motion, but launches forth into what is perhaps the most illogical argument he ever employed.

The retailer's capital, he says, puts into motion the least labour, because the retailer himself is the only productive labourer whom it immediately employs.'1 The wholesale merchant's capital puts a good deal' more labour into motion, because it 'employs the sailors and carriers who transport his goods from one place to another. The manufacturer's capital 'puts immediately into motion a much greater quantity of productive labour . . . than an equal capital in the hands of any wholesale merchant,' because a great part of it is always either annually, or in a much shorter period, distributed among the different workmen whom he employs.'2 Lastly, the farmer's capital puts into motion a greater quantity of labour than even the manufacturer's, because not only the farmer's labouring servants, but his labouring cattle are productive labourers,' and in agriculture 'nature labours along with man.' Adam Smith seems to have entirely forgotten that the question is not whether one retailer, one merchant, one manufacturer, or one farmer employs many or few persons (to say nothing of cattle and nature), but whether a given amount of capital in the hands of a retailer, a merchant, a manufacturer, employs many or few persons. Even if it were true that shopkeepers employed no assistants—and it was not true even in Adam Smith's time-the fact that each shopkeeper's capital only employed one labourer, while each manufacturer's capital employed twenty, would prove nothing to the purpose, unless we knew that each manufacturer's capital was less than twenty times as great as each shopkeeper's.

The chief use of examining Adam Smith's arguments on the different amounts of industry put into motion by capital invested in the four different employments, is to show how excessively vague was his idea of the connexion between the magnitude of the capital of a country and the amount of industry exerted in it. He seems to have had no better basis

3 At first Adam Smith only says, 'No equal capital puts into motion a greater quantity of productive labour than that of the farmer,' but he clearly means, 'No equal capital puts into motion so much productive labour as that of the farmer.'

for his theory that the magnitude of the capital regulates the number of useful and productive labourers, than the observation of the facts that in every business, as a rule, the large capitalists are the large employers, and that the power of an individual to employ labourers in any particular business depends to a great extent on the amount of his capital. From these facts he deduced the proposition that in each of four great employments, a man's ability to employ depends on the amount of his capital, and in turn from this proposition, reasoning in his usual manner from the individual to the society, he deduced the further proposition that the ability of a nation to employ useful and productive labourers depends on the amount of its capital, and the proportions in which it is divided between the four employments. There is more than one weak link in this chain of reasoning.

First, though it may be said, roughly speaking, that at the same time and place an individual's power to employ labourers in some one particular business depends, at any rate very greatly, on the amount of his capital, it cannot be said with any approach to accuracy that even at the same time and place an individual's power to employ labour in (1) agriculture, (2) manufactures, (3) commerce, and (4) retail trade, depends on the amount of his capital. It is only true that all farmers farming the same kind of land and producing the same kind of produce, will (if they are all farming in the most profitable manner), employ much the same number of labourers to each £100 of their capital. It is not true that all farmers employ the same number of labourers to each £100 of their capital. To give an obvious illustration, the number of labourers employed to each £100 will be much less on a grazing than on an arable farm. Again, it is only true that all manufacturers using the same kind of machinery and producing the same kind of goods will employ much the same number of hands to each £100 or their capital. It is not true that all manufacturers of whatever kind employ the same number of labourers to each £100 of their capital.

Secondly, the fact that in exactly similar businesses, and at the same time and place, an individual's power to employ labour depends greatly on the magnitude of his capital, does not

prove, even excluding changes and differences in the proportions in which the whole capital is divided between different businesses, that the capacity of a whole community to employ labour is regulated at all by the magnitude of its capital. Whether a particular individual has much or little capital will seldom have any appreciable effect on the profitableness of different methods of production. Consequently, in order to produce any particular commodity profitably, an employer must generally conform pretty closely to the methods in use at the time. It would be possible, physically possible, for a man to employ people to spin wool by hand with a distaff at present in Bradford, but it certainly would not be profitable, and so no one does it. No one employs people to spin unless he can command the usual machinery. If he gets much machinery he employs many people; if he gets little, he employs few. But the whole community is in no way bound by these limitations. If the community had no means of providing expensive spinning mills, it would not follow that no one would be employed in spinning. On the contrary, if thread were considered a great necessary of life, more hands would be employed in spinning than are employed under present conditions; labour would be diverted to spinning from less necessary occupations.

