The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003
Nathan Rosenberg
*
Adam Smith on Profits--Paradox Lost and Regained
The Journal of Political Economy
Volume 82, Issue 6
Nov. - Dec. 1974
1177-1190.
Abstract
This paper examines the following apparent paradox. Adam Smith’s Wealth of Nations is
universally regarded as a book that powerfully presented the social case for
giving the businessman the maximum degree of freedom of action. And yet, although Smith unqualifiedly treats
high wages as desirable, he treats high profits as undesirable. Why did so eloquent a spokesman for capitalism
and laissez faire treat high profits with such unrelieved hostility? The interpretation of Smith presented in
answering this question revolves primarily around the belief that easily earned
high profits destroy the effectiveness with which the capitalist carries out
his social role.
It might be best to begin
with a candid admission. This paper is
not the paper I had originally set out to write. Adam Smith’s treatment of the business
community in general and the entrepreneur in particular is a subject that has
long fascinated me. [1]
It seemed therefore to be both useful and rewarding to
ferret out and to examine Smith’s treatment of the role of the entrepreneur in
the Wealth of Nations. [2]
After all, in a book
that has been regarded as the locus classicus of
the laissez faire ideology for 200 years, a book that shook the world by
recommending a maximum degree of freedom for business enterprise - in such a
book surely the entrepreneur would play a major role. Although this originally seemed like a
reasonable expectation, it was not fulfilled. As I should certainly have realized, Smith’s
analytical distinctions here were inevitably limited by the modest state of
capitalist development itself and the relatively small degree of specialization
of function that still prevailed in the middle of the eighteenth century. Indeed, Smith had made a significant
contribution to
* Stanford University
1. See Rosenberg (1960).
2. Smith (1937).
1177
analytical economics merely by his forceful recognition of
profit on capital as constituting a separate and distinct income category. [3]
I have not, I am happy to
report, returned from this brief excursion into intellectual history completely
empty-handed. Instead of the story I had
hoped to tell, I want to report upon a rather unexpected paradox that I
encountered. I would like, moreover, to
try to unravel this paradox. My
determination to do so comes about not only because of a certain taste for
intellectual history - although that would be justification enough - but also
because the paradox is one that goes to the heart of Adam Smith’s
Weltanschauung.
Stated in somewhat
oversimplified terms, my paradox lies in the fact that Adam Smith treated high
wages as being unqualifiedly a good thing, and high profits as being
unqualifiedly a bad thing. Why should so
eloquent a spokesman for capitalism and laissez faire regard high profits with
such a jaundiced eye? Indeed, he closes
his chapter on profits with the following devastating barrage: “Our merchants and
master-manufacturers complain much of the bad effects of high wages in raising
the price and thereby lessening the sale of their goods both at home and
abroad. They say nothing concerning the
bad effects of high profits. They are
silent with regard to the pernicious effects of their own gains. They complain only of those of other people.” [4] So fervently did Smith believe these sentiments that the statement
actually appears, substantially unchanged, in two different places in The
Wealth of Nations. [5]
The question of whether
high wages were desirable had such an obviously affirmative answer to Smith
that he did not even undertake to justify it, but rather asserted it with a
rhetorical flourish: “Is this improvement in the circumstances of the lower
ranks of the people to be regarded
3. On this subject, see the perceptive article by Meek
(1954). Meek states: “Many of Smith’s
predecessors had recognized, of course, that those who employed stock in
mercantile pursuits generally received a net reward which was proportioned not
to the effort, if any, which they had expended, but rather to the value of the
stock employed. In Smith’s new model it
was recognized that net gains similar in this respect to mercantile profit were
now also being earned on capital employed in other economic pursuits, such as
agriculture and manufacture. But even
more important, it was also recognized that the origin of these net
gains was now very different from what it had formerly been. To Smith’s predecessors, generally speaking,
profit had appeared as ‘profit upon alienation’ - i.e., as the gain from buying
things cheap and selling them dear. To Smith, on the other hand, profit began to appear as an income
uniquely associated with the use of capital in the employment of wage-labor”
(pp. 138-39).
