The fact that the rate of interest is lower in this country than in these foreign countries is at the same time the efficient cause of the export of our capital, and also a symptom that the capital exported is of the nature of a surplus. The profit that is obtained on these foreign investments is so much addition to the national revenue or dividend, and being redistributed in the country increases the demand for labour including productive labour.

Holland, in Adam Smith's day, had made the nearest approach to free trade (though still very remote from it), and not only derived its whole wealth, but a great part of its necessary subsistence from foreign trade including these foreign investments. As illustrating his breadth of view it may be mentioned that Adam Smith asserts that the republican form of government seems to be the principal support of the grandeur of Holland. The great mercantile families, the owners of great capitals, have some share or influence in the government, and are thereby induced to live in a country in which less profit is to be obtained. "The residence of such wealthy people necessarily keeps alive, in spite of all its disadvantages, a certain degree of industry in the country. Any public calamity which should destroy the importance of these wealthy merchants would make them remove their residence and their capital to some other country, and the industry and commerce of Holland would soon follow the capitals which supported them." 1

1 Book v. chap. ii. part ii. art. iv.

§ 5. General Resumé of the Argument.

To resume the main argument: Under natural conditions the capital of a country is first of all devoted to those industries in that country, especially agriculture, in which "nature labours with man,” and there is a surplus value in the form of rent. The extent of the home trade (i.e. trade as distinct from industry or production in the narrow sense) is limited by the value of the surplus produce of the distant places within the country which have occasion to exchange their products. The foreign trade of consumption is limited by the value of the surplus products which can be exported to pay for the foreign goods. The extent of the carrying trade is only limited by the value of the surplus produce of all the countries in the world; and, accordingly, this branch of trade is capable of indefinite expansion as compared with the other two. We may place on the same footing as the carrying trade the investment of capital in foreign nations for all sorts of purposes, and compared with any one country the field for investment of the whole world is practically infinite.

At this point, however, a difficulty arises which has been generally overlooked, through the neglect of Adam Smith's distinctions on the different advantages of the employment of capitals.

After considering, in the way already explained, these relative advantages, Adam Smith concludes with the following remarkable statement of the

possible conflict of the actual interests of individuals with national interests.

§ 6. The Employment of Capital by Individuals depends on Profit not on Advantage.

1

"The consideration of his own private profit is the sole motive which determines the owner of any capital to employ it either in agriculture, in manufactures, or in some particular branch of the wholesale or retail trade. The different quantities of productive labour which it may put in motion, and the different values which it may add to the annual produce of the land and labour of the society, according as it is employed in one or other of these different ways never enter into his thoughts." 1 Taking a broad historical survey, Adam Smith finds that the policy of Europe -under which is included the influence of laws and customs of all kinds - has greatly interfered with the natural order in the progress of opulence. In particular agriculture, which is naturally the most advantageous of all employments of capital, has been discouraged to such a degree that "private persons frequently find it more for their advantage (ie. as measured by the profit to be got) to employ their capitals in the most distant carrying trades of Asia and America, than in the improvement and cultivation of the most fertile lands in their own neighbourhood."

§ 7. Influence of the Policy of Europe.

Of such importance is this difference between national and private interests considered to be that Adam Smith devotes the two following books (namely the third and fourth) to the examination of the historical causes which have interfered with the natural order of progress.

The general result of this historical examination is that the policy of Europe has favoured the towns at the expense of the country. People in the towns have been enabled to get better profit than people in the country, mainly because the law has given them privileges of all kinds which are of the nature of monopolies, and it is against monopolies of all kinds that Adam Smith's attack is mainly directed. The position, so far, is precisely the same as that now prevailing in the United States and Canada.

The towns and cities, through the agencies of trusts, which have grown up under the protection of a tariff, are able to get the advantage in the general exchange of their produce with that of the country. The farmers, through this policy, pay more for their materials, and for their consumable commodities, and the towns pay less for the products of agriculture. That is the general complaint of the agricultural interests, both in the United States and in Canada. And, just as in the time of Adam Smith, the main cause is that the people in the towns can, and those in the country cannot, make effective combinations.

As regards the United Kingdom, since Adam

Smith wrote, most of the particular abuses which interfered with what he considered the natural distribution of capital, have been destroyed, and there has been a closer approximation to freedom in the application of capital apart from the direction of the state than he had deemed possible. Under these conditions a question of the greatest interest at present is, whether this natural distribution of capital is that which is most advantageous for the nation. For it is certainly as true as ever that the guide to the employment of their capital by individuals is the profit to be obtained.

§ 8. Does Profit in general lead to Advantage?

Much attention has recently been given to the investment of British capital in foreign states. Supposing that we still accept Adam Smith's ideas on the relative advantage of the employment of capital at home, are we entitled to say that the capital now exported is only a surplus?

Again, there has been an enormous development of all branches of foreign trade. Has this development taken place in such a way as to lead to an increase also in the home employment of capital, or has it been at the expense of the latter?

Adam Smith tried to show that under natural conditions, that is, apart from the influence of the state, individuals in seeking to promote their own interest would in general also promote that of the nation. If left to themselves, without any artificial system of preference or restraint, they would be