SOURCE: "The Economics and Sociology of Labor," in Adam Smith and Modern Sociology: A Study in the Methodology of the Social Sciences, The University of Chicago Press, 1907, pp. 79–154.

… [The Wealth of Nations] was primarily a technological inquiry, with the ways and means of producing national wealth as its objective; it assumed that this interest had a value of its own; at the same time it assumed that this interest in production is tributary to the interest in consumption; it assumes, further, that the wealth interest in general is but a single factor in the total scheme of human and divine purposes, and that, whatever the technique of satisfying the wealth interest may prove to be, the place of that interest in the whole harmony of human relations has to be established by a calculus in whose equations the formulas of economic technique are merely subordinate terms.

All of this was understood by Smith's friend Dugald Stewart, and it was uttered by him with sufficient clearness more than a century ago. It may assist our own insight to recall some of his words:¹

The foregoing very imperfect hints appear to me to form not only a proper, but in some measure a necessary introduction to the few remarks I have to offer on Mr. Smith's Inquiry; as they tend to illustrate a connection between his system of commercial politics [sic], and those speculations of his earlier years in which he aimed more professedly at the advancement of human improvement and happiness. It is this view of political economy that can alone render it interesting to the moralist, and can dignify calculations of profit and loss in the eye of the philosopher. Mr. Smith has alluded to it in various passages of his work, but he has nowhere explained himself fully on the subject; and the great stress he has laid on the division of labour in increasing its productive powers, seems at first sight, to point to a different and very melancholy conclusion:—that the same causes which promote the progress of the arts, tend to degrade the mind of the artist; and, of consequence, that the growth of national wealth implies a sacrifice of the character of the people.

The fundamental doctrines of Mr. Smith's system are now so generally known, that it would be tedious to offer any recapitulation of them in this place, even if I could hope to do justice to the subject, within the limits which I have prescribed to myself. I shall content myself, therefore, with remarking, in general terms, that the great and leading object of his speculations is, to illustrate the provisions made by nature on the principles of the human mind, and in the circumstances of man's external situation, for a gradual and progressive augmentation in the means of national wealth; and to demonstrate that the most effectual plan for advancing a people to greatness, is to maintain that order of things which nature has pointed out, by allowing every man, as long as he observes the rules of justice, to pursue his own interest in his own way, and to bring both his industry and his capital into the freest competition with those of his fellow citizens. Every system of policy which endeavours either by extraordinary encouragements to draw toward a particular species of industry a greater share of the capital of the society than what would naturally go to it, or, by extraordinary restraint, to force from a particular species of industry some share of the capital which would otherwise be employed in it, is, in reality, subversive of the great purpose which it means to promote.

In other words, what we know of Adam Smith's whole scheme of thinking justifies the interpretation that, as it presented itself to his mind, what we now formulate as the general sociological problem might be explained as follows:

The destiny of mankind is to work out a certain moral achievement. The great intellectual task is to understand the conditions and implications of that destiny. There are certain grand divisions of that task. Not touching upon those which belong within the scope of socalled natural or physical science, the first division of the intellectual problem of discovering the conditions and implications of human destiny—that is, the terms in accordance with which mankind must learn how to achieve well-being, or happiness, or progress, or whatever term we may prefer to use as the algebraic x to denote the content of that undetermined resultant of human endeavor toward which we look when we employ the concept destiny—the first division of the problem of human life in the large, is religious. Human life is conditioned by its relations to a divine order and purpose. That divine purpose must be investigated, and so far as possible understood, in order to get the bearings of human life. Then, without attempting to put into Smith's theory details about which we cannot get information, we have evidence enough to show that, whether as a subordinate section of religious relations, or as a division of relations somehow parallel with the religious relations, there was an ethical division of life. If we were to judge merely from the essay on the moral sentiments, we should be left to the impression that Smith's conception of ethics was that it had to do merely with the theory of appreciation or evaluation. We know, however, that this psychological discussion represented merely preliminaries which in his mind led to the doctrines of practical morals, and that the whole plexus of moral attitudes with reference to which approbation or disapprobation is possible constituted in his mind a plane of human activities distinct from that which for him made up the religious sphere. Then the third division of the problem of understanding human life appeared to Smith to be that which deals with the history and theory of civic justice, the ways and means of attempting to secure an approximation to the principles of morals which ethics treats in the abstract and in the individualistic phases. And, finally, as all moral achievement has to get the use of material bases and media, it was necessary to work out a science of the ways and means by which the necessary material conditions of all spiritual achievement are to be secured. Thus Smith's science of wealth had relatively the same relation to his whole philosophy of life that the technique of marine architecture has to our systems of commercial and admiralty and international law. It was not a science of people in the fulness of their lives. It was merely a science of things and people considered as factors in producing the material equipment of life.

