extension of division of labour-Adam Smith's terminology for our law of increasing return-such surpluses naturally arise, and unless they are exported the growth of the industry must be checked.

§ 5. Adam Smith's first Answer: Industry limited by Capital.

Adam Smith, however, tries to show that, although particular species of industry are encouraged by protection against foreign competition in the home market the general industry of the society is prejudiced.)

His first argument is that which has become so familiar to students through the expression and expansion it has received in John Stuart Mill's four fundamental propositions on capital.

Adam Smith's own statement is, however, perfectly clear, and is free from the paradoxes which led Mill to assert that "demand for commodities is not demand for labour," and that the demand for labour is "the wages fund.”

"The general industry of the society," says Adam Smith, "can never exceed what the capital of the society can employ. As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of the society, and never can exceed that proportion. No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain.

2

It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord."

The relations between capital and labour, or, more generally, the relations of capital to industry, have already been examined. All experience shows that one necessary condition of the existence and the expansion of any particular industry is the command of the necessary capital; and in the same way capital is necessary for the continuance and development of the general industry of the society. There are other requisites and other equally necessary conditions, e.g. land and labour, but Adam Smith, at this stage, confines himself to the influence of capital.

It is one thing, however, to admit that capital is one of the superior limits to the expansion of industry, or the employment of labour, and quite another to say that the amount of capital available for the industry of any society is itself always limited-in the sense, namely, that any increase of employment at one place or in one industry can only mean a diminution elsewhere. Mill himself pointed out that though industry is always limited by capital it does not always come up to that limit, although he seems to have forgotten the qualification when he came to consider the influence of demand and the relations of capital to labour. In the passage quoted Adam Smith only says that it is "by no means certain" that the artificial direction

1 See Chapter VI.

given to industry by the commercial regulations of the state are more advantageous than the natural distribution.

And if we look to his general treatment of capital we see that he never takes it for granted that the amount of capital available for home industry in any society is always limited. On the contrary, his central position is that, under natural conditions, it is only when the home industries have got all they require that the surplus overflows into the less advantageous channels of foreign trade.

1

It is quite certain that the United Kingdom, under present conditions, has at its command a far larger amount of capital than can be profitably employed in home industries and trade. Recent estimates show that we have already three thousand millions of capital invested abroad; and apart from this there is the large amount involved in carrying on our foreign trade. The rate of export of capital also seems to be increasing, and yet there appears to be no diminution in the amount that is retained at home. That is to say the capital exported directly and indirectly is of the nature of a surplus.

Under these conditions, then, it cannot be said that the amount of capital available for home industry is limited, and that an artificial expansion of one industry (by means of protection) can only mean the abstraction of capital from some other home industry;

1 "Great Britain's Capital Investments in other Lands," by G. Paish, Journal of Royal Statistical Society, September 1909.

The market value of the public securities negotiable on the Paris Bourse at the end of 1908 was £2,629,520,000 French, and £2,705,800,000 foreign (Economist, August 21, 1909).

it may come from what would otherwise have been exported.

§ 6. Second Answer; Home Industries

naturally protected.

г

Here Adam Smith introduces the argument that no artificial encouragement of home industries is needed, because under natural conditions every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry. To this statement is added the condition that is always assumed as essential, namely, "provided always that he can obtain the ordinary or not a great deal less than the ordinary profits of stock." The arguments already noticed are advanced to show why the individual has this preference for the employment of capital as near home as possible. The different cases are examined with the result that: "Home is the centre round which the capitals of the inhabitants of every country are continually circulating, and towards which they are always tending, though by particular causes they may sometimes be driven off and repelled from it towards more distant employments. But a capital employed in the home trade, it has already been shown, necessarily puts into motion a greater quantity of domestic industry, and gives revenue and employment to a greater number of the inhabitants of the country than an equal capital employed in the foreign trade of consumption; and one employed in the 1 See above, Chapter I., on the influence of Newton.

1

foreign trade of consumption has the same advantage over an equal capital employed in the carrying trade. Upon equal or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give employment and revenue to the greatest number of people of his own country."

This passage is remarkable for the insistence on two points: first, that for capital to be employed at home it must obtain the ordinary or nearly the ordinary rate of profit; and secondly, that the employment of capital at home is most advantageous.

And here the difficulty arises. Suppose the introduction of some foreign import takes away the profit of the home producer may this not lead to a diminution of domestic industry? Before the foreign trade was opened there was an interchange of products and a replacement of capitals within the country; but after the foreign trade is established one of the capitals is a foreign capital, as in the example already noticed of the trade between Edinburgh and London compared with that between London and Portugal.

§ 7. Third Answer: Effect of Protection on "The Annual Produce of the Land and Labour of the Society."

This difficulty is met by Adam Smith by taking account of the effect on the national dividend or the annual produce of the land and labour. And this brings to the surface the arguments that at present