4. Smith (1937, p. 98).
5. “Our merchants frequently complain of the high wages
of British labour as the cause of their manufactures
being undersold in foreign markets; but they are silent about the high profits
of stock. They complain of the
extravagant gain of other people; but they say nothing of their own. The high profits of British stock, however,
may contribute towards raising the price of British manufactures in many cases
as much, and in some perhaps more, than the high wages of British labour” (Smith 1937, pp. 565-66). This statement appeared in the first edition
of the book whereas the one in the text above made its appearance in the second
edition.
1178
as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly
plain. Servants, labourers
and workmen of different kinds make up the far greater part of every great
political society. But what improves the
circumstances of the greater part can never be regarded as an
inconveniency to the whole. No
society can surely be flourishing and happy, of which the far greater part of
the members are poor and miserable.” [6]
If Adam Smith’s views here
do not strike our egalitarian sensibilities as particularly startling, that is
partly because of a drastic shift in attitudes which Smith himself played some
role in bringing about. For earlier in
the eighteenth century the dominant view was of the social utility of poverty. Smith’s predecessors were very much exercised
- indeed, some were absolutely obsessed - over the socially undesirable
consequences of high or rising wages. It
had been a firmly accepted part of the conventional wisdom that high wages
would reduce effort, that the working class response to higher wages could be
described - in the jargon of a later day - in the form of a backward-sloping
labor-supply curve. The dominant view
was well expressed by Arthur Young, that repository of conventional wisdom, who
wrote in his Farmer’s Tour through the East of England in 1771 that
“every one but an idiot knows that the lower classes must be kept poor or they
will never be industrious; I do not mean, that the poor of England are to be kept
like the poor of France, but, the state of the country considered, they must
(like all mankind) be in poverty or they will not work.” [7]
Similarly, Sir William
Temple, in his Vindication of Commerce and the Arts, says categorically
of laborers that “the only way to make them temperate and industrious, is to
lay them under the necessity of labouring all the
time they can spare from meals and sleep, in order to procure the necessaries
of life.” [8] Such were the dominant views of Smith’s time. [9]
In such a context, Smith’s
views were both enlightened and advanced. Moreover, they were novel in a respect that
needs to be made quite explicit. Not
only did Smith believe that high wages were intrinsically
6. Smith (1937, pp. 78-79).
7. Young (1771, 4: 361).
8. Temple (1786, p. 534).
9. For an excellent scholarly presentation of the mercantilists’
attitude toward labor, see Furniss (1957). For a careful study of the transition from the
old set of views to the later ones, see Coats (1958). Coats states: “Apart from a few isolated
advocates of a ‘high wage economy,’ most British economists before 1750
regarded low wages as an essential precondition of the maintenance of a high
volume of exports, although the plea that the British workman should enjoy a
higher standard of living than that of his Continental counterpart represented
a tacit admission that successful competition in foreign markets did not
require that home wage levels should be equal to or lower than foreign wage
levels. By contrast, in the third
quarter of the century there was growing support for the view that high wages
and rising living standards were not merely compatible with, but were even a
necessary concomitant of the prosperity of our domestic and exported manufactures”
(p. 46).
1179
desirable because they improved the standard of living of the
mass of the population, but he also believed - and here he clashed head-on with
the prevailing view - that the working class supply of effort was positively
sloped, that higher wages called forth greater effort and not less: “The
liberal reward of labour... increases the industry of
the common people. The wages of labour are the encouragement of industry, which, like every
other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily
strength of the labourer, and the comfortable hope of
bettering his condition, and of ending his days perhaps in ease and plenty,
animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall
always find the workmen more active, diligent, and expeditious, than where they
are low.” [10] Although Smith concedes that higher wages are likely to induce
some workers to reduce the number of hours worked, he is insistent that such
workers constitute only a minority of the labor force. Indeed, Smith appears to be genuinely
concerned over the opposite possibility, that a system of incentive wages will
cause many workers to suffer the deleterious effects of overwork. In this respect he is the first economist of
whom I am aware for whom this was a major concern.
