saved and added to his capital. In the case of clothes he is right, because when he has once acquired a stock of clothes, which probably happened when he was a minor, all he has to do is to keep up that stock, and the maintenance of a stock is not the same as the increase of a stock. But when a man accumulates a library of books, he is obviously saving and investing money; the investment may be a good or a bad one, but so may any investment. In regard to the accumulation of houses, which, according to Adam Smith, are not part of the community's capital, no one ever thinks of doubting the necessity of saving, and houses only differ from furniture, books, and such like things, because they constitute so large a portion of the value of men's property that definite accounts are kept in relation to them. When, then, we find Adam Smith only teaching that the 'capital' of a country is the result of saving,1 we naturally begin to suspect that he must mean by saving, something different from what we now mean by it, and this is indeed the case. When we say a

thing has been 'saved,' we mean that it has been produced, and not (yet, at any rate) consumed. The things the British nation has saved are its whole present stock of goods acquired by industry. But according to Adam Smith, what is saved is consumed:

'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. That portion of his revenue which a rich man annually spends, is in most cases consumed by idle guests and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as, for the sake of the profit, it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people; by labourers, manufacturers, and artificers, who reproduce with a profit the value of their annual consumption. His revenue, we shall suppose, is paid to him in money. Had he spent the whole, the food, clothing, and lodging, which the whole could have purchased, would have been distributed among the former set of people. By saving a part of it, as that part is, for the sake of the profit, immediately employed as a capital, either by himself or by some other person, the food, clothing, and lodging, which may be purchased with 1 'Whatever a person saves from his revenue he adds to his capital,'

p. 149 b.

it, are necessarily reserved for the latter. The consumption is the same, but the consumers are different.'1

In the chapter 'Of Money,' Adam Smith had explained clearly enough that the real revenue of individuals and societies consists not of the money or metal pieces at which it is valued, but of the things which are bought with those metal pieces. In accordance with this view of the subject, if we were asked, what was the difference between the part of the rich man's revenue represented by the £800 which he 'spent last year, and that represented by the £200 which he 'saved,' we should say that the £800 which he spent, represents certain things, such as the food, the fuel, the shelter, the maintenance of furniture and clothes, and the menial service, which he consumed or gave to his friends to consume; and the £200 represents certain other things, such as a few feet of the Manchester Ship Canal, or a portion of waterworks in Argentina, which he has acquired, and which neither he nor any one else has consumed. But in Adam Smith's argument just quoted, it is not the new canal or the new waterworks 2 which are said to be saved, but the food, clothing, and lodging,'s consumed by the productive labourers who produce them. What is annually saved,' is thus made to signify, not the annual additions to the stock of the community, the surplus of production over consumption, but the wages of productive labourers. Whether it means the wages

1 P. 149 b.

2 Of course it frequently happens that the 'rich man' does not invest in new enterprises, but buys shares in old ones. The annual savings of the community in any particular year, consequently, do not altogether belong to the persons who have saved during that year, but partly to others who have exchanged old property for new. The savers determine the amount of the annual addition to the community's capital, but they have abdicated, to a great extent, the office of determining what form the addition shall take.

3 How does the inclusion of 'lodging' in 'what is employed as a capital' fit in with Adam Smith's theory that houses are not part of a country's capital, and produce nothing?

Adam Smith imagined that labour employed for a money profit is all 'productive' labour, labour which 'fixes and realises itself in a particular subject or vendible commodity.' He forgot entirely that an employer's profit can be made by employing labourers whose work 'perishes in the very instant of its performance,' just as well as by employing productive labourers. The profits, for example, of the hotel-keeper and the hair-dresser are obtained by employing 'menial servants.'

of all productive labourers or only the wages of those who are employed in producing the additions to the capital, it is not necessary to decide. In either case, it is plain that Adam Smith does not mean by 'saving' what we mean by it. His 'savings,' instead of being accumulations or stores of the produce of past labour, are a part of the annual produce and annual consumption. When he wishes to show that in spite of all prodigality and misconduct the capital of England has increased, does he take the course which would be obvious to any one who understood the capital to be an accumulation of goods? Does he say the land of England has been improved, the farm-houses and other buildings have increased and grown better in quality, the cattle, sheep, and horses are more numerous and finer? By no means. He says that increase of capital is almost always' necessary for increase of produce,1 and sets himself to prove that the annual produce has increased, and even then he does not exactly arrive at the conclusion that the capital has increased, but only that 'the capital annually employed' has increased :

"Though the profusion of government must undoubtedly have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is undoubtedly much greater at present than it was either at the restoration or the revolution. The capital, therefore, annually employed in cultivating this land, and in maintaining this labour, must likewise be much greater.'