It can scarcely be denied that Adam Smith left the whole subject of 'capital' in the most unsatisfactory state. Hei makes unscientific distinctions between the stock which is capital and the stock which is not capital; he makes trivial distinctions between fixed and circulating capital; he con- 1 fuses the capital of a country with a particular part of its annual produce; and with regard to the functions of the capital he completely fails to prove his most important proposition, namely, that the amount of the capital determines the amount of industry.

§ 4. Adam Smith's successors on the Nature and Origin of the Capital of a Community.

The critic of Lauderdale's Public Wealth in the Edinburgh Review for July 1804, rejected Adam Smith's distinction between the capital of a country and its stock reserved for consumption:

'A difference is established by some, especially by Dr. Smith, between capital and the other parts of stock; capital being, according to them, that part which brings in a revenue. This idea clearly appears, by the whole of the illustrations given of it, to have arisen from the fundamental error of considering nothing as productive which does not yield a tangible return, and of confounding use with exchange. For may not a man live upon his stock, that is, enjoy his capital, without either diminishing or exchanging any part of it? In what does the value, and the real nature of stock reserved for immediate consumption, differ from stock that yields what Dr. Smith calls a revenue or profit? Merely in this-that the former is wanted and used itself by the owner; the latter is not wanted by him, and therefore is exchanged for something which he does want.'1

Subsequent writers scarcely discussed the division of the community's stock into capital and reserve for consumption, because they did not conceive the capital of a country as a part of its accumulated stock. They succumbed completely to Adam Smith's tendency to regard the capital of the country as a particular part of its annual produce, and they misunderstood as completely as he did the process of adding to the capital by saving. In Commerce Defended, James Mill remarks:

'The whole annual produce of every country is distributed into two great parts; that which is destined to be employed for the purpose of reproduction, and that which is destined to be consumed.' 2

Though he does not actually say that the first of these is the capital of the country, he shows that he thought so by using 'the augmentation of capital,' and 'the augmentation of that part of the annual produce which is consumed in the way of reproduction,' as synonymous phrases. That he did. not understand that all that a nation saves is simply the additions which it makes to its accumulated stock is shown by his bold assertion that 'every country will infallibly consume to the full amount of its production.' The writer of the article 'Political Economy' in the fourth edition of the Encyclopædia Britannica understood that the capital is an accumulated stock as little as James Mill in Commerce Defended:

1 Vol. iv. p. 366.

4 P. 79; see also pp. 71, 76.

'Every man's wealth,' he says, 'is of two kinds; the one which he lays aside for immediate consumption; the other which he reserves for the supply of future wants, or employs in such a manner as to make it produce new wealth. The former is called his income, the latter his capital.'1

This is like dividing a water company's water into the water in its reservoir and its supply, into x gallons collected at one time in its reservoir and y gallons supplied per diem or per annum.

2

Ricardo says: Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labour.' This is rather vague, for we do not know exactly what Ricardo meant by 'the wealth of a country,' or by 'employed in production.' In his chapter 'On Taxes,' he distinctly implies that the houses, clothes, and furniture used by labourers are part of the capital of the country, a fact which is difficult to harmonise with Adam Smith's conception of the stock reserved for immediate consumption not being part of the capital of the country.

In the first and second editions of his Principles he gives a fairly clear account of the process of saving or adding to the capital or stock:

'When the annual productions of a country,' he said, 'exceed its annual consumption, it is said to increase its capital; when its annual consumption at least is not replaced by its annual production, it is said to diminish its capital. Capital may therefore be increased by an increased production, or by a diminished consumption.

'If the consumption of the government, when increased by the levy of additional taxes, be met either by an increased production, or by a diminished consumption on the part of the people, the taxes will fall upon revenue, and the national capital will remain unimpaired; but if there be no increased production or diminished consumption on the part of the people, the taxes will necessarily fall on capital.'4

It is not quite logical, because if the production already exceeds the consumption, the capital will be increased

1 Vol. xvii. p. 108 a.

2 1st ed. pp. 93, 94; 3d ed. in Works, p. 51. 1st ed. pp. 186, 187; 3d ed. in Works, p. 87. 1st ed. p. 187; 2d ed. p. 170.