The Naturalism and Optimism Of Smith

The Naturalism and Optimism Of Adam Smith

In addition to the conception of the economic world as a great natural community created by division of labour, we can distinguish in Smith's work two other fundamental ideas, around which his more characteristic theories group themselves. First is the idea of the spon­taneous origin of economic institutions, and secondly their beneficent character—or, more briefly, Smith's naturalism and optimism.

The two ideas, though frequently intermingled and sometimes even confused in Smith's work, must be carefully distinguished by the historian of economic thought.

Spontaneity and beneficence were intimately connected for Smith. In the eighteenth century anything natural or spontaneous was im­mediately voted good, and the terms 'natural,' 'just,' and 'advan­tageous' were often used as synonymous. Smith did not escape the confusion of ideas. Having shown the natural origin of economic institutions, he imagined that at the same time he had demonstrated their useful and beneficent character. The confusion is no longer permissible. To give a scientific demonstration of the origin of social institutions and to gauge their value from the point of view of the general interest are two equally legitimate but very different intellec­tual pursuits. We may agree with Smith that our economic organiza­tions, both in their origin and functions, participate of the spontaneity of natural organisms, but we may at the same time reserve judgment as to their real worth. Pessimism no less than optimism ,may be en­gendered by contemplation of the spontaneous character of economic institutions. While this conception of the spontaneity of economic institutions seems to us just and fruitful, the demonstration given of their beneficent character appears insufficient and doubtful. The former conception is a commonplace with all the greatest economists; the latter is rejected by the majority of them.

These two ideas which have played such an important part in the history of economic doctrines must be separately examined.
The conception of spontaneity is the one to which Smith refers most frequently. // mondo va da se. Here at any rate he and the Physiocrats were entirely at one. There is no need for organization, no call for the intervention of any general will, however far-seeing or reasonable, and no necessity for any preliminary understanding between men. Such are the reflexions that the study of the economic world suggests ever anew to our author. The present aspect of the economic world is the result of the spontaneous action of millions of individuals, each of whom follows his own sweet will, taking no heed of others, but never doubting the ultimate result. The noble outlines of the economic world as we know it have been traced, not by following a plan issuing complete from the brain of an organizer and deliberately carried out by an intelligent society, but by the accumulation of numberless deeds designed by a crowd of individuals in obedience to an instinctive force wholly unconscious of the work which it was encompassing.

This idea of the spontaneous constitution of the economic world is in some aspects analogous to the conception of an 'economic law' of a later period. Both ideas suggest the presence of something superior to individual wills, and imposed upon them even despite their resist­ance. The differences are equally marked, however, the scope of the former being far greater than that of the latter. The words ' natural law,' in the first place, suggest regularity and repetition—the constant recurrence of the same phenomena under similar conditions. This is not the aspect that particularly struck Smith. He insists less upon the constancy of economic phenomena and more on their spontaneity, their instinctive and natural character. Say's delight was to compare the economic and the physical worlds. Smith loves to regard the economic world as a living organism which creates for itself its own indispensable organs. Nowhere is the term 'economic law' employed, but his delineation of the chief economic institutions and the account of their functions always results in the same conclusion.

First of all take division of labour, which we have just studied, and which more than any other institution contributes to the increase of wealth.

This marvellous institution is "not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion." "It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another." This tendency itself is the outcome of personal interest.

Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this: Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own neces­sities, but of their advantages.

This gives rise to exchange, and with exchange comes division of labour.

And thus the certainty of being able to exchange all that surplus part of the produce of his ov/n labour, which is over and above his own consumption, for such parts of the produce of other men's labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particu­lar species of business.

Division of labour is the outcome of a tendency common to all men, the tendency to barter; and this tendency itself is spontaneously developed under the influence of personal interest, which acts simul­taneously for the benefit of each and all.
Next comes money, and nothing has so facilitated exchange or so greatly increased wealth. Every economic treatise since Smith's has demonstrated its advantages in terms almost identical with his. But how did money first come to be employed? It was not by the act of a public body, nor was it the outcome of a nation's reflective judgment. It is simply the result of the operation of a collective instinct. Some men who were keener than others saw the inconveniences of the truck system. And
in order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry.

