Comparison with the Physiocratic doctrine concerning the natural and essential order of societies is illuminating. To the Physiocrats the “natural order” implied a system—an ideal. It required a genius to discover it, and only an enlightened despotism could realise it. For Smith the “spontaneous order” was a fact. It was not a thing to be brought into being. It already existed. It was doubtless held in check by a hundred imperfections, including, among others, the stupidity of human legislation.[206] But it was triumphant over them all. Beneath the artificial constitution of society lay the natural constitution which completely dominated it. This natural constitution, which for the Physiocrats was nothing more than an ideal, Smith discovered in actual operation, and he was able to describe its modus operandi. Political economy, which with Quesnay was nothing better than a system of rules and regulations, became in Smith’s hands a natural science based upon the observation and analysis of existing facts. In a passage written in his usual lucid style Smith shows the superiority of his system over that of the Physiocrats. “Some speculative physicians seem to have imagined that the health of the human body could be preserved only by a certain precise regimen of diet and exercise, of which every, the smallest, violation necessarily occasioned some degree of disease or disorder proportioned to the degree of the violation. … Mr. Quesnai, who was himself a physician, and a very speculative physician, seems to have entertained a notion of the same kind concerning the political body, and to have imagined that it would thrive and prosper only under a certain precise regimen, the exact regimen of perfect liberty and perfect justice. He seems not to have considered that in the political body, the natural effort which every man is continually making to better his own condition, is a principle of preservation capable of preventing and correcting, in many respects, the bad effects of a political œconomy in some degree both partial and oppressive. Such a political œconomy, though it no doubt retards more or less, is not always capable of stopping altogether the natural progress of a nation towards wealth and prosperity, and still less of making it go backwards. If a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered. In the political body, however, the wisdom of nature has fortunately made ample provision for remedying many of the bad effects of the folly and injustice of man; in the same manner as it has done in the natural body, for remedying those of his sloth and intemperance.”[207]
This passage leads us to his second thesis, namely, the excellence of these economic institutions. As we have already remarked, these two ideas of spontaneity and excellence, though confused by Smith, ought to be treated apart. His naturalism and optimism are inseparable, and both of them find expression in the same paragraph. The passage just quoted affords a proof of this. Personal interest not only creates and maintains the economic organism, but at the same time ensures a nation’s progress towards wealth and prosperity. The institutions are not only natural, but are also beneficial. They interest him not merely as objects of scientific curiosity, but also as the instruments of public weal. Herein lies their chief attraction for him, for political economy to him was more of a practical art than a science.[208]
But this is hardly emphatic enough. Natural economic institutions are not merely good: they are providential. Divine Providence has endowed man with a desire to better his condition, whence arises the “natural” social organism: so that man, following where this desire leads, is really accomplishing the beneficent designs of God Himself. By pursuing his own interest, man “is in this as in many other cases” (he is writing now of the employment of capital) “led by an invisible hand to promote an end which was no part of his intention.”[209] The Physiocrats could hardly have improved upon that.
We can scarcely share in his optimism to-day. But it has played too prominent a rôle in the history of ideas not to detain us for a moment. We must examine the arguments upon which it is based and endeavour to grasp their import.
Let us note, in the first place, that every example hitherto deduced with a view to proving the spontaneity of economic institutions at the same time furnishes a demonstration of the beneficial effects of personal interest. Owing to a coincidence by no means fortuitous every institution mentioned by Smith as owing its existence to the prevalence of action of this kind is at the same time favourable to economic progress. Division of labour, the invention of money, and the accumulation of capital are so many natural social facts that also increase wealth. The adaptation of demand and supply, the distribution of money according to the need for a circulating medium, the growth of population according to the demand for it, are so many spontaneous phenomena which ensure the efficient working of economic society. A perusal of Smith’s work leaves us with the impression that these spontaneous institutions must also be the best.
The general proof of this thesis is scattered throughout the whole book. But there was one point especially upon which Smith was very anxious to show complete accord between public and private interest. This was in connection with the investment of capital. In his opinion capital spontaneously seeks, and as spontaneously finds, the most favourable field for investment—most favourable, that is to say, to the interest of society in general. This proof at first sight seems to apply only to one special fact, but it really has a more general import. We know the great stress which Smith laid upon capital. Division of labour depends upon it, and so does the abundance or scarcity of produce. It determines the quantity of work and fixes the limit of population. To show that the investment of capital conforms to the general interest is to show that all production is organised in the manner most favourable to national prosperity.
Smith distinguishes between four methods of investing capital: in agriculture, in industry, in the wholesale and in the retail trades. Wholesale industry is further divided into three classes: domestic trade; foreign trade, furnishing the nation with foreign products; and the carrying trade which transports those goods from one country to another. Smith maintained that the order in which these various forms of activity were mentioned was also the order of their utility, agriculture being the most advantageous, industry the second best, etc.
He also proposes two criteria for testing this hierarchy: (1) the quantity of productive labour put into operation by means of the capital employed by each; (2) the amount of exchange value annually added to the revenue by each of these employments. As we pass from agriculture to the other branches, the quantity of productive labour brought into operation and the amount of exchange value obtained gradually decreases, and with this decrease goes a diminishing utility for the country. Smith thought that a nation ought to employ its capital in the way he had suggested. It ought to give the preference to agriculture, and engage in the other branches only as the accumulation of capital permitted.
But this is precisely what the capitalists would do were they entirely free. Every one of them, in fact, is interested in keeping his capital as near home as possible, with a view to better supervision. Only as a last resource does he venture to engage in foreign commerce. Again, even among the industries carried on in his own country every capitalist will preferably choose that which will result in the production of the greatest exchange value, seeing that his profit varies with the amount of this exchange value. His investments will accordingly be made in the order mentioned, an order which roughly corresponds to the greater or lesser quantity of exchange values produced by each industry. And finally, when contemplating investment in foreign trade he will for the same reason follow the order specified above—the order of greatest general utility. Thus the double desire of keeping one’s capital within one’s reach and of finding for it the most lucrative field of investment leads every capitalist to employ his capital in the fashion which is most advantageous for the nation. Such is the argument, whatever its value.
Even if we adopted his criteria it is obvious that his classification is altogether too arbitrary. How, for example, can we justify the statement that an industrial enterprise or the carrying trade employs less capital than agriculture? The exact contrary would be nearer the truth, and agriculture ought to be given a much more modest position. Moreover, the conception of such a hierarchy does not accord very well with the theory of division of labour, which seeks to put the various forms of human activity more nearly on an equality.
As a matter