settled, not by its actual exercise, but by its ultimate destination, it is difficult to see why the question whether it is fixed or circulating capital should not be settled by the same criterion. Equally difficult is it to see how the straightforward term exchanged' is explained by the metaphorical 'converted.'1

§ 5. Adam Smith's successors on the Functions of the Capital of a Community.

With regard to the functions of the capital of a community, Lauderdale's Nature and Origin of Public Wealth shows a great advance upon the Wealth of Nations. Lauderdale denied that the function of the capital is to set labour in motion or to support industry, and saw that the functions ascribed to the fixed capital belong also to the circulating capital.

Capital may be employed, he says, in five different ways:(1) In obtaining buildings and machinery.

(2) 'In procuring and conveying to the manufacturer the raw materials in advance of wages, or conveying the manufactured commodity to the market and furnishing it to the consumer; that is, in the home trade.'

(3) In importation and exportation. (4) In agriculture.

(5) In circulation (as money). 2

In all cases where capital is so employed as to produce profit, that profit arises from the capital 'supplanting a portion of labour which would otherwise be performed by the hand of man, or from its performing a portion of labour which is beyond the reach of the personal exertion of man to accomplish.' 3

In the case of buildings and machinery, he thought Adam Smith showed a strange confusion of ideas' when he said.

·

1 In another place (Bk. I. ch. iv. § 1, ad fin; People's ed. 35 b) Mill says the 'shape' of the 'values' destined for productive reinvestment, 'whatever it may be, is a temporary accident; but, once destined for production, they do not fail to find a way of transforming themselves into things capable of being applied to it.' The mystic process is not explained. 2 Public Wealth, p. 159. 3 Ibid., 161.

p.

6

that machinery facilitates labour or increases its productive powers.1 'The same process of reasoning,' he says, 'would lead a man to describe the effect of shortening a circuitous road between any two given places from ten miles to five miles as doubling the velocity of the walker.' He wished to say that machinery supplants labour.' The force of this lies entirely in the illustration, which is not very fairly chosen. Had Adam Smith lived at the present time he might have retorted that it is surely better to say that a pneumatic-tyred ball-bearing safety bicycle increases the productive (locomotive) power of the cyclist's labour as compared with the time when he rode an old-fashioned bone-shaker,' than to say that it supplants his labour.' Lauderdale's 'walker' apparently stops when he has got to the second of the two given places, but the world in general behaves more like the cyclist, who with his improved machine exerts the same labour as before, but travels double the distance.

In the cases of the home and foreign trade he teaches that capital supplants labour because less labour is required to produce a given result when there are middlemen like shopkeepers, manufacturers, and merchants, than if the consumers had always to deal directly with the producers. The fact that the middleman saves more labour to the consumer than he himself expends, 'proves that it is his capital, and not himself,' that supplants the consumer's labour :

"Though the proprietor of capital so employed saves, by the use of it, the labour of the consumer, he by no means substitutes in its place an equal portion of his own; which proves that it is his capital, and not himself, that performs it. He, by means of his capital, perhaps, does the business of three hundred consumers by one journey; and carts, boats, and a variety of other machinery, all tending to supplant labour, are applicable to the large scale in which he deals, from which a consumer could derive no benefit in procuring for himself the small quantity adapted to the satisfaction of his individual desires.' 2

The case of capital employed in agriculture is identical with that of capital employed in buildings and machinery.

1 Public Wealth, p. 185, note. The reference is to Wealth of Nations, Bk. 11. ch. ii. p. 124 a.

2 lbid., p. 179.

The 'circulating' capital or money supplants labour by doing away with the necessity of the laborious processes involved in barter.

'From this short examination it appears that capital, whether fixed or circulating, whether embarked in the home or in foreign trade, far from being employed in putting labour into motion, or in adding to the productive powers of labour, is, on the contrary, alone useful or profitable to mankind from the circumstance of its either supplanting the necessity of a portion of labour that would otherwise be performed by the hand of man, or of its executing a portion of labour beyond the reach of the powers of man to accomplish: and this is not a mere criticism on words, but a distinction in itself most important.' 1

In general, however, the economists of the first half of the nineteenth century seem to have been very well satisfied with Adam Smith's account of the functions of the capital of a country.

