The contrast between the industrial England of 1760 and the industrial England of to-day is not only one of external conditions. Side by side with the revolution which the intervening century has effected in the methods and organisation of production, there has taken place a change no less radical in men's economic principles, and in the attitude of the State to individual enterprise. England in 1760 was still to a great extent under the medieval system of minute and manifold industrial regulations. That system was indeed decaying, but it had not yet been superseded by the modern principle of industrial freedom. To understand the origin of the medieval system we must go back to a time when the State was still conceived of as a religious institution with ends that embraced the whole of human life. In an age when it was deemed the duty of the State to watch over the individual citizen in all his relations, and provide not only for his protection from force and fraud, but for his eternal welfare, it was but natural that it should attempt to insure a legal rate of interest, fair wages, honest wares. Things of vital importance to man's life were not to be left to chance or self-interest to settle. For no philosophy had as yet identified God and Nature: no optimistic theory of the world had reconciled public and private interest. And at the same time, the smallness of the world and the community, and the comparative simplicity of the social system made the attempt to regulate the industrial relations of men less absurd than it would appear to us in the present day.
This theory of the State, and the policy of regulation and restriction which sprang from it, still largely affected English industry at the time when Adam Smith wrote. There was, indeed, great freedom of internal trade; there were no provincial customs-barriers as in contemporary France and Prussia. Adam Smith singled out this fact as one of the main causes of English prosperity, and to Colbert and Stein, and other admirers of the English system, such freedom appeared as an ideal to be constantly striven after. But though internal trade was free for the passage of commodities, yet there still existed a network of restrictions on the mobility of labour and capital. By the law of apprenticeship no person could follow any trade till he had served his seven years. The operation of the law was limited, it is true, to trades already established in the fifth year of Elizabeth, and obtained only in market-towns and cities. But wherever there was a municipal corporation, the restrictions which they imposed made it generally impossible for a man to work unless he was a freeman of the town, and this he could as a rule become only by serving his apprenticeship. Moreover, the corporations supervised the prices and qualities of wares. In the halls, where the smaller manufacturers sold their goods, all articles exposed for sale were inspected. The medieval idea still obtained that the State should guarantee the genuineness of wares: it was not left to the consumer to discover their quality. And in the Middle Ages, no doubt, when men used the same things from year to year, a proper supervision did secure good work. But with the expansion of trade it ceased to be effective. Sir Josiah Child already recognised that changes of fashion must prove fatal to it, and that a nation which intended to have the trade of the world must make articles of every quality. Yet the belief in the necessity of regulation was slow in dying out, and fresh Acts to secure it were passed as late as George II's reign.
It is not clear how far the restrictions on the mobility of capital and Labour were operative. No doubt they succeeded to a large extent; but when Adam Smith wrote his bitter criticism of the corporations, he was probably thinking of the particular instance of Glasgow, where Watt was not allowed to set up trade. There were, however, even at that time, many free towns, Like Birmingham and Manchester, which flourished greatly from the fact of their freedom. And even in the chartered towns, if Eden is to be trusted, the restrictions were far less stringent than we should gather from Adam Smith. 'I am persuaded,' he says, 'that a shoemaker, who had not served an apprenticeship, might exercise his industry at Bristol or Liverpool, with as little hazard of being molested by the corporation of either place, as of being disturbed by the borough-reve of Manchester or the head-constable at Birmingham.' Then after quoting and criticising Adam Smith, he adds: 'I confess, I very much doubt whether there is a single corporation in England, the exercise of whose rights does at present operate in this manner.... In this instance, as in many others, the insensible progress of society has reduced chartered rights to a state of inactivity.' We may probably conclude that nonfreemen were often unmolested, but that, when trade was bad, they were liable to be expelled.
Another relic of Medievalism was the regulation of wages by Justices of the Peace, a practice enjoined by the Act of Elizabeth already referred to. Adam Smith speaks of it as part of a general system of oppression of the poor by the rich. Whatever may have been the case in some instances this was not generally true. The country gentry were, on the whole, anxious to do justice to the working classes. Combinations of labourers were forbidden by law, because it was thought to be the wrong way of obtaining the object in view, not from any desire to keep down wages. The Justices often ordained a rise in wages, and the workmen themselves were strongly in favour of this method of fixing them. The employers on their part also often approved of it. In fact we have an exactly similar system at the present day in boards of arbitration. The Justice was an arbitrator, appointed by law; and it is a mistaken assumption that such authoritative regulation may not have been good in its day.
