division of labour is impossible without exchange, and the productive powers of a society are consequently limited by its powers of effecting exchanges, which depend partly on the means of communication and partly on the organization of its markets. For division of labour, organization is as important as extent of markets.

The consideration of exchange naturally leads Adam Smith, in the next place, to investigate the medium of exchange-money. The distinction drawn between real and nominal price is inaccurate in expression: the real price of a thing is, in Adam Smith's phraseology, its value in terms of labour; and it is not clear whether he means the labour of production (the real cost), or the labour the commodity would command in the market. He apparently

supposes that in the normal case the two will coincide. What Adam Smith really wished to draw attention to was the difference between the money a thing would exchange for (that is, its price according to Mill's definition) and the amount of things in general it would obtain, which he unfortunately symbolizes by the term labour. The practical importance of the distinction he illustrates by leases and endowments, and shows that for long periods money is not the best unit of value. But however obscure the phraseology and confused the reasoning, the fundamental proposition remains quite clear, that ultimately commodities pay for commodities, and that this in general implies, in the last resort, an exchange of services (to adopt the language of Bastiat). Exchange being only a means to production, and this again to consumption, it is clear that, cæteris paribus, the less labour and capital are expended in exchange so much the richer will the society be; which is the same thing as saying that everything which brings the producer nearer to the consumer prevents economic waste. It follows from these principles that the great commerce of every civilized society is that carried on between the inhabitants of the town and those of the country. In this commerce division of labour is extended to a maximum, and the expenses of exchange are reduced to a minimum. In this manner the importance of agriculture to manufacture and of manufacture to agriculture is made obvious. The question naturally arises,-By what causes is a nation induced to turn its energies to one form of production more than to another?

Stated

And it can only be answered by considering the motive which induces the members of the society to produce at all. generally, this is the satisfaction of wants; but the statement is too abstract to be of practical use. In a modern society the proximate causes of production are-1. The desire of the owner of natural resources to derive a revenue; 2. The desire of the owner of capital to obtain profits; and 3. The desire of the labourer to obtain wages for his labour. The proximate causes of production then are wages, profits, and rents; labourer, landlord, capitalist can only satisfy their wants by employing their respective possessions.

Adam Smith is thus led by the natural course of the argument to consider the laws of the distribution of wealth under a system of individual property and free exchange. In a modern society the labourer does not take the initiative, so that the direction given to production depends on the landlord and the capitalist. In the main, no doubt, the interests of the three coincide. In the progress of society the same causes have improved the position of all three classes-wages, profits, and rents, estimated in commodities, have been continually rising. But that the interests of the three classes are necessarily harmonious, so far from being selfevident, seems at first sight obviously false. It is clear that profits may rise at the expense of wages, and vice versa. Again, rents may vanish by an undue morcellement of the land-the total produce becoming wages; while, on the other hand, the conversion of cultivated land into forest may be a gain to the landlord at the expense of labour. Production remaining the same, if one class gets more the others get less, and there is thus an obvious conflict. It is then of the utmost importance to discover which of the methods of employing capital is of the greatest advantage to the community at large.

The chapter entitled "Employment of Capital" (bk. ii., ch. v.) is one of the most important in the whole work, and Adam Smith continually appeals to the positions there established; and as they have not generally been accepted by modern economists, a somewhat lengthened examination of them may be pardoned.

Taking first an isolated country, he shows that capital may be employed in four ways:-1. In the production of raw material;

2. In the manufacture of raw material; 3. In the distribution by the wholesale merchant; and 4. In the distribution by the retail trader. These are all equally necessary; the act of production is not completed till the commodity is in the hands of the consumer. But although equally necessary, they present essential points of contrast. It is for the interest of society to increase the proportion of its energy employed in the first two modes compared with that in the third and fourth. Any increase in the amount of commodities produced may be considered advantageous, and the greater will that amount be the less the energy required for mere distribution: hence, again, we see the advantage of bringing the producer near the consumer. Again, if we compare agriculture and manufacture, it is obvious (the arts of production remaining stationary) that the latter is limited by the former. The number of labourers in an isolated country is limited by the amount of food produced, and manufactures are further limited by the amount of raw material. This consideration naturally leads to the proposition, again very inaccurately expressed, that "no equal capital puts into motion a greater quantity of productive labour than that of the farmer." This statement has been subjected to more severe criticism than any other passage in the "Wealth of Nations;" but it must not be forgotten in reading Adam Smith that he never uses terms in the strict sense they have acquired in the hands of later economists. If we look below the surface to the ideas the words stand for, as Locke would put it, it is very rarely that Adam Smith is in error. Here, as is clear from the course of the argument, he wishes to point out that in existing societies, if a certain amount of labour and capital is employed in agriculture, it will produce a greater value of commodities than if applied to manufactures, because it will not only pay the ordinary rate of profits and wages, but yield a surplus in the form of rent.* In other words, the value of agricultural produce resulting from the employment of a certain amount of labour and capital of the society is greater than the value of the commodities resulting from any other employment of the same amount-it is greater by the amount of rent paid for the land. But though the fact is undeniable, different theories of explanation may be advanced. The surplus value may be ascribed * Compare Ricardo, chap. xxvi. : " Although I admit," etc.

