 42, 69, 77.Google Scholar

61 Hamilton, Alexander, Industrial and Commercial Correspondence (Chicago, 1928), p. 257.Google Scholar

62 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 258.Google Scholar

63 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 258;. List followed Hamilton completely in emphasizing the decisive role of technical intelligence to productivity; List, National System, pp. 111–15, 159–65, 183.Google Scholar

64 Hamilton, Industrial and Commercial Correspondence, p. 260.Google Scholar

65 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 261.Google Scholar

66 Say, J.-B., Letters to Thomas Robert Malthus on Political Economy and Stagnation of Commerce (London, 1936), p. 22.Google Scholar

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69 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 59.Google Scholar

70 Wealth I.v.7.Google Scholar

71 Wealth I.vi.6.Google Scholar

72 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 59.Google Scholar

73 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 59. Smith advanced these opinions on capital and entrepreneurship despite his familiarity with entrepreneurial problems if the Carron ironworks and the Boulton-Watt firm.Google ScholarSee Hollander, Economics of Adam Smith, pp. 105, n. 42, 217, n. 28.Google Scholar

74 Say, Letters, pp. 68–74. Pierre-Louis Roederer is usually mentioned as the source of Say's industrie concept. A more likely source, I believe, is Jean-Antoine Chaptal's Essai sur le perfectionnment des arts chimiques en France (1800), which presents a vivid description of the productive power of technology. Chaptal was on the faculty of the École polyrechnique, pioneered industrial chemistry, and was minister responsible for industry from 1800 to 1804.Google Scholar

75 Say, Letters, p. 71.Google Scholar

76 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 53, 57, 61, 64.Google Scholar

77 Babbage, Charles, On the Economy of Machines and Manufacture (4th ed. 1835; New York, 1963), pp. 211–15.Google Scholar

78 Ure, Andrew, The Philosophy of Manufactures (London, 1835), p. 19. The division of labor he styled “a scholastic dogma exploded by enlightened manufacture” (pp. 23f.).Google Scholar

79 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 2, 13, 20f.Google Scholar

80 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 20f.Google Scholar

81 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), p. 231.Google Scholar

82 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 8, 17.Google Scholar

83 List, National System, pp. 161, 164.Google Scholar

84 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 97–107, 181ff., 277–81.Google Scholar

85 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 163f.Google Scholar

86 Eliot, T. D., “The Relation Between Adam Smith and Benjamin Franklin,” Political Science Quarterly, 29 (1924), pp. 102f.Google Scholar

87 The literature on this subject is considerable. I mention only the essays by Joseph Cropsey, Nathan Rosenberg, Robert Heilbroner, and E. G. West in Essays on Adam Smith; E. H. Phelps Brown, “The Labour Market,” in The Market and the State;Google Scholar and Meek, R. L.. Smith: Marx and After (London, 1977).CrossRefGoogle Scholar