Money is thus the product of the simultaneous though not concerted action of a great number of people, each obeying his personal inclina­tion. The intervention of the public authority is much later, and its object is merely to guarantee by means of a design the weight and purity of such coins as are already in circulation. Take another well-known phenomenon—capital. With the exception of division of labour and the invention of money, Smith thought there was no phenomenon of greater importance and no more essential fount of national wealth than capital. The larger the store of capital, the greater the number of productive workers, makers of tools and machinery—the essentials of increased productivity—the further will division of labour extend. To increase a nation's capital is to expand its industry and to further its well-being. In some passages the growth of wealth appears not merely as the chief but as the only method of augmenting a nation's wealth. "The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue." In short, capital limits industry, a phrase that was destined to become classic, and one that was repeated by every econo­mist down to Mill. Capital is the true source of economic life. Let capital increase and industry will expand in every direction; diminish it, and a bar is set to all improvement. Capital fertilizes the earth, whereas the labour of man simply leaves it a weary waste.

Criticism has been freely levelled at this exaggerated importance which capital is made to assume. It is certainly somewhat curious that labour should now be treated as altogether subordinate to capital, whereas earlier in the volume labour alone was regarded as the great wealth-producing agent. But we are not here concerned with the revival of these threadbare controversies. We merely wish to note that Smith finds in this accumulation of capital a new illustration of spontaneity. The saving of capital is not the result of any foresight on the part of society, but is solely due to the simultaneous and con­current actions of thousands of individuals. These individuals, urged on by a desire to better their situation, are spontaneously urged to save their earnings and to employ those savings productively.

The principle which prompts to save, is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. . . . An augmentation of fortune is the means by which the greater part of men propose and wish to better their condition. It is the means the most vulgar and the most obvious; and the most likely way of augmenting their fortune, is to save and accumulate some part of what they acquire.
This desire is so powerful that even the greatest follies perpetrated by governments have never succeeded in annulling its beneficial effects.

The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national as well as private opulence is originally derived, is frequently power­ful enough to maintain the natural progress of things toward im­provement, in spite both of the extravagance of government, and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the consti­tution, in spite, not only of the disease, but of the absurd prescriptions of the doctor. But the idea of the spontaneity of economic institutions finds its
most interesting illustration in the theory of demand and supply, upon which we must dwell a little.

In a society based upon division of labour, where every one produces for a market without previous arrangement with his fellow producers and without any external direction, the great difficulty lies in the adapting of the amount of goods supplied to the amount demanded. How, as a matter of fact, are these producers to know at any particular moment what they ought to produce and in what quantities? More­over, who is to direct and who can restrain them? It is true that Smith was careful to point out that they are not concerned with the satisfaction of all needs, of whatever kind they may be. Their duty lies towards what he calls the "effectual," not the "absolute," demand. By effectual demand we are to understand the demand of those who are capable of offering not merely something in exchange for the products which they desire, but of offering at least enough to cover the expenses of raising those products. Society founded upon division of labour and exchange implies that nothing can be gratuitous and every loss involves a sacrifice on the part of some person or other. But if production is carried on in this haphazard fashion how are we to avoid an occasional over-production or an accidental under-supply?
Before we can understand this we must acquaint ourselves with Adam Smith's theory of prices.

In the preceding chapter we had occasion to note how Condillac in 1776 put forward a theory of value which was altogether superior to the Physiocrats'. Smith's book, also published in 1776, betrays not the least sign of Condillac's influence, and the new theory never comes up for discussion. The very success of the Wealth of Nations had eclipsed the fame of the French philosopher, and Smith's theory, though quite inferior to Condillac's, held the field for so many years simply because it won the allegiance of the English economists, whose influence was paramount throughout the first half of the nineteenth century. Its popularity only waned with the publication of the works of Walras, Jevons, and Menger. Its historic interest is further enhanced by the fact that it had the singular good fortune to win the approval both of the socialists and the Liberal economists. It is the fate of writers like Smith, remarkable for wealth of ideas rather than for logical presenta­tion, to impel minds along different and sometimes even opposite paths. Unfortunately the theory of value is not the only one that presents a somewhat hazy outline. We cannot here enter into the details of the theory, but must content ourselves with a mere sketch of it. Even this, however, will immediately enable us to understand its insufficiency, and appreciate the twofold influence which it exercised upon subsequent doctrines.

Smith opens his treatment by emphasizing the fundamental dis­tinction which exists between 'value in use' and 'value in exchange.'1 By value in use he means almost exactly what we understand by utility, or what other writers call subjective value, desirability, or ophelimity.

