general rate of interest.1 This last problem had already been discussed with some success in England by Petty' and Hume, but Turgot carried his analysis considerably further and his definition of interest as" the price given for the use of a certain quantity of value during a certain time" is, in Professor Cassel's opinion, "a formula never afterwards surpassed in clearness and definiteness." 1 Ibid, § 72-82. A Treatise of Taxes and Contributions (1667). • Essays. Moral, Political and Literary Part II. (1752). Nature and Necessity of Interest, pp. 20–21. CHAPTER III. SECOND PERIOD: 1776-1817. §1. Adam Smith's Wealth of Nations, published in 1776, is chiefly noticeable, for our present purpose, by reason of its influence upon the framework within which subsequent economic ideas have been set. This influence has been specially strong upon later theories of distribution. From Adam Smith is derived the threefold classification of the factors of production-land, labour and capital-which has been so prominent in the work of later writers. This historic tripod of the economist is first introduced by Adam Smith in his discussion of the component elements of price. As the price or exchangeable value of every particular commodity, taken separately, resolves itself into some one or other, or all of those three parts; so that of all the commodities which compose the whole annual produce of the labour of every country, taken complexly, must resolve itself into the same three parts, and be parcelled out among different inhabitants of the country, either as the wages of their labour, the profits of their stock, or the rent of their land. Wages, profit and rent are the three original sources of all revenue, as well as of all exchangeable value." In subsequent chapters, however, Adam Smith fixes his attention upon the causes which determine wages per head, profits per cent, and rent per acre. Of the causes which determine wages, profits and rent in the aggregate, or aggregate wages, profits and 1 Book I., Ch. VI. (World's Classics Edn., Vol. I., p. 57). * Compare Cannan, Theories of Production and Distribution, Chs VI. and VII. rent, relatively to one another, he has practically nothing to say. His chapter on the variations of "wages and profit in the different employments of labour and stock " has become famous, not so much because the reasoning is correct--in fact, it is far from correct, especially as regards profits,-but because it contains the germ from which later theories have sprung. It is worth while to note here a point to which further reference will be made, namely that, whereas the causes of differences in wages per head in different occupations are identical, so far as wage-earners are concerned, with the causes of differences in individual incomes from labour, the causes of differences in profits per cent in different occupations are not identical with the causes of differences in individual incomes from capital. For the size of an income from capital evidently depends not only on the rate of profit, but on the quantity of capital.2 Into the causes of differences in the quantities of capital owned by different individuals, Adam Smith made no enquiry. He regarded the distinction between the three factors of production as equivalent, broadly speaking, to a distinction between three classes of persons. The whole annual produce naturally divides itself 66 into three parts, and constitutes a revenue to three orders of people; to those who live by rent, to those who live by wages and to those who live by profit. These are the three great, original and constituent orders of every civilised society." To Adam Smith, as to most early 1 Book I., Ch. X. " • Moreover, profits" in Adam Smith's sense consist partly of income from capital and partly of income from business activity, a form of labour. But this distinction was not yet much appreciated. I., p. 287. He made no general enquiry into the causes of the inequality of individual incomes and does not appear to have felt, with his countryman Burns, that " It's scarcely in a body's power To keep at times from being sour To see how things are shared." economists, the "landowner" is essentially a rural land owner. The urban landowner, with his dramatic scoops of " unearned increment," had not yet impressed himself upon the popular imagination, nor had the long and slow decline of agricultural rents yet begun. "Merchants," no less than " country gentlemen," were a class apart, "an order of men," according to Adam Smith, “whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it." Even in 1776, however, a division of society into landowners, merchants and labourers was becoming crude and misleading, and the changes which have since occurred have rendered such a division still less applicable to modern conditions. The factors of production may be a necessary device of economic analysis, but in the modern world they do not, with any approach to accuracy, indicate the sources of income of groups of persons wholly distinct from one another. §2. Adam Smith's admission that a disharmony may arise between the interest of merchants and the interest of the community is a striking, because almost a solitary, exception to his well-known doctrine that "every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . He intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." This doctrine is founded more 1 I., p. 290. Book IV., Ch. II. (Vol. II., p. 33). In his Theory of the Moral Sentiments (pp. 264-5) Adam Smith goes even further. "The rich consume little more than the poor; and in spite of their natural selfishness and rapacity, though they mean only their own conveniency . . . they divide with the poor the produce of all upon quasi-theological prepossessions than upon economic reasoning, and cannot be maintained without many qualifications. It has, however, the appealing quality of simplicity and induces a sleek optimism. Consequently it has proved very popular, and has been constantly quoted, with the weight of Adam Smith's authority, as an argument against many desirable changes. Probably, however, Adam Smith would have greatly modified this and other doctrines, had the Wealth of Nations been written twenty years later, with the Industrial Revolution in full blast. §3. Bentham, whose Introduction to the Principles of Morals and Legislation was published in 1789, was not primarily an economist. But he influenced economists by his ethical "principle of utility" and his writings contain many suggestions of later economic doctrines. For example," the greater the quantity of the matter of property a man is already in possession of, the less is the quantity of happiness he receives by the addition of another quantity of the matter of property, to a given amount." On the nature of property Bentham writes clearly, and his treatment of the problem of inheritance, from the point of view of public policy, is a great advance on anything previously attempted.2 The idea of property," he says, "consists in an established expecta their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have been made had the earth been divided into equal portions among all its inhabitants; and thus, without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition." 1 Works, IX., p. 18. 2 Adam Smith had contented himself with a few comments on the origin and evil effects of primogeniture and entails. Wealth of Nations, Book III., Ch. II. (Vol. I., PP. 428 ff). |