Some workmen, indeed, when they can earn in four days
what will maintain them through the week, will be idle the other three. This, however, is by no means the case with
the greater part. Workmen, on the
contrary, when they are liberally paid by the piece, are very apt to over-work
themselves, and to ruin their health and constitution in a few years. A carpenter in London, and in some other
places, is not supposed to last in his utmost vigour
above eight years. Something of the same
kind happens, in many other trades, in which the workmen are paid by the piece,
as they generally are in manufactures, and even in country labour,
whenever wages are higher than ordinary. [11]
Where workers do, in fact,
avail themselves of long intervals of leisure, Smith finds the cause, not in
laziness or deficiency of character, but in deeply rooted physiological causes.
Excessive application during four days of the week, is frequently the real cause of the idleness of the
other three, so much and so loudly complained of. Great labour, either
of mind or body, continued for several days together, is in most men naturally
followed by a great desire of relaxation, which, if not restrained by force or
by some strong necessity, is almost irresistible. It is the call of nature, which requires to be
relieved by some
10. Smith (1937, p. 81).
11. Smith (1937, pp. 81-82).
1180
indulgence, sometimes of ease only, but sometimes too of dissipation
and diversion. If it is not complied
with, the consequences are often dangerous, and sometimes fatal, and such as
almost always, sooner or later, bring on the peculiar infirmity of the trade. If masters would always listen to the dictates
of reason and humanity, they have frequently occasion rather to moderate, than
to animate the application of many of their workmen. [12]
When
Smith turns from the examination of the economic behavior of the worker to that
of the capitalist, his attitude shifts from that of compassion and
understanding to one of compulsive and cantankerous criticism and suspicion. The long-term
interests of capitalists, to begin with, do not coincide with those of society:
“The rate of profit does not, like rent and wages, rise with the prosperity,
and fall with the declension, of the society. On the contrary, it is naturally low in rich,
and high in poor countries, and it is always highest in the countries which are
going fastest to ruin. The interest of
this third order [i.e., capitalists], therefore, has not the same connexion with the general interest of the society as that
of the other two [i.e., landlord and worker].” [13] As a result, capitalists as a class are simply not to be trusted: “The
proposal of any new law or regulation of commerce which comes from this order,
ought always to be listened to with great precaution, and ought never to be
adopted till after having been long and carefully examined, not only with the
most scrupulous, but with the most suspicious attention. It comes from an order of men, 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.” [14]
A businessman who had been
taught to regard Adam Smith as a capitalist apologist might well be excused for
wondering what sort of strange capitalist apologetics this is, and, if this is
what we are likely to get from our friends, just what may we expect from our enemies.
Part of the answer may be stated
briefly. High profits that persist are
often the result of those private conspiracies against which Smith so
eloquently inveighed, or of government dispensations of exclusive privileges.’ [15] In both cases the result is an impediment to resource mobility upon which
the effective functioning of a market economy must be predicated. The alacrity with
12. Smith (1937, p. 82).
13. Smith (1937, pp. 249-50).
14. Smith (1937, p. 250).
15. Profits must also remain relatively high in some areas to
compensate for additional risk or for a disagreeable activity (see Smith 1937,
chap. 10, pt. 1). “The keeper of an inn
or tavern, who is never master of his own house, and who is exposed to the brutality
of every drunkard, exercises neither a very agreeable nor a very creditable
business. But there is scarce any common
trade in which a small stock yields so great a profit” (p. 101).
1181
which businessmen have entered into such arrangements
in the past and their persistence and ingenuity in subverting the disciplining
effects of the market are the main reason that the text of The Wealth of
Nations abounds in phraseology extremely critical of the business
community: “the sneaking arts of underling tradesmen”; the “mean and malignant
expedients” of merchants and manufacturers; the “clamour
and sophistry of merchants and manufacturers”; the “interested sophistry of
merchants and manufacturers”; “the mean rapacity, the monopolizing spirit of
merchants and manufacturers”; and traders who argue with “all the passionate
confidence of interested falsehood.”
