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

examined, are in accord with the latest developments. The annual produce of the land and labour-the great revenue of the body of the people-corresponds to the "national dividend." To keep up the dividend, the labour and the capital must also be kept up or continued in the same degree of efficiency. And in a healthy progressive society much more is produced than is requisite for this purpose; population increases and capital increases, and the wealth available for immediate consumption by the inhabitants of the country also increases. From the national point of view "the first object of political economy considered as a branch of the science of a statesman or legislator is to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves."

The distribution of the annual produce between the great social orders depends on their relative strength or on their power of making contracts. This again depends partly on the causes which may be brought under the terms demand and supply, and partly on the influence of law and custom with the force of law, which again depend largely on historical causes which go far back in their origins.

But though, in a sense, the interests of masters and men (or of capital and labour) are opposed, from another point of view they are in harmony. Both are interested in the increase of the joint product of their co-operation. And looking to the actual progress of nations Adam Smith arrives at the conclusion: "The wages of labour do not sink with the profits of

stock. The demand for labour increases with the increase of stock whatever be its profits; and after these are diminished stock may not only continue to increase but to increase much faster than before. . . . A great stock, though with small profits, generally increases faster than a small stock with great profits

Under any system in which private property and individual liberty are the essential bases of society -however much they may be modified by various moral or political ideals-capital and labour are mutually necessary and interdependent. The capital within any country, in order to preserve its existence, must be continuously restored and reproduced by labour. And equally under modern conditions labour can find no employment without the aid of capital.

Even supposing the socialist state were established there must be a reservation of stock for capital purposes, or the land would be afflicted with famine and misery."

2

§ 5. Complexity of Industrial Relations.

It is equally obvious that under actual conditions (i.e. as contrasted with the socialist ideal) the direction of industry is in the hands of those who control the capital. Those again who control the capital look to profit as the guide, and profit again depends largely on the price to be obtained for the product and that again on the demand of the consumers. The con

1 Book I. chap. ix.

2 Cf. Pareto, Cours d'économie politique, vol. ii. p. 366 sq.

sumers in the last resort are all who have any share in the great revenue of the society. With such a complex interaction of economic forces, it seems prima facie that it is extremely improbable that the national interests will be promoted simply by leaving individuals to do as they please.

§ 6. Conflict possible between Individual and
Public Interests.

This possible conflict of the interests of the individual and the nation is always recognised and emphasised by Adam Smith. He does not take it for granted that, owing to a beneficent providence, the pursuit of self-interest naturally in all circumstances promotes the public good. To attain to that misty summit of optimism was left to the followers of Ricardo. The following passage from M'Culloch's Introduction to the Wealth of Nations (revised in 1838) shows very clearly the opposition between Adam Smith and the greatest and most extreme of the Ricardians. "But however excellent there are errors, and those, too, of no slight importance, even in those parts of the Wealth of Nations which treat of the production of wealth. So long as Smith confines himself to a statement of the advantages, resulting from the freedom of industry, and of the mischiefs occasioned by the frequent attempts to fetter its operations and to force it into certain channels in preference to others, his principles and reasonings are equally sound and conclusive; but they are less so in other instances. He does not say that those branches

of industry which are found to be most for the advantage of individuals are necessarily also most for the advantage of the public. His leaning to the system of the Economists-a leaning perceptible in every part of his work-made him so far swerve from his own principles as to admit that individual and public advantage do not always coincide. He contends that agriculture, though not the only productive employment, is more productive than any one else; that the home trade is more productive than a direct foreign trade; and the latter than the carrying trade. It is clear, however, that these distinctions are entirely imaginary. A state being nothing but a collection of individuals, whatever is most advantageous to them individually must be so also to the collective body; and it is obvious that the interest of the parties will always prevent them from engaging in manufactures and commerce unless they yield as large profits and are consequently as publicly beneficial as agriculture."

§ 7. Weakness of Dogmatic Free Trade owing to Neglect of Adam Smith's Distinctions.

These distinctions which M'Culloch regards as imaginary are with Adam Smith of vital importance. And when allowance is made for Adam Smith's use of popular language with ambiguities that must be interpreted by the context, they are seen to be reasonable and to point to important matters of fact.

In the opinion of the present writer, it is owing to the neglect of these distinctions that the theory of