to monopoly. There is no doubt that if in an isolated country the Government suddenly threw half the land out of cultivation, the value of the total product might for a limited time be greater than before it is well-known that the value of agricultural produce rises more than in proportion to the deficiency of the supply. But it could be so only for a limited time. The want of food or the dearness of food would place a check on manufactures, and when equilibrium was restored the total value of the agricultural produce, expressed in terms of other commodities, would be less than before; the surplus would still exchange against all the manufactures, but the amount of manufactures would be less. But under the natural system, capital applied to land will produce a greater value than the same amount applied in any other manner, although in this system there is no such monopoly: and Adam Smith accounts for the fact by saying that in agriculture nature labours with men, whilst in manufactures nature does nothing. No justification can be offered for the use of such phraseology; but here again, if we look to the ideas the words stand for, an important truth emerges. Certain things are presented to men by nature without any labour, except the mere "labour of occupation," as it has been termed. If these things are limited, and satisfy human wants, they possess value; and this value, in proportion to the labour and capital expended in their acquirement, may be regarded as infinite. The labour of acquisition is saved by nature, and, in Adam Smith's phraseology, nature does the chief part of the work. The point is of importance, and deserves an illustration. Capital devoted to the production of indigo in the Plantations yields a very large profit, because the value of the indigo is much greater than the expenses of production. It is possible that the same amount of capital applied artificially by chemical methods might produce indigo, but a much smaller amount. In this case Adam Smith would say that the natural method was more productive because nature laboured with men. If now, instead of supposing artificial indigo to be produced, we suppose some other commodity to be made by the same capital-for example, lace-and compare the value of this lace with that of the indigo, the value of the latter is greater in proportion to the capital and labour employed; for if it were not, it could not yield greater profits; and the reason is that nature does

more of the work. To say that nature does nothing in manufactures is no doubt absurd; but to say that to obtain things of equal value different amounts of human labour are required, owing to natural conditions, or, which is the same thing, that the same amount of labour will produce in different circumstances different values, is an important truth. It is, moreover, in Adam Smith the necessary supplement to his general theory of value-that value depends simply on the amount of labour given to a thing. Under the natural system, then, the society first appropriates the gifts of nature, then those things which require a certain amount of labour, and lastly those which require still more labour. Thus the natural order of opulence is agriculture, followed by manufactures; and naturally improvement of agriculture should precede improvement of manufactures.

To resume, then: so far as an isolated country is concerned, Adam Smith argues that under a system of natural liberty and individual property the owners of capital direct industry; that the proximate cause of the movements of capital is the rate of profits; and that all capital, however employed, will, under the system proposed, yield the ordinary rate of profits. But Adam Smith carefully avoided the error into which many of his successors have fallen, of supposing that to the nation it is a matter of indifference how the capital is employed so long as the ordinary rate of profits is obtained. On the contrary, he maintains that the capital employed in distributing wealth is not so advantageously employed as it would be in production, or, in other words, that the society gains nothing from middle-men and similar agents so far as they can be dispensed with. But, further, passing on to production, and comparing manufactures and agriculture, he maintains capital is more advantageously employed in the latter than in the former.

In his examination of foreign trade, Adam Smith, first of all, draws a sharp distinction between capital employed within the country and capital employed abroad. He allows that the latter may yield larger profits, but it does so by supporting foreign and not native industry. It is for the interest of the capitalist to obtain a maximum profit, and the place where his capital is employed is to him so far indifferent. But to the labourer and to