Smith’s criticisms of
mercantilism, which take up such a large portion of his book, also issue from
the same cause. Smith sees mercantilism
as the successful attempt of rapacious businessmen to exploit the machinery of
government for their own self-aggrandizement. Such efforts really had their historical
origin in the exclusive corporative spirit of privileged groups, which grew up
in medieval towns and cities: “Country gentlemen and farmers, dispersed in
different parts of the country, cannot so easily combine as merchants and
manufacturers, who being collected into towns, and accustomed to that exclusive
corporation spirit which prevails in them, naturally endeavour
to obtain against all their countrymen, the same exclusive privilege which they
generally possess against the inhabitants of their respective towns.” [16]
The violence of Smith’s
polemic against mercantilism lay in the fact that it enabled merchants to
better their condition in a manner that did not contribute to the nation’s
economic welfare. As a result of the
dispensation of monopoly grants, of the arbitrary bestowal of “extraordinary
privileges” and “extraordinary restraints” upon different sectors of industry
by the government, the individual merchant was provided with innumerable
opportunities to enrich himself without enriching the nation. Even when legislation is passed with an
ostensibly legitimate social purpose in view, the opportunities for profit
making are likely to be restructured in such a way as to lead to private
enrichment and not social enrichment. Thus, with respect to the herring bounty,
Smith sardonically observes: “The bounty to the white herring fishery is a
tonnage bounty; and is proportioned to the burden of the ship, not to her
diligence or success in the fishery; and it has, I am afraid, been too common
for vessels to fit out for the sole purpose of catching, not the fish, but the
bounty.” [17]
The more interesting part
of the answer to my question, however, does
16. Smith (1937, p. 429).
17. Smith (1937, p. 486). Smith
adds the following extraordinary bit of accounting: “In the year 1759, when the
bounty was at fifty shillings the ton, the whole buss fishery of Scotland
brought in only four barrels of sea sticks. In that year each barrel of sea sticks cost
government in bounties alone £113 15s; each barrel of merchantable herrings
£159 7s. 6d.”
1182
not lie in monopolistic barriers or other impediments to
the achievement of static efficiency with respect to resource use. Rather, it involves the realm of dynamic
change over time and broader influences shaping human behavior. For the growth of trade and commerce - and, in
their wake, manufactures - is of course associated historically with the rise
of the capitalist class. This class
gradually displaces the landlord class, which had previously dominated the
European economy and polity and had squandered society’s social surplus by
maintaining a large army of retainers and by what Smith calls “rustic
hospitality.” The new goods made
available by expanding commerce bring in their wake drastic social and
political changes.
But what all the violence of the feudal institutions
could never have effected, the silent and insensible
operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great
proprietors with something for which they could exchange the whole surplus
produce of their lands, and which they could consume themselves without sharing
it either with tenants or retainers. All
for ourselves, and nothing for other people, seems, in
every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a
method of consuming the whole value of their rents themselves, they had no
disposition to share them with any other persons. For a pair of diamond buckles perhaps, or for
something as frivolous and useless, they exchanged the maintenance, or what is
the same thing, the price of the maintenance of a thousand men for a year, and
with it the whole weight and authority which it could give them. The buckles, however, were to be all their
own, and no other human creature was to have any share of them; whereas in the
more ancient method of expence they must have shared
with at least a thousand people. With
the judges that were to determine the preference, this difference was perfectly
decisive; and thus, for the gratification of the most childish, the meanest and
the most sordid of all vanities, they gradually bartered their whole power and
authority. [18]
The growth of the
commercial sector and the increasing control over income flows by the
capitalist class are a critical element in Smith’s version of economic growth
because, whereas the landlord directed society’s surplus resources into
frivolous, unproductive activities, the capitalist now directs these resources
into productive channels. As Smith
18. Smith (1937, pp. 388-89; see also p. 385). For further discussion, see Rosenberg (1968).
1183
puts it, “It is the stock that is employed for the sake of
profit, which puts into motion the greater part of the useful labour of every society.” [19]
Smith’s sociological
analysis of the rise of capitalism - primarily in book 3 of The Wealth of
Nations - has been strangely neglected and will, unfortunately, also
be neglected here, since it would require a separate paper to treat adequately.
A couple of things, however, need to be
asserted. By providing a ready market
for agricultural products, the growth of commercial and manufacturing towns
provides powerful new incentives to the attainment of efficient resource use in
agriculture. Furthermore, and for Smith
most important, the growth of commerce, by dissolving feudal ties and
obligations, makes good government possible for the first time: “Commerce and
manufactures gradually introduced order and good government, and with them, the
liberty and security of individuals, among the inhabitants of the country, who
had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors.