Present-day economists when treating of prices—the exchange value of things—chiefly rely upon this conception of 'value in use.' The explanation of the ' ratio of exchange' of commodities is based upon a previous analysis of their utility for those who exchange them. Smith proceeds in a different fashion. 'Value in use' is mentioned, but only for the purpose of contrasting it with value in exchange. It is then dismissed without further consideration. The two notions seem to have no point of contact. Value in exchange was the only one that was of any interest to Smith; hence there was all the more reason for denying its derivative character.

Thus from the very first the only avenue that might have led to a satisfactory solution of this problem of prices was closed. One could easily have predicted that this was bound to land Smith in difficulty; as a matter of fact he is doubly involved. Two different but equally erroneous solutions have been successively adopted by him, but he has never actually decided between them. The socialists and econo­mists who are to follow will be engaged in the same task, and the cleavage between them will be marked by their adoption of one or other of these two theories.

Smith was led to the study of prices because he wished to know something of the constant oscillation which is such a feature of their history. The actual or market price is unstable because of the un­stable connexion between demand and supply, or, as he puts it, "It is adjusted, however, not by any accurate measure, but by the higgling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life." It seemed impossible that their perpetual fluctuation should represent the true value of the commodity. Its real value could not vary from this moment to the next or from one place to another. Underneath the constantly oscillating market price may be discerned another price, referred to by Smith as the real or sometimes as the natural price. The discovery of a more stable and a more constant element beneath the continual fluctuations of price movements still constitutes the great problem of pure economics.

Smith's first theory makes the true value of any commodity depend upon the amount of labour or effort which it has taken to produce ' Labour, therefore, is the real measure of the exchangeable value of all commodities." "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Labour—that is, the effort expended upon the pro­duction of a commodity—is both the origin and the measure of its exchange value. The theory that labour or effort is the cause of value (if value can be said to have a cause) was first formulated by the father of political economy himself. It is curious to think that it was this same theory that was used with such good effect by Karl Marx in his attack upon capitalism.

This first attempt to find a firmer foundation for exchange value than that afforded by the shifting sands of demand and supply was scarcely made before Smith became aware of some difficulties in the path. For example, how was this work and the value dependent upon it to be measured?

There may be more labour in an hour's hard work than in two hours' easy business; or in an hour's application to a trade which it cost ten years' labour to learn, than in a month's industry at an ordinary and obvious employment. But it is not easy to find any accurate measure either of hardship or ingenuity.

A second objection arises when the theory is applied to civilized society. Work by itself cannot produce anything; something must be contributed by both land and capital. But neither of these is a free good, and they must cost something to those who employ them. Accordingly primitive societies are the only ones where "the quantity of labour commonly employed in acquiring or producing any com­modity" is the only circumstance determining its value. We must nowadays take some account of land and capital. So that labour is not the only source of value, nor is it its sole measure.

Another hypothesis becomes necessary forthwith. This time cost of production is hit upon as the likely regulator of value. Hitherto the 'real' price has signified the price that is based upon labour. Now the ' natural' price is defined as the price of goods valued at their cost of production. The change of name is not of any great significance. What Smith was in search of on both occasions was that true value which always kept in hiding behind the fluctuations of market prices. It is the same problem, but with a new solution. Just now we were informed that if a commodity sold at a price representing the labour which it cost to produce, that price would also represent its real cost. With no less assurance we are now told that a commodity sold at cost of production "is then sold precisely for what it is worth, or for what it really costs the person who brings it to market." The true value of goods corresponds to their cost of production. By this we are to understand a sum sufficient to pay at normal rates the wages of labour, the interest of capital, and the rent of land, all of which have colla­borated in the production of the particular commodity.

Smith, having discarded labour, finds a new determinant of value in cost of production, and if socialists rallied to his first hypothesis the great majority of economists right up to Jevons have clung to his second. As for Smith himself, he never had the courage to choose between them. They remain juxtaposed in the Wealth of Nations because he never made up his mind which to adopt. As a result his work is full of contradictions which it would be futile to try to recon­cile. For example, land and capital in one place are regarded as sources of new values, adding to and increasing the value which labour creates, and producing normally an element of profit and rent, which, together with the wages of labour, makes up the cost of production. In another connexion they are treated as deductions made by capitalists and landlords from the value created by labour alone. Some writers accordingly argue that Smith must have been a socialist. On the whole the cost of production theory prevailed, and the natural price of commodities is taken to mean that price which coincides with their cost of production. As to market price, he makes the remark that it is higher or lower than the natural price according as the quantity offered diminishes or increases as compared with the quantity demanded.