Many of them seem even to have adopted his doctrine that the great use of the capital is to make division of labour possible. Lauderdale's critic in the Edinburgh Review says:

'The remaining part of Lord Lauderdale's theory-his assertion that the capital employed in commerce supplants a labour otherwise unavoidable-appears to have proceeded from an oversight of a different nature, and to have been indebted for all its novelty to a mistake of the remote for the proximate cause. The accumulation of capital is necessary to that division of labour by which its productive powers are increased, and its total amount diminished. . . . All Lord Lauderdale's explanation of the manner in which mercantile and manufacturing capital supplants the labour of the purchaser resolves itself into this doctrine of the division of employments. The accumulation of stock enables one class of men to work in any line cheaper for the rest of the community than if each class worked in every line for itself. The immediate saving of labour is here occasioned by its subdivision. It is a consequence of the same accumulation of stock, that one class of men collects the articles necessary for the others all at once, and thus saves each the necessity of collecting for itself, which would be a repetition of the same toil for every transaction. This saving, too, is occasioned by the division of labour; and all writers have agreed

1 Public Wealth, pp. 203, 204.

in giving the same account of the connexion between the division of labour and the accumulation of stock. Lord Lauderdale's discovery consists in dropping the intermediate link of the chain, and ascribing the effect directly to what the schoolmen used to call the causa causæ.

'1

Doubtless Lauderdale was wrong when he ignored the division of labour, but that scarcely proves that the account given by all writers' of 'the connexion between the division of labour and the accumulation of stock' is correct. The fact that the division of labour makes labour more productive does not prove that the accumulation of capital employed in commerce only makes labour more productive by facilitating the division of labour. Malthus, Ricardo, and James Mill pay little attention to the subject. Senior, however, expressed an approval of Adam Smith's view which was so qualified as to amount to a condemnation. Quoting the passage from the Introduction to Book II. of the Wealth of Nations in which Adam Smith endeavours to explain the connection between the accumulation of capital and the division of labour, he

says:

'Perhaps this is inaccurately expressed; there are numerous cases in which production and sale are contemporaneous. The most important divisions of labour are those which allot to a few members of the community the task of protecting and instructing the remainder. But their services are sold as they are performed. And the same remark applies to almost all those products to which we give the name of services. Nor is it absolutely necessary in any case, though, if Adam Smith's words were taken literally, such a necessity might be inferred, that, before a man dedicates himself to a peculiar branch of production, a stock of goods should be stored up to supply him with subsistence, materials, and tools, till his own product has been completed and sold. That he must be kept supplied with those articles is true; but they need not have been stored up before he first sets to work, they may have been produced while his work was in progress. Years must often elapse between the commencement and sale of a picture. But the painter's subsistence, tools, and materials for those years are not stored up before he sets to work: they are produced from time to time during the course of his labour. It is probable, however, that Adam Smith's real meaning was, not that the identical supplies which will be wanted in a course of progressive industry

1 Vol. iv. p. 370.

must be already collected when the process which they are to assist or remunerate is about to be begun, but that a fund or source must then exist from which they may be drawn as they are required. That fund must comprise in specie some of the things wanted. The painter must have his canvas, the weaver his loom, and materials-not enough perhaps to complete his web, but to commence it. As to those commodities, however, which the workman subsequently requires, it is enough if the fund on which he relies is a productive fund, keeping pace with his wants, and virtually set apart to answer them.'1

The criticism is sound, but the apology is lame. It is not in the least probable that when Adam Smith said that 'a weaver cannot apply himself entirely to his peculiar business unless there is beforehand stored up somewhere . . . a stock sufficient to maintain him, and to supply him with the materials and tools of his work, till he has not only completed but sold his web,' his 'real meaning' was that the maintenance and materials used by the weaver must be forthcoming from some source when they are required. Moreover, the real meaning, obligingly invented for Adam Smith by Senior, does not prove the case. The facts that the painter must have his canvas, the weaver his loom, and materials, not enough, perhaps, to complete his web, but to commence it, and that a productive fund, keeping pace with the workman's wants, and virtually set apart to answer them, is necessary for the supply of those commodities which the workman subsequently requires, have nothing to do with the division of labour. Every one who paints must have his canvas, whether he devotes himself principally to painting or not, every one who weaves must have his loom and materials, whether he is only a weaver, or also a tinker, tailor, and apothecary. And the 'productive fund' which the workman subsequently requires is not formed by 'abstinence,' and so is not, even according to Senior himself, 'capital.' The baker does not abstain when he supplies the wants of the weaver by giving him bread in exchange for cloth, nor does the weaver abstain when he supplies the wants of the baker by giving him cloth in exchange for bread.

Of course, no economist could fail to see that the function

1 Political Economy, 8vo ed. pp. 78, 79.