CHAPTER IV

OF THE RELATIONS OF LABOUR AND CAPITAL

§ 1. Labour and Capital in Relation to the
Annual Produce.

THE relations of labour and capital, on the view of Adam Smith, are best seen if we consider, as he does, the relation of both to "the annual produce of the land and labour of the society," or "the great revenue of the body of the people," another substitute for our modern "national dividend."

The leading ideas may first be stated in Adam Smith's own words: "Though the whole annual produce of the land and labour of every country is no doubt ultimately destined for supplying the consumption of its inhabitants; yet when it first comes either from the ground or from the hands of productive labourers, it naturally divides itself into two parts. One of them, and frequently the largest, is in the first place destined for replacing a capital or for renewing the provisions, materials, and finished work which had been withdrawn from a capital; the other for constituting a revenue either to the owner of this capital as the profit of his stock or to some other person as the rent of his land. . . . That part of the annual produce of

the land and labour of a country which replaces a capital never is immediately employed to maintain any but productive hands. It It pays the wages of productive labour only. . . . Whatever part of his stock a man employs as a capital he always expects it to be replaced to him with a profit. He employs it therefore in maintaining productive hands only; and after having served in the function of a capital to him it constitutes a revenue to them. Whenever he employs it in maintaining unproductive hands of any kind that part is from that moment withdrawn from his capital and placed in the stock reserved for immediate consumption. Unproductive labourers, and those who do not labour at all, are all maintained by revenue."

This view is essentially also the modern view which emphasises the conception of a great stream or flow of national wealth which is used partly for keeping up and adding to the "productive powers" of the society and is partly used for immediate consumption or gratification. It is to be noted carefully that Adam Smith always draws a distinction between unproductive labourers and those who do not labour at all. And following up his conception of capital fixed in the natural and acquired abilities of the inhabitants of the country we see that a large part of productive labour may be regarded as employed in maintaining and adding to these forms of "living" capital. Tested either by cost of production or by earning capacity this living capital is of far greater value in any

modern civilised society than the dead or material capital.1

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Again, if in the same way we develop the content of the phrase "the annual produce of the land and labour," we should arrive at the definition of produce" given by Henry Sidgwick when he was searching for a term wider than the popular conception of wealth, which in general has an implied reference to material.

§ 2. Meaning of Parsimony or Saving.

There are, no doubt, expressions in Adam Smith which, taken without the context, and with all the reminiscences of fallacies born after his death, suggest false ideas of capital and of the relations of capital to labour. Take, for example, the sentence: "Parsimony and not industry is the immediate cause of the increase of capital." In the next sentence, however, we are told that "industry, indeed, provides the subject which parsimony accumulates"; and a little lower down we read: "What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people." Adam Smith constantly uses the term fund where a modern writer (mindful of the pitfalls of the wages fund theory) would use the term "flow" or introduce in brackets a number of qualifications. But when we look beneath the surface-to the ideas the words stand for—it is plain that when he

1 Cf. Essay on the "Living Capital of the United Kingdom" in Strikes and Social Problems, by the present writer.

speaks of "parsimony increasing the fund destined for the maintenance of productive hands" he only means foresight directing the flow of wealth to the satisfaction of future needs. "Both productive and unproductive labourers, and those who do not labour at all, are all equally maintained by the annual produce of the land and labour of the country." Here, at any rate, there is no suggestion of a fund put aside, and stored up for the future payment of the real wages of labour.

And when we examine Adam Smith's definite treatment of the wages of labour and the profits of capital, and of the relations of capital to labour, we also find that the ideas are what we are pleased to call modern and not early or mid-Victorian.

§ 3. The Dependence of Labour on Capital. To begin with, Adam Smith points out that even in his day the cases are not very frequent in which a single independent workman would have a stock sufficient to purchase the material of his work and to maintain himself till it is completed. On the contrary, "in every part of Europe twenty workmen serve under a master for one that is independent."

That is to say, the command of capital is necessary to enable labour to work, and in general this command of capital is not in the power of the workmen themselves.

Capital and labour both being necessary for the annual production of the revenue out of which both

are paid, what are the principles which determine the distribution of the joint earnings? "What are the common wages of labour depends everywhere upon the contract usually made between those two parties (namely the masters and men) whose interests are by no means the same. The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour."

He then goes on to show that in making the contracts or bargains as a rule the masters have the advantage. They can combine more easily, and the law authorises or at least does not prohibit their combinations, while it prohibits those of the workmen. It took the nation a century to recognise the essential truth of these positions, which in the meantime were obscured by crude theories of wages and of the relations of capital to labour.

§ 4. Resumé of Adam Smith's Ideas on Labour and Capital.

The main object of the present inquiry, as already explained, is not to justify the opinions of Adam Smith, or to make a comparison of his opinions with those of recent writers, but to apply some of his ideas to our actual problems, and especially to the problems connected with foreign trade and foreign investment of capital. For this purpose it is not necessary to give a summary of all Adam Smith's views on labour and capital, but it is necessary to understand his fundamental positions. And these, so far as yet