Now, if the capital of a country, or what seems in Book II. Chapter iii. of the Wealth of Nations to be much the same thing, 'the capital annually employed,' is to be, sometimes at any rate, considered as a part of its periodical produce, the question naturally arises, what part? In Book II. Chapter iii. it is apparently that part of produce which is not ' revenue,' and for the purpose in hand 'revenue' seems to consist entirely of rent and profit. The capital,' then, or the part of produce which in the course of a year replaces a capital,' is that part of the annual produce which is neither rent nor profit. But in Book I., and indeed at the beginning of Chapter ii. of Book II., that part of the annual produce which is neither rent nor profit is wages. The capital,' then, of

1 P. 152 a.

2 P. 153 b.

Book II. Chapter iii. and the wages paid in a year ought to be identical. But if this were so, it could scarcely have escaped the attention of Adam Smith himself; moreover, there seem to be included in the capital of Book II. Chapter iii. things which are evidently not thought of as constituting wages, namely, materials.' The explanation of the discrepancy must lie in an ambiguity of the word 'produce.' When following his earlier or British train of thought, Adam Smith makes produce' exactly the same thing as 'revenue,' or what we call 'income'; it is the necessaries, conveniences, and amusements which men actually enjoy plus any objects which they may add to their accumulated stock or capital. But when following his later or physiocrat train of thought, as in Book II. Chapter iii., he looks on the produce of a country as a mass of material objects. We have already observed that the income or revenue of a community includes many things which are not material objects.1 It is also the case that many of the material objects which are produced cannot possibly be regarded as parts of the income of the community. Nothing strikes the ordinary mind as better entitled to be called produce than wheat. But it is not wheat but bread and other things made of flour that reach the consumer and constitute a part of his revenue or income. The amount spent by the consumers on bread is supposed to be about double the value of the wheat after it has been harvested and threshed. If, then, we were making up a computation of national income by adding together products, instead of by the usual and simple method of adding individual incomes, we should have to leave wheat out of account altogether. If we took wheat alone as the income, we should under-estimate the item in question by 50 per cent; if we took both wheat and bread as the income, we should over-estimate the item by 50 per cent. So when produce' is taken as equivalent to revenue or income, we must understand by it only ultimate produce, no intermediate products being taken into account. Adam Smith was probably groping for this truth when he made the distinction between gross and net revenue, which is to be found in the opening paragraphs of the second chapter of Book II. :—

1 Above, pp. 18-31

'The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labour; the net revenue, what remains free to them after deducting the expense of maintaining, first, their fixed, and secondly, their circulating, capital, or what, without encroaching upon their capital, they can place in their stock reserved for immediate consumption, or spend upon their subsistence, conveniencies, or amusements.

'The whole expense of maintaining the fixed capital must evidently be excluded from the net revenue of the society. Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings, etc., nor the produce of the labour necessary for fashioning those materials into the proper form, can ever make any part of it.'1

The materials fashioned into proper form which 'support' useful machines and instruments of trade are clearly intermediate, not ultimate, products. Such things as new tyres for wheels, machine-oil, and coal used in steam-engines form part of nobody's income.

Very possibly when Adam Smith divided the total produce into wages, profits, and rent, he was thinking of his net produce,' and when he divided produce into profits, rent, and the part of produce destined for replacing a capital, he was 'thinking of his 'gross produce.' But this does not make it much easier to say what the part of produce destined for replacing a capital is, for Adam Smith's gross revenue or gross produce is a mere chimæra. It is impossible to form any conception of the aggregate of products, intermediate and ultimate, all jumbled together. We cannot think of a country's annual produce as consisting of x qrs. of wheat + y sacks of flour + z lbs. of bread. We cannot make an aggregate of the coal, iron, oil, cotton, and other things used to make a calico shirt, and add them to the shirt itself. Adam Smith was misled by the fact that an individual carrying on a business has a gross revenue, or, as we should say, gross receipts, consisting of two parts, one of which 'replaces his capital,' or, as we should say, pays his working expenses, while the other constitutes his profits. This, of course, does not show that the world in general has similar gross receipts divisible into what replaces a capital on the one hand and

1 P. 124 a.