Such is Smith's theory of prices. The element of truth which it con­tains, namely, that the prices of goods tend to coincide with their cost of production (the remark is not originally Smith's at all), must not blind us to its many faults. It is open to at least two very serious objections.

An attempt is made to explain the price of goods by referring to the price of the services (wages, interest, and rent) which make up the cost of production. When the cost of those services comes up for consideration it is assumed that their cost is dependent upon the price of the goods. Wages, for example, are determined by the selling price of the commodities which labour has produced. Escape from the vicious circle is only possible by availing ourselves of the modern theory of economic equilibrium. That theory shows us how prices generally, whether of goods or of services, are interdependent; all being determined simultaneously—like the unknown in an algebraical formula—just when the exchange is taking place. But this theory of economic equilibrium was, of course, unknown to Smith.

Cost of production being the regulator of price, it is very important that an analysis of cost of production and a study of the causes which determine the rates of wages, profit, and rent should be made. One might have expected that this study would have cleared away any obscurity that still clung to the theory of prices. But this analysis is one of the least satisfactory portions of Smith's work. We have already had occasion to note the unsatisfactory character of his theory of rent.

That of profits—which Smith fails to distinguish from interest—is equally useless; and his theory of wages is hopelessly inconsistent. He hesitates between the subsistence theory of wages and the other theory which makes them depend upon the relations between demand and supply, without ever making a final choice.

We cannot agree with Say in considering Smith's theory of distribu­tion one of his best claims to fame. His treatment of this problem, which afterwards became the kernel of Ricardian economics, is altogether inferior to his handling of production. We also know that this is the least original part of his work. It was simply added as a kind of afterthought, the original intention being to deal only with production. This becomes evident if we compare the Wealth of Nations with the Glasgow course of 1763, the whole of which is devoted to production. The addition of a theory of distribution to the original skeleton was probably due to the Physiocrats, with whom in the mean­time he had become acquainted; and the hesitations and uncertainties which mar this part of the work merely go to prove that Smith had not thought it out as clearly as the other sections.

The subject cannot be pursued here. We can only point to the inference which Smith draws from his theory of value, and how it is made to support the contention that demand adapts itself spon­taneously to the conditions of supply. This is how Smith explains the continual oscillation of prices:

When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get imme­diately rid of the commodity.
The reverse will happen when demand exceeds supply.

When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price. The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less.

Thus "the quantity of every commodity brought to market naturally suits itself to the effectual demand."
And this very remarkable result is simply the outcome of personal interest.

If at any time it exceeds the effectual demand, some of the com­ponent parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to the natural price.
And so, in the majority of cases at least, this natural and spon­taneous mechanism secures a constant balancing of the quantities of goods produced and the quantities effectively demanded. The circum­stances under which such a result does not follow are really quite exceptional—although Smith does not deny that sometimes they do exist. Whenever such conditions obtain—that is, when the market price remains for a considerable length of time above the natural price—we find that it is always due to the capitalists' action in con­cealing the high rate of profits which they draw, or in retaining possession of some patent or natural monopoly, such as wine of a special quality. It occasionally happens also as the result of an artificial monopoly. But these are mere exceptions, their rare occurrence confirming the fundamental rule concerning the spontaneous adapta­tion of the quantity offered to the quantity demanded, thanks to this oscillation of the market price about the natural.
This theory of adaptation, we know, is one of the most important in the whole of political economy. Since Smith wrote it has been reproduced by almost every economist, and without any very sub­stantial alteration. It remains even to this day the basis of our theory of production.

It is interesting to note the manner in which Smith makes use of his theory to illustrate his thesis. We shall refer to two cases which are intrinsically important as well as affording admirable illustrations of that spontaneity upon which Smith laid such stress.

The first concerns population. Population, like commodities, may be superabundant or it may be insufficient. What regulates its num­bers? "The number of people," Smith replies, depends upon the demand of society, and this is how it works. Among the proletariat, generally speaking, children are plentiful enough. It is only when wages are very low that poverty and misery cause the death of many of them; but when wages are fairly high several of them manage to reach maturity.