The principle of regulation was applied much more thoroughly to our externaL than to our internal trade. The former was entirely carried on by great chartered companies, whether they were on a joint-stock footing, Like the East India Company, or were 'regulated' like the Turkey Company, in which every man traded on his own capital. Here, again, Adam Smith carried too far his revolt against the restrictive system, which Led him to denounce corporate trading as vicious in principle. 'The directors of such companies,' he says, 'being the managers rather of other people's money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private co-partnery frequently watch over their own.... Negligence and profusion must always prevail, more or less, in the management of the affairs of such a company.' This is an instance of pure a Priori reasoning, but Smith's main argument is derived from the history of Joint-Stock Companies. He sought to show that, as a matter of fact, unless they had had a monopoly, they had failed; that is, he proceeded inductively, and wound up with an empirical law: 'it seems contrary to all experience that a Joint-Stock Company should be able to carry on successfully any branch of foreign trade, when private adventurers can come into any sort of open and fair competition with them.' But he was too honest not to admit exceptions to his rule, as in the instance of banking, which he explained by the fact that it could be reduced to routine.
Smith's empirical law is, as we all now know, far from being universally true, though it was a reasonable induction enough at the time when it was made. Since then a large number of Joint-Stock Companies have succeeded, as for instance in the iron trade. Nor is it difficult to see the reason of this change. The habit of combination is stronger than it was, and we have discovered how to interest paid servants by giving them a share in the results of the enterprises they direct. Experience has shown also that a big company can buy the best brains. In the recent depression of trade the ironworks of Dowlais, which are managed on the Joint-stock system, alone remained successful amid many surrounding failures, and that because they had the ablest man in the district as manager.
In Adam Smith's time, however, the existence of Joint-Stock Companies was due not to any notion of their economical superiority, but to the tendency to place restrictions upon individual enterprise, based upon that belief in the antagonism of public and private interests which was characteristic of the time. The same idea of opposition obtained equally in international relations. The prosperity of one country was thought to be incompatible with that of another. If one profited by trade, it seemed to do so at the expense of its neighbours. This theory was the foundation of the mercantile system. It had its origin in the spirit of Nationalism - the idea of self-sustained and complete national life - which came in with the Renaissance and the Reformation.
But how came this Nationalism to he connected with a belief in the special importance of gold and silver, which is generally regarded as the essence of the mercantile system? The object of that system was national greatness, but national greatness depends on national riches generally, not on one particular kind of riches only, such as coin. The explanation must be sought in the fact that, owing to the simultaneous development of trade and the money system, gold and silver became peculiarly essential to the machinery of commerce. With the growth of standing armies, moreover, State finance acquired a new importance, and the object of State finance was to secure a ready supply of the precious metals. Thus the theory sprang up that gold and silver were the most solid and durable parts of the moveable wealth of a nation, and that, as they had more value in use than any other commodities, every state should do all in its power to acquire a great store of them. At first the Government tried to attain this object by accumulating a hoard; but this policy soon proved too wasteful and difficult. It then turned its attention to increasing the quantity of bullion in the hands of the people, for it came to see that if there was plenty of bullion in the country it could always draw upon it in case of need. The export of gold and silver was accordingly forbidden; but if hoarding had proved impracticable, this new method of securing the desired end was soon found to be useless, as the prohibition could be easily evaded. In the last resort, therefore, it was sought to insure a continuous influx of the precious metals through the ordinary channels of trade. If we bought less than we sold, it was argued, the balance of trade must be paid in coin. To accomplish this end every encouragement was given to the importation of raw materials and the necessaries of life, but the purchase of foreign manufactures was, for the most part, prohibited, and individuals were entreated not to buy imported luxuries. The result was retaliation abr and a deadlock in the commercial machine. Wars of tariff were common; for instance, we prohibited the importation of gold-lace from Flanders, and the Flemings in return excluded our wool. The system, however, resisted the teaching of experience, despite the fact that in abolishing the prohibition of the export of gold and silver, the Government acknowledged the true principle of free trade put forward by the East Indian Company. The latter contended that the law forbidding the export of bullion was not only useless, since it was easily stultified by smuggling, but even, if enforced, was hurtful, since the Orientals would only sell their valuable goods for silver. The success of this contention marks the transition from the Mercantile System proper to modern Protection. The advocates of that system had shifted their ground, and instead of seeking merely to prohibit the export of the precious metals, they established a general protection of native industries.
