Category: Steve

319: “The great commerce of every civilized society, is that carried between the inhabitants of the town and those of the country.”  Even though this has changed in the sense that this commerce is now a tiny fraction of all commerce, it is still the most fundamental, because without it, nothing else can happen.  The country stops growing food, and the cities starve.

320: “The corn which grows within a mile of the town, sells there for the same price with that which comes from twenty miles distance.  But the price of the latter must generally, not only pay the expense of raising and bringing it to market, but afford too the ordinary profits of agriculture to the farmer.”  Smith’s point here is the advantage of those parts of the country that lie physically near the market (ie, the city); which is true, but there is another point that deserves discussion, which is that the above appears to contradict a previous statement.  As I see it, Smith earlier declared that the value of a commodity is the amount of labor necessary TO PRODUCE it.  Later (previous chapter) he indicates that transportation adds value.  Here, he once again denies that transportation adds value.  It would seem clear that labor adds value; the point is that, if the commodity (corn in this case) requires increased transportation cost, then some of that added value must go to the labor of transporting it, thus reducing the amount of added value that can go into the pocket of the farmer as profit.

“As subsistence is, in the nature of things, prior to conveniency and luxry, so the industry which procures the former, must necessarily be prior to that which ministers of the latter.” This is true both historically and theoretically; the development of the country proceeded the development of the town, and it was only when country was able to produce a considerable surplus that the town came to exist (see division of labor, book 1 chapter 1).

Page 321:  “Upon equal, or nearly equal profits, most men will chuse to employ their capitals rather in the imporivement and cultivation of land, than either in manufactures or in foreign trade.  The man who employs his capital in land his more under his view and command, and his fortune is much less liable to accident, then that of the trader…”  Two things.  First, he ignores vagaries of weather, which are a vital and unpredictable element of agriculture, and, two, the profits are not generally liable to be equal or nearly equal.  Today, the greatest profits by far are to be found in the realm of finance, which at the time Smith was writing was barely considered an industry.  (I kept his spelling of “chuse” because I think it’s charming). His thesis is Agriculture > manufacture > transport or foreign commerce; making money directly from finance never enters the equation.

Capital may be used 1. procuring rude produce, 2. manufacture commodities from rude produce, 3. transporting commodities, or 4. dividing commodities into salable proportions (retail).  Each of  these is necessary for the other, and for society as a whole.

Note: Smith does love to divide things up into categories, doesn’t he?  I suspect he studied Aristotle.

Page 302: …if it was produced spontaneously, it would be no value in exchange…”

Page 303:  “It is not the multitude of ale-houses, to give the most suspicious example, that occasions a general disposition to drunkenness among the common people; but that disposition arising from other causes necessarily gives employment to a multitude of ale-houses.”  I can’t help but wonder if the relationship isn’t more dialectical than he expresses; but that is only in passing.  His point, in terms of prime cause, is certainly valid.

“The persons whose capitals are employed in any of those four ways are themselves productive laborers.”  This is interesting, because he here uses a far broader definition of  ‘laborer’ than he has used anywhere else in the book so far; where before he made a distinction between the laborer and the one who owned the tools and the raw produce upon which the laborer worked, here he says the latter is also a laborer.  Interesting change, and one that gives the impression of someone palming a card, though for what purpose I can’t yet see.

Page 304: “His capital employs too the sailors and carriers who transport his goods from one place to another, and it augments the price of those goods by the value, not only of his profits, but of their wages.”  In other words, transporting a commodity to a place where it can be sold adds value.  This appears to contradict his earlier explanation of value which is something inherent in the commodity itself; because if it is, as he says, inherent in the commodity, then moving it to a different, more profitable market, ought not to change it’s value (even though, it will naturally change it’s price).  I wonder if he will resolve this contradiction later, or if he even realizes it is there.

Page 305: Here he discusses nature as laborer, which broadens the definition even more, as now labor is not an exclusively human characteristic, but nature “labors” as it causes plants to grow.  Compare this with his discussion of labor in book one.  “This rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.”   Now ground-rent is payment for the labor of nature!  Yet earlier, ground-rent was it’s, unique attribute, one of the categories (along with wages and profit) that go to make up the cost of a commodity.  Labor must, indeed, labor mightily to do all of these things, some of which contradict each other.

Page 306:” Of all the ways in which a capital can be employed, it [agriculture] is by far the most advantageous to society.”  This was almost certainly true at one time, but it is far from universal.

Page 309:”Where the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could ;manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.”  Uh…not so much.

Page 313: “That part of the capital of any country which is employed in the carrying trade, is altogether withdrawn from supporting the productive labor of that particular country, to support that of some foreign countries.”  Not sure about this.  If France pays an English shipping country to bring goods to China, is not the capital invested in the English shipping company, for which the company makes a profit, increasing the wealth of England?  Or am I missing his point?