"It deserves to be remarked, too," he continues,

that it necessarily does this as nearly as possible in the proportion which the demand for labour requires. If this demand is continually increasing, the reward of labour must necessarily encourage in such a manner the marriage and multiplication of labourers as may en­able them to supply that continually increasing demand by a con­tinually increasing population. If the reward should at any time be less than what was requisite for this purpose, the deficiency of hands would soon raise it; and if it should at any time be more, their excessive multiplication would soon lower it to this necessary rate. The market would be so much under-stocked with labour in the one case, and so much over-stocked in the other, as would soon force back its price to that proper rate which the circumstances of the society required. It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the produc­tion of men; quickens it when it goes on too slowly, and stops it when it advances too fast.

The second case relates to the demand for money and its supply. We have already seen how the problem of its origin is solved. Along­side of that problem is now placed another, namely, how is the quantity in circulation regulated to meet the requirements of exchange? Smith's first task was to expose the popular fallacy concerning this topic. According to one school of thinkers, money was wealth par excellence, and it was all the more important that he should get rid of this view seeing that it constituted the very foundation of the Mercan­tile theory, the overthrow of which was the immediate object in pub­lishing the Wealth of Nations. The Mercantilists contended that a country should export more than it imports, receiving the balance in money. If it can be proved that this balance is useless because money is a mere commodity possessing no greater and no less utility than any other, then the Mercantilist foundation is completely destroyed.

Smith thought that money was less indispensable than some other goods, seeing that we are anxious to pass it on as often as we can. The disdain with which Smith regarded money was the result of a reaction against Mercantilism, and it led some of his followers to over-emphasize his point of view and to misconceive the special character of monetary phenomena. A nation's true wealth "consists," Smith tells us, "not in its gold and silver only, but in its lands, houses, and consumable goods of all different kinds." "It is the annual produce of the land and labour of the society." Hence in evaluating a country's net revenue we must omit money, because it is not consumed. It only serves as an instrument for the circulation of wealth and for the measurement of value. It is the "great wheel of circulation." In virtue of this title, although Smith himself classed money along with circulating capital, he remarks that it might be likened to the fixed capital of an industry, to machinery or workshops. The greater the economy in the use of fixed capital, provided there is no diminution in production, the better, for the larger will be the net product. This is equally true of money—a necessary but a very costly instrument of social production. "Every saving in the expence of collecting and supporting that part of the circulating capital which consists in money is an improvement of exactly the same kind"4 as that which reduces the fixed capital of industry.

This is why bank-notes—the circulation of which diminishes the quantity of money needed—have proved such a precious invention. What they do is to set free a certain quantity of gold and silver which may be sent abroad to pay for machinery and other instruments of production, and which will in turn increase the true revenue of the country. Smith's parable in which he illustrates these advantages has long since become classic:

The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of bank­ing, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labour.

The conclusion is that every policy—the Mercantilist, for example —which aims at increasing the quantity of money within the country, whether by direct or indirect methods, is absurd, for money, far from being indispensable, is really an encumbrance.

It is not only absurd, but also useless. Have we not seen already that money is a mere commodity designed to facilitate circulation and that the demand for it is entirely determined by that object? But the supply of any commodity usually adapts itself spontaneously to the demand for it. No one concerns himself with supplying the nation with wine or with crockery. Why trouble about money?2 If the quantity of goods diminishes, exchange slackens and a part of the money becomes useless. But the "interest of whoever possesses it requires that it should be employed." Accordingly "it will, in spite of all laws and prohibitions, be sent abroad, and employed in pur­chasing consumable goods which may be of some use at home."
On the other hand, as the prosperity of a nation grows it neces­sarily attracts the precious metals because a multiplication of ex­changes leads to a growing demand for money. These exportations and importations will depend, as Hume had already shown, upon the relative cheapness or dearness of money. What is true of metallic money is also true of a special kind of money known as bank-notes. Smith has given us a vivid description of the functions of banks, and especially of the fortunes of the most famous bank of this period, the Bank of Amsterdam. This afforded him another opportunity of demonstrating how the quantity of notes offered spontaneously adapts itself to the quantity demanded. If banks issue more notes than the circulation warrants prices will rise. Buying from foreign countries will be resorted to and the notes will be returned to the banks to be exchanged for gold and silver—the only international money. The banks cleariy have no interest in issuing too many notes, because it involves a greater metallic reserve as the result of the more frequent demands for payment which they will have to face. Of course, "every particular banking company has not always understood or attended to its own particular interest, and the circulation has frequently been overstocked with paper money." But this does not affect the main principle, and we have one further proof of the spontaneous activity of the economic mechanism.