Their measures were not all alike bad. The Navigation Acts, for instance, were defended by Adam Smith, and Mill has indorsed his defence, on the ground that national defence is more important than national opulence.
The most famous of these Acts was the law of 1651, by which no goods of the growth or manufacture of Asia, Africa, or America were to be imported into England, Ireland, or the Plantations, except in ships belonging to English subjects, and manned by a crew three-fourths of whom were English; while no goods of any country in Europe were to be imported except in English ships, or ships belonging to the country from which the goods came. The argument used by the promoters of the law was that by excluding the Dutch from the carrying trade to this country we should throw it into the hands of English shipowners, and there would he an increase of English ships. It was admitted, indeed, that this would be giving a monopoly to English shipowners and English sailors, and that therefore freights would be dearer, and a check given to the growth of commerce. It was further admitted that owing to their higher charges English ships might be driven out of neutral ports; but the contention was, that we should secure to ourselves the whole of the carrying trade between America and the West Indies and England, and that this would amply compensate for our expulsion from other branches of commerce.
These anticipations were on the whole fulfilled. The price of freights was raised, because English ships cost more to build and man than Dutch ships, and thus the total amount of our trade was diminished. We were driven out of neutral ports, and lost the Russian and the Baltic trades, because the English shipowners, to whom we had given a monopoly, raised their charge. But on the other hand, we monopolised the trade to ports coming within the scope of the Act, the main object of which was 'the preservation of our plantation trade entire.' Our shipping received a great stimulus, and our maritime supremacy grew with it. At the time when the Navigation Act was passed our colonial trade was insignificant; New York and Jersey were Dutch; Georgia, the Carolinas, Pennsylvania, Nova Scotia were not yet planted; Virginia, Maryland, New England were in their infancy. At the end of the century the Barbados alone employed 400 vessels; while with the growth of the colonies the English power at sea had increased, until it rivalled the Dutch. In the next century the continuous development of the American and East Indian trades gave us a position of unquestionable maritime superiority.
There is another argument in favour of Protection, at any rate in its early days. Its stimulus helped to overcome the apathy and dulness of a purely agricultural population, and draw a part of the people into trade. But here, as everywhere, Protection involves this great disadvantage, that, once given, it is difficult to withdraw, and thus in the end more harm is done than good. English industries would not have advanced so rapidly without Protection, but the system, once established, led to perpetual wrangling on the part of rival industries, and sacrificed India and the colonies to our great manufacturers. And our national dislike to Protection deepens into repugnance when we examine the details of the system. Looking at its results during the period from 1688 to 1776, when it was in full force, we are forced to acknowledge that Adam Smith's invectives against the merchants, violent as they were, were not stronger than the facts demanded.
But the maintenance of Protection cannot be entirely set down to the merchants. Though the trading classes acquired much influence at the Revolution, the landed gentry were still supreme in Parliament; and the question arises, why they should have lent themselves to a policy which in many cases, as in the prohibition of the export of wool, was distinctly opposed to the interests of agriculture. Adam Smith's explanation is very simple. The country gentleman, who was naturally 'least subject of all people to the wretched spirit of monopoly,' was imposed upon by the 'clamours and sophistry of merchants and manufacturers,' and 'the sneaking arts of underling tradesmen,' who persuaded him into a simple but honest conviction that their interest and not his was the interest of the public. Now this is true, but it is not the whole truth. The landowners, no doubt, thought it their duty to protect trade, and, not understanding its details, they implicitly followed the teaching of the merchants. But, besides this, there was the close connection, already referred to, between them and the commercial classes. Their younger sons often went into trade; they themselves, in many cases, married merchants' daughters. Nor did they give their support gratuitously. they wanted Protection for themselves, and if they acquiesced in the prohibition of the wool export, they persuaded the merchants to allow them in return a bounty of 5s. a quarter on the export of corn.