This, though it has been the least
observed, is by far the most important of their effects.” [20]
This good government
includes the reduction of crime, which Smith associates with the elimination of
the personal ties of dependency of feudalism. He asserts in his Lectures that
“nothing tends so much to corrupt mankind as dependency, while independency
still increases the honesty of the people.” And he concludes that “the establishment of
commerce and manufactures, which brings about this independency, is the best
police for preventing crimes.” [21]
Finally, as suggested
earlier, the rise of a capitalist class brings an increasing proportion of
society’s resources - including agriculture itself - under the control of a
more efficient class of decision makers. [22] But it is
19. Smith (1937, p. 249). The
structure of feudal society effectively suppressed the possibility of capital
accumulation from all classes - albeit in different ways: “Under the feudal constitution
there could be very little accumulation of stock, which will appear from
considering the situation of those three orders of men, which made up the whole
body of the people: the peasants, the landlords, and the merchants. The peasants had leases which depended upon
the caprice of their masters; they could never increase in wealth, because the
landlord was ready to squeeze it all from them, and therefore they had no
motive to acquire it. As little could
the landlords increase their wealth, as they lived so indolent a life, and were
involved in perpetual wars. The merchants again were oppressed by all
ranks, and were not able to secure the product of their industry from rapine
and violence. Thus
there could be little accumulation of wealth at all; but after the fall of the
feudal government these obstacles to industry were removed, and the stock of
commodities began gradually to increase” (Smith 1956, p. 220).
20. Smith (1937, p. 385).
21. Smith (1956, p. 155).
22. Smith succinctly lays out the differences in attitude and
mentality between the merchant and landowner: “The wealth acquired by the
inhabitants of cities was frequently employed in purchasing such lands as were
to be sold, of which a great part would frequently be uncultivated. Merchants are commonly ambitious of becoming
country gentlemen, and when they do, they are generally the best of all
improvers. A merchant is accustomed to
employ his money chiefly in profitable projects, whereas a mere country [gentleman is accustomed to employ it chiefly in expence. The one
often sees his money go from him and return to him again with a profit; the
other, when once he parts with it, very seldom expects to see any more of
it. Those different habits naturally
affect their temper and disposition in every sort of business. A merchant is commonly a bold; a country
gentleman, a timid undertaker. The one
is not afraid to lay out at once a large capital upon the improvement of his
land, when he has a probable prospect of raising the value of it in proportion
to the expence.
The other, if he has any capital, which is not always the case, seldom
ventures to employ it in this manner. If he improves at all, it is commonly not with a capital,
but with what he can save out of his annual revenue” (Smith 1937, pp. 384-85).]
HHC: [bracketed] displayed on page 1185 of original.
1184
the dynamic aspect of this point that requires emphasis. The growth of commerce is instrumental in
shaping character, in altering tastes, and in providing new and more powerful
incentives. The growth of commerce, by
increasing the importance of the capitalist class as compared to large
landowners, increases the proportion of those in society devoted to parsimony
and frugality (“those who are naturally the most disposed to accumulate”), [23] as compared
to those who live lives of indolence and prodigality. [24] Commerce inculcates habits of orderliness, reliability,
precision, and painstaking attention to detail. Participation in business enterprise
inevitably inculcates certain behavior patterns - in particular, those of
“order, economy and attention.” [25] Commerce introduces probity and punctuality. But it is important to note that Smith’s
argument makes these qualities emerge and spread as a direct response to
personal self-interest:
Whenever commerce is introduced into any country
probity and punctuality always accompany it. These virtues in a rude and barbarous country
are almost unknown. Of all the nations
in Europe, the Dutch, the most commercial, are the most faithful to their word.
The English are more so than the Scotch,
but much inferior to the Dutch, and in the remote parts of this country they
are far less so than in the commercial parts of it. This is not at all to be imputed to national
character, as some pretend; there is no natural reason why an Englishman or a
Scotchman should not be as punctual in performing agreements as a Dutchman. It is far more reducible to self-interest,
that general principle which regulates the actions of every man, and which
leads men to act in a certain manner from views of
23. Smith
(1937, p. 578).