We have now reviewed some of Smith's principal themes, and we have seen how every phenomenon impresses him in the same fashion. Had space permitted we might have cited other examples all pointing to the same conclusion. This conception of spontaneity and wise beneficence is by no means the product of mere a priori thinking. It was no abstract theory that needed the backing of a rigid demonstra­tion. It was a belief gradually borne in upon him in the course of his review of the economic field. This is characteristic of all his thought, and with every new vista we are reminded of it. The conclusion is hinted at again and again, and the impression left upon the reader's mind is that no other conclusion could ever be possible. Smith thought of the economic order as an organism—the creation of a thousand human wills unconscious of the end whither they are tending, but all of them obedient to the impulse of one instinctive, powerful force. This force, the root of all economic activity, its constancy and uni­formity triumphant over every artificial obstacle and giving unity to the whole system, what is it?

We have already encountered it on more than one occasion. It is personal interest, or, as Smith prefers to call it, "the natural effort of every individual to better his own condition." Hidden deep in the heart of every individual lies this essential spring of human life and social progress.

Doubtless it is not the only one. Smith is never exclusive. He knew that there were other passions1 besides self-interest, and he is not afraid of naming them, as when he attributes an economic revolution which had such beneficial effects as the emancipation of the rural classes to "the most childish vanity of proprietors." Neither did he omit to point out that personal interest is not equally strong in the breast of every one, and that there is the greatest diversity in human motives. All this he had forgotten,' according to some of his critics, while others charge him with the creation of the homo aconomicus, a poor representation of reality and a mere automaton exclusively guided by material interests. Some one has remarked that if you add to this figure a tinge of patriotism you have a faithful picture of the English­man and Scotsman of his day. Had he been acquainted with Germans or Frenchmen, with their less sordid attachment to material gain, he might have judged differently. It may be that our reading of him is incorrect. He seems to have taken care to note that his remarks do not apply to all, but only to the generality of men. He continually recalls the fact that he is speaking of men of common understanding, or of those gifted with common prudence. He knew well enough that the principles of common prudence do not always govern the conduct of every individual, but he was of opinion that they always influenced that of the majority of every class and order. His reasoning is applic­able to men en masse, and not to individuals in particular. Moreover, he does not deny that man may be unacquainted with or may even entirely ignore his own interest. We have just quoted a passage wherein he remarks that bankers who temporarily issue too many notes are at that moment ignorant of their own interests.

These reservations notwithstanding, and full account being taken of all the exceptions to the principles as laid down by Smith, it is still true to say that as a general thesis he considers "the natural effort of every individual to better his own condition"—that is, personal in­terest—as the fundamental psychological motive in political economy. Any reference to the case of business men who are really actuated by a desire to take general welfare as their guide in matters of conduct is treated with a measure of scepticism which it is difficult not to share. " I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuad­ing them from it." Not that sentiment does not play a part, and an important part, in the philosophy of Smith; but sentiment, or sympathy as he calls it, has the domain of morality for its own, while interest, dominates that of economics. All his thinking led him to a firm belief in a spontaneous economic order founded and guided by self-interest. Comparison with the Physiocratic doctrine concerning the natural and essential order of societies is illuminating. To the Physiocrats the 'natural order' implied a system—an idea. It required a genius to discover it, and only an enlightened despotism could realize it. For Smith the 'spontaneous order' was a fact. It was not a thing to be brought into being. It already existed. It was doubtless held in check by a hundred imperfections, including, among others, the stupidity of human legislation. But it was triumphant over them all. Beneath the artificial constitution of society lay the natural constitution which completely dominated it. This natural constitution, which for the Physiocrats was nothing more than an ideal, Smith discovered in actual operation, and he was able to describe its modus operandi. Political economy, which with Quesnay was nothing better than a system of rules and regulations, became in Smith's hands a natural science based upon the observation and analysis of existing facts. In a pas­sage written in his usual lucid style Smith shows the superiority of his system over that of the Physiocrats.

Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smalles, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. . . . Mr Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political economy in some degree both partial and oppressive. Such a political ceconomy, though it no doubt retards . more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance.

This passage leads us to his second thesis, namely, the excellence of these economic institutions. As we have already remarked, these two ideas of spontaneity and excellence, though confused by Smith, ought to be treated apart. His naturalism and optimism are inseparable, and both of them find expression in the same paragraph. The passage just quoted affords a proof of this. Personal interest not only creates and maintains the economic organism, but at the same time ensures a nation's progress towards wealth and prosperity. The institutions are not only natural, but are also beneficial. They interest him not merely as objects of scientific curiosity, but also as the instruments of public weal. Herein lies their chief attraction for him, for political economy to him was more of a practical art than a science.

But this is hardly emphatic enough. Natural economic institu­tions are not merely good: they are providential. Divine Providence has endowed man with a desire to better his condition, whence arises the 'natural' social organism: so that man, following where this desire leads, is really accomplishing the beneficent designs of God Himself. By pursuing his own interest, man "is in this as in many other cases" (he is writing now of the employment of capital) "led by an invisible hand to promote an end which was no part of his intention." The Physiocrats could hardly have improved upon that.

We can scarcely share in his optimism to-day. But it has played too prominent a role in the history of ideas not to detain us for a moment. We must examine the arguments upon which it is based and endeavour to grasp their import.

Let us note, in the first place, that every example hitherto deduced with a view to proving the spontaneity of economic institutions at the same time furnishes a demonstration of the beneficial effects of personal interest. Owing to a coincidence by no means fortuitous every institution mentioned by Smith as owing its existence to the prevalence of action of this kind is at the same time favourable to economic progress. Division of labour, the invention of money, and the accumulation of capital are so many natural social facts that also increase wealth. The adaptation of demand and supply, the distri­bution of money according to the need for a circulating medium, the growth of population according to the demand for it, are so many spontaneous phenomena which ensure the efficient working of eco­nomic society. A perusal of Smith's work leaves us with the impres­sion that these spontaneous institutions must also be the best.

The general proof of this thesis is scattered throughout the whole book. But there was one point especially upon which Smith was very anxious to show complete accord between public and private interest. This was in connexion with the investment of capital. In his opinion capital spontaneously seeks, and as spontaneously finds, the most favourable field for investment—most favourable, that is to say, to the interest of society in general. This proof at first sight seems to apply only to one special fact, but it really has a more general import. We know the great stress which Smith laid upon capital. Division of labour depends upon it, and so does the abundance or scarcity of produce. It determines the quantity of work and fixes the limit of population. To show that the investment of capital conforms to the general interest is to show that all production is organized in the manner most favourable to national prosperity.

Smith distinguishes between four methods of investing capital: in agriculture, in industry, in the wholesale and in the retail trades. Wholesale industry is further divided into three classes: domestic trade; foreign trade, furnishing the nation with foreign products; and carrying trade, which transports those goods from one country to another. Smith maintained that the order in which these various forms of activity were mentioned was also the order of their utility, agricul­ture being the most advantageous, industry the second-best, etc.

He also proposes two criteria for testing this hierarchy: (i) the quantity of productive labour put into operation by means of the capital employed by each; (2) the amount of exchange value annually added to the revenue by each of these employments. As we pass from agriculture to the other branches, the quantity of productive labour brought into operation and the amount of exchange value obtained gradually decreases, and with this decrease goes a diminish­ing utility for the country. Smith thought that a nation ought to employ its capital in the way he had suggested. It ought to give the preference to agriculture, and engage in the other branches only as the accumulation of capital permitted.

But this is precisely what the capitalists would do were they entirely free. Every one of them, in fact, is interested in keeping his capital as near home as possible, with a view to better supervision. Only as a last resource does he venture to engage in foreign commerce. Again, even among the industries carried on in his own country every capita­list will preferably choose that which will result in the production of the greatest exchange value, seeing that his profit varies with the amount of this exchange value. His investments will accordingly be made in the order mentioned, an order which roughly corresponds to the greater or lesser quantity of exchange values produced by each industry. And finally, when contemplating investment in foreign trade he will for the same reason follow the order specified above—the order of greatest general utility. Thus the double desire of keeping one's capital within one's reach and of finding for it the most lucrative field of investment leads every capitalist to employ his capital in the fashion which is most advantageous for the nation. Such is the argument, whatever its value.