One of the worst features of the system was the struggle of rival interests at home. A great instance of this was the war between the woollen and cotton trades, in which the former, supported by the landed interest, for a long time had the upper hand, so that an excise duty was placed on printed calicoes, and in 1721 they were forbidden altogether. It was not till 1774 that they were allowed again, and the excise duty was not repealed till 1831. To take another instance: it was proposed in Parliament in 1750 to allow the importation of pig and bar iron from the colonies. The tanners at once petitioned against it, on the ground that if American iron was imported, less iron would be smelted in England, fewer trees would be cut down, and therefore their own industry would suffer; and the owners of woodland tracts supported the tanners, lest the value of their timber should be affected. These are typical examples of the way in which, under a protective system, politics are complicated and degraded by the intermixture of commercial interests. And the freer a government is, and the more exposed to pressure on the part of its subjects, the worse will be the result. As an American observer has lately said, Protection may be well enough under a despotism, but in a republic it can never be successful.
We find still stronger illustration of the evils of Protection in our policy towards Ireland and the colonies. After the Cromwellian settlement, there had been an export of Irish cattle into England; 'but for the pacifying of our landed gentlemen,' after the Restoration the import of Irish live stock, meat and dairy produce was prohibited from 1660 to 1685. As cattle-farming then became unprofitable, the Irish turned their lands into sheepwalks, and not only exported wool, but started woollen manufactures at home. Immediately a law was passed (1699) confining the export of Irish wool to the English market; and this was followed by the imposition of prohibitive duties on their woollen manufactures. The English manufacturers argued that as Ireland was protected by England, and its prosperity was due to English capital, the Irish ought to reconcile themselves to restrictions on their trade, in the interests of Englishmen. Besides, the joint interests of both kingdoms would be best considered if England and Ireland respectively monopolised the woollen and linen industries, and the two nations thus became dependent on one another. If we turn to the colonies, we find them regarded simply as markets and farms of the mother country. The same argument was used: that they owed everything to England, and therefore it was no tyranny to exploit them in her interests. They were, therefore, not allowed to export or import in any but British vessels; they might not export such commodities as Englishmen wanted to any part of Europe other than Great Britain; while those of their raw materials in which our landowners feared competition were excluded from the English markets. All imports into the colonies from other parts of Europe, except Great Britain, were forbidden, in order that our manufacturers might monopolise the American market. Moreover, every attempt was made to prevent them from starting any manufactures at home. At the end of the seventeenth century some Americans had set on foot a woollen industry'. In 1719 it was suppressed; all iron manufactures-even nail-making-were forbidden; a flourishing hat manufacture had sprung up, but at the petition of English hatters, these competitors were not allowed to export to England, or even from one colony to another. Adam Smith might well say, that 'to found a great empire, for the sole purpose of raising up a people of customers, may at first sight appear a project fit only for a nation of shopkeepers.' Nothing contributed more than this commercial system to the Declaration of independence, and it is significant that the same year which saw its promulgation saw also the publication of the Wealth of Nations.
Many people on first reading the Wealth of Nations are disappointed. They come to it expecting lucid arguments, the clear exposition of universal laws; they find much tedious and confused reasoning and a mass of facts of only temporary interest. But these very defects contributed to its immediate success. It was because Adam Smith examined in detail the actual conditions of the age, and wrote a handfor the statesman, and not merely, as Turgot did, a systematised treatise for the philosopher, that he appealed so strongly to the practical men of his time, who, with Pitt, praised his 'extensive knowledge of detail,' as well as 'the depth of his philosophical research.' It was the combination of the two which gave him his power. He was the first great writer on the subject; with him political economy passed from the exchange and the market-place to the professor's study; but he was only groping his way, and we cannot expect to meet with neat arrangement and scientific precision of treatment in his His language is tentative, he sometimes makes distinctions which he forgets elsewhere, as was inevitable before the language of economics had been fixed by endless verbal discussions. He had none of Ricardo's power of abstract reasoning. His gift lay in the extent and quickness of his observation, and in his wonderful felicity of illustration. We study him because in him, as in Plato, we come into contact with a great original mind, which teaches us how to think and work.
Original people always are confused because they are feeling their way.