24. Adam
Smith’s close friend, David Hume, had said: “(As) the spending of a settled
revenue is a way of life entirely without occupation, men have so much need of
somewhat to fix and engage them, that pleasures, such as they are, will be the
pursuit of the greater part of the landholders, and the prodigals among them
will always be more numerous than the misers. In a state, therefore, where there is nothing
but a landed interest, as there is little frugality, the borrowers must be very
numerous, and the rate of interest must hold proportion to it. The difference depends not
on the quantity of money, but on the habits and manners which prevail” (Hume
1955, p. 50).
25. Smith
(1937, p. 385).
1185
advantage, and is as deeply implanted in an Englishman as a
Dutchman. A dealer is afraid of losing
his character, and is scrupulous in observing every engagement. When a person makes perhaps twenty contracts
in a day, he cannot gain so much by endeavouring to
impose on his neighbours, as the very appearance of a
cheat would make him lose. When people
seldom deal with one another, we find that they are somewhat disposed to cheat,
because they can gain more by a smart trick than they can lose by the injury which
it does their character... Wherever dealings are frequent, a man does not
expect to gain so much by any one contract, as by probity and punctuality in
the whole, and a prudent dealer, who is sensible of his real interest, would
rather choose to lose what he has a right to, than give any ground for
suspicion. Everything of this kind is
odious as it is rare. When the greater part of people are merchants, they always bring probity and
punctuality into fashion, and these, therefore, are the principal virtues of a
commercial nation. [26]
This discussion of the
character-forming aspects of a commercial society now provides the basis for
our confrontation with the “paradox of high profits” with which this paper is
concerned. A commercial society needs to
be perceived as a set of institutions, which, although at one level it may be
treated as a collection of legally free individuals engaging in free
contractual agreements, at another level is an intensely coercive system. By this I mean that, in order to succeed under
a system of competitive capitalism, one needs to develop
certain characteristics - the characteristics of order, economy, attention, and
probity - with which Smith is concerned and which are the qualities essential
for success under the unique pressures imposed upon individual participants in
the business arena by capitalist institutions. (The capitalist is haunted by the spectre of bankruptcy. “Bankruptcy is perhaps the greatest and most
humiliating calamity which can befall an innocent man. The greater part of men,
therefore, are sufficiently careful to avoid it. Some, indeed, do not avoid it; as some do not
avoid the gallows.” [27]) These characteristics, it should be clear, do not come naturally to man. Man does not by nature prefer the active and
energetic life to the life of indolence and repose. Indeed, Smith asserts that “it is the interest
of every man to live as much at his ease as he can.” [28] As a consequence, Smith regards it as axiomatic that “in every
profession, the exertion of the greater part of those who exercise it, is
always in proportion to the necessity they are under of making that
26. Smith
(1956, pp. 253-55). For Smith’s
characterization of the “inconveniences” of a commercial society, see Smith
(1937, pp. 255-59).
27. Smith
(1937, p. 325).
28. Smith
(1937, p. 718).
1186
exertion.” [29] Landlords “are
the only one of the three orders whose revenue costs them neither labour nor care, but comes to them, as it were, of its own
accord, and independent of any plan or project of their own.” [30] Their characteristic indolence, therefore, is viewed by
Smith as “the natural effect of the ease and security of their situation.” [31]
But, while the landed
classes live a life of indolence, self-indulgence, and ostentation, they are
merely doing what other classes would do if they had the opportunity. For, “a man of a large
revenue, whatever may be his profession, thinks he ought to live like other men
of large revenues; and to spend a great part of his time in festivity, in
vanity, and in dissipation.” [32] The great virtue of competitive capitalism, from this
point of view, is that the intense pressures of the marketplace render such behavior
extremely difficult or impossible on the part of the capitalist class. So long as profits are difficult to earn, and
so long as competitive pressures keep the rate of profit low, the system itself
may be relied upon to force the capitalist to display the traditional virtues
of his class. However, high rates of
profit, when they persist, constitute evidence that the competitive mechanism
is, for whatever reason, not functioning properly. While it is obvious that this has undesirable
consequences in terms of resource allocation, [33] it has not been commonly
noticed that such easily earned profits had other undesirable consequences, to
which Smith attached enormous importance. For
besides all the bad effects to the country in general,
which have already been mentioned as necessarily resulting from a high rate of
profit; there is one more fatal, perhaps, than all these
29. Smith
(1937, p. 717).
