Smith next proceeds to indicate the limits of this division of labour. Of such limits he mentions two: (1) In the first place it must be limited by the extent of the market. “When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for.”[137] This is why foreign trade, including trade with the colonies, by extending the market for some products is favourable to further division of labour and a further increase of wealth. (2) The other consideration which, according to Smith, limits division of labour is the quantity of capital available.[138] The significance of this observation is not quite so obvious as that of the former one. Here it seems to us that a conclusion drawn from one particular trade has been applied to industry as a whole. It may be true of a private manufacturer that he will be able to push technical division of labour further than any of his rivals provided he has more capital than they; but taking society as a whole it is clear that the existence of division of labour enables the same product to be produced with less capital than is necessary for the single producer.[139]
Such is an outline of Adam Smith’s theory of division of labour—a theory so familiar to everyone to-day that we are often unable to realise its importance and to appreciate its originality, and this despite the fact that certain sociologists like Durkheim have hailed it as supplying the basis of a new ethic. Juxtaposed with the Physiocratic theory, it is not very difficult to realise its superiority.
To the Physiocrats the economic world was a hierarchy of classes. The agriculturist in some mysterious way bore the “whole weary weight of this unintelligible world” upon his own shoulders, giving to the other classes a modicum of that sustenance which he had wrested from the soil. Hence the fundamental importance of the agricultural classes and the necessity for making the whole economic system subordinate to them. Adam Smith, on the other hand, attempted to get a view of production as a whole. He regarded it as the result of a series of joint undertakings engineered by the various sections of society and linked together by the tie of exchange. The progress of each section is bound up with that of every other. To none of these classes is entrusted the task of keeping all the others alive; all are equally indispensable. The artisan who spares the labourer the task of building his house or of making his shoes contributes to the accumulation of agricultural products just as much as the ploughman who frees the artisan from turning the furrow or sowing the seed. The progress of national wealth cannot be measured in terms of a single net product; it must be estimated by the increase in the whole mass of commodities placed at the disposal of consumers.
One very evident practical conclusion follows; namely, that taxation should fall, not upon one class, as the Physiocrats wished, but upon all classes alike. As against the impôt unique, Smith advocates multiple taxation which shall strike every source of revenue equally, labour and capital as well as land; and the fundamental rule which he lays down is as follows: “The subjects of every State ought to contribute towards the support of the Government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.”[140] This is his famous maxim of equality so frequently quoted in every financial discussion.[141]
It is very curious that Smith should have failed to make the best possible use of this theory. Its full significance was lost upon him. The theory of division of labour alone was sufficient to dispose of the whole Physiocratic system. Nevertheless, in the last chapter of Book IV we find him still valiantly struggling to disprove the conclusions of the Physiocrats, by the aid of arguments not always very convincing. Forgetting his principle of division of labour, he even adopts a part of their thesis and finds himself entangled by the invalid distinctions which they had drawn between productive and unproductive workers. He simply gives another definition and describes as unproductive all works which “perish in the very instant of their performance, and seldom leave any trace or value behind them for which an equal quantity of service could afterwards be procured.”[142] All these services, which comprise the labours of domestic servants, of administrators and magistrates, of soldiers and priests, of counsellors, doctors, artists, authors, musicians, etc., Say classed together as “immaterial products.” By restricting the term “productive” to material objects only, Smith gave rise to a very useless controversy on the nature of productive and unproductive works—a controversy that was first taken up by Say and revived by Mill, but which to-day seems to be decided against Smith, thanks to a more exact interpretation of his own doctrines. It is, indeed, quite clear that all these services constitute a part of the annual revenue of the nation, and that “production” in a general sense would be diminished if some persons did not exclusively devote themselves to the performance of such tasks.
After criticising the Physiocratic distinction drawn between the wage-earning classes and the productive, Smith immediately admits that the labour of artisans and traders is not as productive as that of farmers and agricultural labourers, for the latter not only return the capital employed by them together with profits, but they also furnish the proprietor with rent.[143]
Whence this hesitation on the part of Smith? Where did he come by the idea of the special and superior productivity of agriculture? An attempt to account for it may prove interesting, and it will help us to give Smith his true place in a history of economic doctrines.
Notwithstanding his recantation, Smith was never quite rid of Physiocratic influence. Writing of the Physiocratic system, he described it as perhaps “the nearest approximation to the truth that has yet been published.”[144] So indelible was the impression which the Physiocrats left upon him that both they and their doctrines, even when the latter are directly opposed to his own, are always spoken of with the greatest respect. The most important evidence of their power over him is the thesis just mentioned which he attempted to defend, namely, that between agriculture and other industries lies an essential distinction, because in industry and commerce the forces of nature are never brought into play, whereas in agriculture they always collaborate with man. “No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. In them nature does nothing; man does all; and the reproduction must always be in proportion to the strength of the agents that occasion it.”[145] We almost think we are dreaming when we read such things in the work of a great economist. Water, wind, electricity, and steam, are they not natural forces, and do they not co-operate with man in his task of production?
Considerations such as these were allowed to pass quite unheeded, and Smith persisted in his error because he believed that this new doctrine furnished him with an explanation of rent, that strange enigma which had puzzled English economists for so long. How was it that while other branches of production gave a return only sufficient to remunerate the capital and labour employed, agriculture, in addition to these two revenues, yielded a supplementary income known as rent? It was because “in agriculture nature labours along with man: and though her labour costs no expence, its produce has its value as well as that of the most expensive workman.” Thus “rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.”[146] Had Smith arrived at a true theory of rent this recourse to the natural powers of the soil to furnish an explanation of the proprietor’s revenue would have been quite unnecessary, and in all probability he would not have so easily accepted the idea of the special productivity of the soil. But this false