If we look for the fundamental ideas of Adam Smith, those which distinguish him most clearly from earlier writers, we are first struck by his cosmopolitanism. He was the precursor of Cobden in his belief that commerce is not of one nation, but that all the nations of the world should be considered as one great community. We may see how widely he had departed from the old national system of economy, by contrasting the mere title of his The Wealth of Nations, with that of Mun's treatise, England's Treasure in Foreign Trade. This cosmopolitanism necessitated a detailed refutation of the mercantile system. He had to prove that gold and silver were not more important than other forms of wealth; and that if we wanted to buy them, we could always do so, if we had other consumable goods to offer in exchange. But it might be objected: 'What if a nation refuses to take your other goods, and wants your gold?' Adam Smith replied: 'in that case, gold will leave your country and go abr as a consequence, prices will fall at home, foreigners will be attracted by the low prices to buy in your markets, and thus the gold will return.' I can give you an actual example from recent history to prove the truth of his deduction. During the potato famine of 1847, we had to import enormous quantities of grain from America, and as a consequence had to send there *16,000,000 worth of bullion. Immediately prices rose in America and fell in England, English merchants discontinued buying in America, while American merchants bought largely in England, so that in the following year all the gold came back again.
Equally prominent in Adam Smith is his individualism, his complete and unhesitating trust in individual self-interest. He was the first to appeal to self-interest as a great bond of society. As a keen observer, he could point to certain facts, which seemed to bear out his creed. If we once grant the principle of the division of labour, then it follows that one man can live only by finding out what other men want; it is on this fact, for instance, that the food supply of London depends. This is the basis of the doctrine of laisser faire. It implies competition, which would result, so Adam Smith believed, in men's wants being supplied at a minimum of cost. In upholding competition he was radically opposed to the older writers, who thought it a hateful thing; but his conclusion was quite true. Again it implies the best possible distribution of industry; for under a system of free competition, every man will carry on his trade in the locality most suitable for it.
But the principle of laisser faire breaks down in certain points not recognised by Adam Smith. It fails, for instance, in assuming that it is the interest of the producer to supply the wants of the consumer in the best possible manner, that it is the interest of the producer to manufacture honest wares. It is quite true that this is his interest, where the trade is an old-established one and has a reputation to maintain, or where the consumer is intelligent enough to discover whether a commodity is genuine or not. But these conditions exist only to a small extent in modern commerce. The trade of the present day is principally carried on with borrowed capital; and it may be a clever man's interest to sell as large a quantity of goods as possible in a few years and then throw up his business. Thus the interests of producer and consumer conflict, and it has been found necessary to pass Adulteration Acts, which recognise the non-identity of interest of seller and buyer. It was argued, indeed, in Parliament, when these acts were proposed, that consumers ought to take care of themselves, but the consumers are far too ignorant to do so, especially the poor who are the great consumers of the articles protected against adulteration. Adam Smith, moreover, could not foresee that internal free trade might result in natural monopolies. A conspicuous feature of our times is the concentration of certain industries in the hands of a few great capitalists, especially in America, where such rings actually dictate the prices of the market. Eighty-five per cent. of the Pennsylvania coal-mines, for instance, are in the hands of six or seven companies who act in combination. The easiest remedy for such monopolies would be international free trade; with international competition few could be maintained. Finally, in the distribution of wealth there must necessarily be a permanent antagonism of interests. Adam Smith himself saw this, when he said that the rate of wages depended on contracts between two parties whose interests were not identical. This being granted, we see that in distribution the 'harmony' of the individual and the public good is a figment. At the present day each class of workmen cares only for the wages of its own members. Hence the complete breakdown of the laisser faire system in the question of wages. We have been driven to attempt the establishment of Boards of Conciliation all over the country, thus virtually surrendering the principle. Nor is it true that self-interest tends to supply all our wants; some of our best institutions, such as hospitals, owe their existence to altruistic sentiment. These antagonisms were to come out more strongly than ever after Adam Smith's time. There were dark patches even in his age, but we now approach a darker period-a period as disastrous and as terrible as any through which a nation ever passed; disastrous and terrible, because, side by side with a great increase of wealth was seen an enormous increase of pauperism; and production on a vast scale, the result of free competition, led to a rapid alienation of classes and to the degradation of a large body of producers.
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