Even if we adopted his criteria it is obvious that his classification is altogether too arbitrary. How, for example, can we justify the statement that an industrial enterprise or the carrying trade employs less capital than agriculture? The exact contrary would be nearer the truth, and agriculture ought to be given a much more modest position. Moreover, the conception of such a hierarchy does not accord very well with the theory of division of labour, which seeks to put the various forms of human activity more nearly on an equality.

As a matter of fact we cannot even accept a criterion which takes the amount of exchange values furnished by an industry as the test of its social utility. This increase in the quantity of exchange values simply proves that the demand for the goods concerned is strongei than the demand for some others. When capital flows into certain industries it only points to the spontaneous satisfaction of social demand. But social demand and social utility are not necessarily the same. Demand is the outcome of human desires, and its intensity depends upon the revenue drawn by the individual. But we can neither regard these desires in themselves nor the system of distribution that makes such desires 'effective' as sufficient tests of social utility. And to say that production follows demand is to prove nothing at all. Smith himself seems to have realized this; hence his other criterion— the quantity of productive labour employed by capital. According to this test those industries that employ the least amount of machinery and the greatest amount of hand labour are the most useful—quite an untenable view.
A demonstration of a somewhat similar character has been attempted by the Hedonistic school. They have shown how free competition always tends to direct production into such channels as will result in maximum utility, or, in other words, that it affords the best method of satisfying the actual demands of the market. But they have been very careful to note that social utility and ophelimity are two very different expressions that must never be confused, and they admit that they have failed to find any scientific test of social utility.

Smith's argument is unsatisfactory, and its foundation untrust­worthy. We do not forget that his optimism is based not so much upon this specious demonstration as upon the great number of observations which he had occasion to make in the course of his work. This idea of a harmony between private interest and the general well-being of a society was not put forward as a rigidly demonstrable a priori theory, open to no exceptions. It was rather a general view of the whole position—the conclusion drawn from repeated observations, the resume of a detailed inquiry which had covered every corner of the economic field. A particular process of reasoning may have helped to confirm this conclusion, but the reasoning itself was largely based upon experience, the universal experience of history. It was the study of this experience that led to the discovery of a 'vital' principle of health and progress in the 'body social.' Smith would have been the first to oppose the incorporation of his belief in any dogma. He was content to say that "most frequently" and in a "majority of cases" general interest was satisfied by the spontaneous action of private interest. He was also the first to point out instances—in the case of merchants and manufacturers, for example—where the particular and the general interest came into conflict. We might cite many charac­teristic passages in which he takes pains to qualify his optimism.

Absolute his optimism was not, neither was it universal. In fact, it would not be difficult to prove that it was never intended to apply to anything other than production. Nowhere does the great Scots economist pretend that the present distribution of wealth is the justest possible—a trait that distinguishes him from the optimists of Bastiat's school. His optimism deserted him when he reached that portion of his subject. On the contrary, he showed that landed proprietors as well as capitalists "love to reap where they have not sown," that in­equalities in social position give masters an advantage in bargaining with their men. In more than one passage he speaks of interest and rent as deductions from the produce of labour. Smith, indeed, might well be regarded as a forerunner of socialism. There is no difficulty in believing, so far as the experience of old countries goes, that "rent and profit eat up wages and the two superior orders of people oppress the inferior one."

It is especially important that we should make a note of the opinions of those people who think that Smith intended his optimism to extend to distribution as well as to production. As a matter of fact he was too level-headed to entertain any such idea. Even Say himself in the last edition of his Treatise expresses some doubts as to the equity of the present system of distribution. Smith was not really concerned with the question at all. It is only at a much later date, when the socialists had demonstrated the importance of the problem, that we hear of this belief in the beneficence of economic institutions. It really repre­sents a reaction against the socialistic teaching and an attempt at a justification of the present methods of distribution.
We must beware of confusing Smith's optimism with that of modern Hedonism, or of identifying it with Bastiat's answer to the socialists. It lacks the scientific precision of the one and has none of the apologetic tone of the other. It is little more than a reflection prompted by the too naive confidence of the eighteenth century in the bounty of 'nature,' and an expression of profound conviction rather than the conclusion of a logical argument.