30. Smith
(1937, p. 249).
31. Smith
(1937, p. 249). In speaking of large
landed proprietors, Smith remarks: “To improve land with profit, like all other
commercial projects, requires an exact attention to small savings and small gains, of which a man born to a great fortune, even though
naturally frugal, is very seldom capable. The situation of such a person naturally
disposes him to attend rather to ornament which pleases his fancy, than to
profit for which he has so little occasion. The elegance of his dress, of his equipage, of
his house, and household furniture, are objects which from his infancy he has
been accustomed to have some anxiety about. The turn of mind which this habit naturally
forms, follows him when he comes to think of the improvement of land. He
embellishes perhaps four or five hundred acres in the neighbourhood
of his house, at ten times the expence which the land
is worth after all his improvements; and finds that if he was to improve his
whole estate in the same manner, and he has little taste for any other, he
would be bankrupt before he had finished the tenth part of it” (Smith 1937, p.
364).
32. Smith
(1937, p. 766). Similarly, although
Smith’s statement about landlords who “love to reap where they never sowed” is
frequently cited, it is usually cited minus a critical qualification which
Smith attaches. “As soon as the land of any country has all become private
property, the landlords, like all other men, love to reap where they
never sowed, and demand a rent even for its natural produce” (Smith 1937, p.
49; emphasis added).
33. Smith (1937,
pp. 564-66).
1187
put together, but which, if we may judge from experience,
is inseparably connected with it. The
high rate of profit seems every where to destroy that parsimony which in other
circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems
to be superfluous, and expensive luxury to suit better
the affluence of his situation. But the
owners of the great mercantile capitals are necessarily the leaders and
conductors of the whole industry of every nation, and their example has a much
greater influence upon the manners of the whole industrious part of it than
that of any other order of men. If his
employer is attentive and parsimonious, the workman is very likely to be so
too; but if the master is dissolute and disorderly, the servant who shapes his
work according to the pattern which his master prescribes to him, will shape
his life too according to the example which he sets him. Accumulation is thus prevented in the hands of
all those who are naturally the most disposed to accumulate; and the funds
destined for the maintenance of productive labour
receive no augmentation from the revenue of those who ought naturally to
augment them the most. The capital of
the country, instead of increasing, gradually dwindles away, and the quantity
of productive labour maintained in it grows every day
less and less. Have the exorbitant
profits of the merchants of Cadiz and Lisbon augmented the capital of Spain and
Portugal? Have they alleviated the
poverty, have they promoted the industry of those two beggarly countries? Such has been the tone of mercantile expence in those two trading cities, that
those exorbitant profits, far from augmenting the general capital of the
country, seem scarce to have been sufficient to keep up the capitals upon which
they were made... Compare the mercantile manners of Cadiz and Lisbon with those
of Amsterdam, and you will be sensible how differently the conduct and
character of merchants are affected by the high and by the low profits of stock…
Light come light go, says the proverb; and the ordinary tone ofl expence seems every where to
be regulated, not so much according to the real ability of spending as to the
supposed facility of getting money to spend. [34]
It is only the force of
competition, apparently, which can be relied upon to keep the capitalist from
behaving like an extravagant landowner. This
is so because a major determinant of economic behavior is the ease or
difficulty involved in the earning of income. While it may be going too
far to suggest that, although Smith did not subscribe to a backward.
34. Smith (1937, pp. 578-79).
1188
sloping supply curve for labor, he did subscribe to it
for the capitalist, he does believe that a rise in the rate of profit will
reduce the quality, if not the supply, of capitalist effort.