Page 314: “The number of sailors and shipping which any particular capital can employ, does not depend upon the nature of the trade, but partly upon the bulk of goods in proportion to their value, and partly upon the distance of the ports between which they are to be carried; chiefly upon the former…The capital, therefore, employed in the home-trade of any country will generally give encouragement and support to a greater quantity of productive labor in that country, and increase the value of its annual produce more than an equal capital employed in this latter trade of consumption; and the capital employed in this latter trade has in both these respects a still greater advantage of an equal capital employed in the carrying trade.”

In the last chapter, I spoke of Smith, in some sense, having predicted the world wars, or at least pointing out the significant factors that lead to them.  Here it is even more strongly, on page 315: “When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abraod, and exchanged for something for which there is a demand at home.  Without such explortation, a part of the productive labor of the country must cease, and the value of its annual produce diminish.”

Page 316: “The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the cause of it.”  This makes perfect sense.  If a nation is producing much, then it will generate businesses for exporting that much.

This chapter deals with the particular characteristics of stock (capital) when it is lent at interest.  He spends some time explaining why it should be lent to those who will invest it in productive ventures, rather than to those who will spend it; but this part doesn’t interest me a great deal.

On page 292 he says, “Almost all loans at interest are made in money, either of paper, or of gold and silver.  But what the borrower really wants, and what the lender really supplies him with, is not the money, but the money’s worth, or the goods which it can purchase…By means of the loan, the lender, as it were, assigns to the borrower his right to a certain portion of the annual produce of the land and labor of the country, to be employed as the borrower pleases.”

The point being that the amount of money that can be loaned is not determined by the value of the money, but “by the value of that part of the annual produce which, as soon as it comes either from the ground, or from the hands of the productive laborers, is destined not only for replacing a capital, but such a capital as the owner does not care to be at the trouble of employing himself.”  What strikes me about this is that, in some ways, the limiting factor becomes the resources of the lender (usually expressed in interest), but the controlling factor is the use the borrower wishes to make of it.  This is especially interesting when we consider the latter stages of capitalism, when finance capital assumes control over industrial capital.

He then goes on to discuss how certain money might be used several times, being lent, spent, lent again, spent again, and so on among different lenders and borrowers.  This seems to be intended to reinforce his earlier point about why money cannot be counted as part of nation’s wealth.

On page 294 we find: “The increase of those particular capitals from which the owners wish to derive a revenue, without being at the trouble of employing them themselves, naturally accompanies the general increase of capitals; or, in other words, as stock increases, the quantity of stock to be lent at interest grows gradually greater and greater.”   And then, further down, “As capitals increase, in any country, the profits which can be made by employing them necessarily diminish.”  These points are significant as yet another reason why capitalism, as a system, must constantly expand.  Indeed, someone could make an argument that Adam Smith predicted the World Wars without stretching the truth too awfully much.

Page 296: “Any increase in the quantity of silver, while that of the commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal.  The nominal value of all sorts of goods would be greater, but their real value would be precisely the same as before.”   Very true.  The value of a commodity consists in the amount of labor embodied in it, and this labor may be expressed as gold, silver, paper, or in terms of other commodities.   “The wages of labor are commonly computed tye quantity of gold and silver which is paid to the laborer.  When that is increased, therefore, his wages appear to be increased, though they may sometimes be no greater than before.  But the profits of stock are not computed by the number of pieces of silver with which they are paid, but by the proportion which those pieces bear to the whole capital employed.”

He then goes on to discuss the relationship between the interest of money and the profits of stock (ie, loan rates are closely tied to return on investment from agriculture or manufacture).

It is interesting to note, at the bottom of page 298, that Smith is in favor of having a legal limit to interest rates.  He proposes that this limit be just a little above the lowest market rate.  Smith could not have predicted the volatility of the money markets; with interest rates fluctuated as they do today, such a plan is impractical.  But it is interesting that Smith proposes it.

Page 299: “No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made.”  Because money, being a commodity like any other, has its price (expressed, like anything else, in terms of labor), and if the law requires a rate below its cost, no one will lend it, or else they will circumvent the law (which, by increasing the risk, will increase the cost).

Still on 299, this is very interesting: “The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest.”  Is that still true?  If so, why?  Much of this feels like a relic of the past–that is, at the time Smith was writing, we were just emerging from a feudal monarchical system where land (ownership and production) formed the entire basis of the economy; he was poised on the brink, as it were, of an economy based on commodity production.  I think this explains why he sees such importance in land.  Not long afterward, the question became: lend money at interest, or invest in manufacture?  But at the end of the 18th century, we still aren’t quite there.