It is true that the barbs
which Smith directed at the wealthy usually have large landowners as their
target. But there is a good historical
reason for this. When Smith wrote, in
the middle of the eighteenth century, the landowning classes still thoroughly
dominated English society and provided far more conspicuous targets for his
attack on great wealth than did the rising class of merchants and
manufacturers. But it should be
abundantly clear from what has preceded that Smith’s sharp invective against
the “indolence and vanity of the rich” [35] is not, in principle or intention, confined to any single class in
society. Rather, these are
characteristics which are attached to the possessors of wealth, from whatever
source that wealth is derived, because such possession conditions its owners in
highly predictable ways. [36]
This remark brings me to
what is both my final point and perhaps a new paradox
to replace the one which I have attempted to resolve. I have argued that Smith’s hostility to high
profits is rooted in his belief that such profits dull the edges of capitalist
performance - as in Cadiz and Lisbon - both by dulling his incentive and
capacities as an earner of income and by destroying his frugality in disposing
of that income. The trouble - and the
paradox - of high profits is that the attainment of wealth corrupts the forces
leading to the generation of wealth - as is obviously the case with the large
landowner. Therefore a recurring theme
of the book bearing the title An Inquiry into the Nature and Causes of the
Wealth of Nations is that, at least on the individual level, the easy
attainment of great wealth is likely to destroy the individual’s capacity to
contribute to the wealth of nations. [37] In this respect,
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 certainly 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.
Yet, with all of Smith’s
preoccupation with the wealth of nations, he
35. Smith (1937, p. 683).
36. See
Rosenberg (1960).
37. Smith
also noted the inverse correlation between income level and human fertility: “A
half-starved Highland woman frequently bears more than twenty children, while a
pampered fine lady is often incapable of bearing any, and is generally
exhausted by two or three. Barrenness,
so frequent among women of fashion, is very rare among those of inferior
station. Luxury in the
fair sex, while it inflames perhaps the passion for enjoyment, seems always to
weaken, and frequently to destroy altogether, the powers of generation” (Smith
1937, p. 79). It is curious that Malthus never examined the important implications of this
statement for his theory of population.
1189
also believes that the pursuit of wealth does not take
place for the direct gratification or utilitarian purposes provided by an
abundance of worldly goods, but rather because the possession of such goods
brings their owner the high esteem and approbation of his fellow man. [38] That paradox - and surely the insistence upon the relative
unimportance of the wealth of nations by the author of The Wealth of Nations
deserves to be called a paradox - has to be pursued through Smith’s earlier
work, The Theory of Moral Sentiments. But that is another story.
References
Coats, A. W. “Changing Attitudes to Labour in
the Mid-eighteenth Century.” Econ. Hist. Rev. 11 (August 1958): 35-51.
Furniss,
Edgar S. The Position of the Laborer in a System of
Nationalism. New York: Kelley & Millman,
1957.
Hume, David. Writings on Economics. Edited by Eugene Rotwein. Madison:
Univ. Wisconsin Press, 1955.
Meek, Ronald.
“Adam Smith and the Classical Concept of Profit.” Scottish J. Pout. Econ. 1
(June 1954): 138-53.
Rosenberg, Nathan. “Some Institutional Aspect of the Wealth
of Nations.” J.P.E. 68 (December 1960): 557-70.
_______________ . “Adam Smith,
Consumer Tastes, and Economic Growth.” J.P.E. 76 (May/June 1968):
361-74.
Smith, Adam. Wealth of Nations. New
York: Modern Library, 1937.
__________ . Lectures on Justice,
Police, Revenue, and Arms. New
York: Kelley & Millman, 1956.
__________ . “The Theory of Moral Sentiments.” In Essays, Philosophical and
Literary. London: 1880.
Temple, Sir William. Vindication of Commerce and
the Arts. London: 1786.
Young, Arthur. Farmer’s Tour through the East of
England. vol. 4. London: 1771.
38, “(W)hat are the advantages which we propose by the great
purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken
notice of with sympathy, complacency, and approbation, are
all the advantages which we can propose to derive from it. It is the vanity, not the ease or the pleasure, which
interests us. But vanity is always
founded upon the belief of our being the object of attention and approbation. The rich man glories in his riches, because he
feels that they naturally draw upon him the attention of the world, and that
mankind are disposed to go along with him in all those agreeable emotions with
which the advantages of his situation so readily inspire him. At the thought of this, his heart seems to
swell and dilate itself within him, and he is fonder of his wealth upon this
account, than for all the other advantages it procures him” (Smith 1880, p.
48). Smith makes this point almost
aphoristically in the Wealth of Nations when he asserts that “with the
greater part of rich people, the chief enjoyment of riches consists in the
parade of riches” (1937, p. 172); see also Rosenberg (1968, pp. 364-67).
1190
The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003