I repeat that we are not at all bound to justify Smith's classification. It is an entirely negligible matter that his analysis of moral phenomena would not now satisfy anyone. The main thing is that he had a definite perception of the mediate, and subordinate, and tributary status of wealth, and that he betrayed relatively slight symptoms of the tendency, which was so strong in the stereotyped classical theory, to assume that the wealth factor is the sole arbiter of social relations. How to build a ship is one thing. How to settle questions of equity between builders, and owners, and officers, and crew, and shippers, and passengers, and consignees, and other navigators, and commercial interests of the nations at large, is a very different thing. The former is analogous with the questions which Smith directly raised in The Wealth of Nations. The latter are suggestive analogues of the sort of questions which he saw the need of raising in his wider moral philosophy, and in spite of himself indirectly raised in his economic discussion.²

We have to justify these propositions by a rapid analysis of The Wealth of Nations itself.

Chapter I expounds the purely technical theorem:

The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which, it is anywhere directed, or applied, seem to have been the effects of the division of labour.

This is a proposition which is as far outside the range of moral relations, as Smith thought of them, as elementary theorems about the increased efficiency of power applied by means of wedge, pulley, screw, or lever.

Smith attributes the increase of work which division of labor makes possible to three factors: first, to the increase of dexterity in every particular workman; second, to saving of time usually lost in passing from one species of work to another; third, to the invention of machines which enable one man to do the work of many.

Under the last head he introduces a consideration which might be generalized beyond the form in which he uses it; viz.:

All the improvements in machinery, however, have by no means been the inventions of those who had occasion to use the machines. Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade; and some by that of those who are called philosophers or men of speculation, whose trade it is not to do anything, but to observe everything, and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects.³

Without restricting this factor to its value in the invention of machinery, we may say that the division of labor makes room for activities which have increasingly remote relations to the productive process, and sets free types of action which enrich life, whether or not they have a direct influence upon processes of producing wealth.⁴

The chapter contains a further theorem which squints toward the bearing of economic factors upon social structure; viz.:

The separation of different trades and employments is a consequence of the efficiency of the division of labour, and is most extensive in the countries which enjoy the highest degree of industry and improvement.⁵…

In its primary purpose the first chapter of The Wealth of Nations is no more an essay in moral relations than an agricultural chemist's statement of the reasons why the virgin soil of the Canadian wheat area is more fertile than an abandoned farm in New England. It has been an effective stimulus of later inquiry into moral relations, but it is immediately no more moral, as Smith would use the term, than a comparison of the vegetation of the temperate and torrid zones.

In Chapter II Smith discusses "the principle which gives occasion to the division of labour." The thesis is as follows:

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

Of this proposition we may say, first, it is methodologically an obiter dictum. That is, it belongs in a larger range of inquiry, antecedent and fundamental to the technological inquiry to which The Wealth of Nations is devoted. It is, moreover, a species of inquiry for which Smith's scheme of moral philosophy apparently does not provide a plane. It is related to the proper subject-matter of economics, as conceived by the author of The Wealth of Nations, very much as an inquiry into the ultimate physical reasons for the relative durability of wood and steel would be related to an engineer's account of the comparative economy of these materials, as discovered by experience, for constructing railroad bridges.

In the second place, the exact nature of the question which Smith raises in this chapter is primarily psychological, and secondarily socio-psychological. It is therefore a fair index of the closeness of relationship between the phenomena of industry and the general phenomena of individual and social consciousness. In this connection Smith's work is a premonition of the inevitable awakening of the sociological consciousness with the unavoidable pursuit of inquiries (which may have started among economic phenomena), out into all their relationships as moral and physical phenomena.

In the third place, the particular explanation which Smith proposes is of a piece with the mental philosophizings of his time, but it merely applies a mouth-filling name to an unanalyzed phenomenon. The "propensity to barter" is just as much and just as little a distinct and ultimate force in human affairs as a "propensity to swim," or a "propensity to jump over stone walls," or a "propensity to go to the circus." If we fall into the water, we try to swim, because we have a preference for living. The same fact, appealed to from another direction, stimulates us to make the best of our ability to get over a wall if we are chased by a bull. Certain desires for nervous stimulation find temporary satisfaction in the circus, but a thousand alternative recourses may serve the same purpose. That is, Smith scratched the surface of psychological phenomena, which have since his time furnished problems for more exact psychology and sociology.

In the fourth place, we may observe that this sort of explanation is not yet entirely discredited even among rather prominent scholars. Sombart has thought it worth while to ridicule such pseudo-explanation at some length.⁷

In this same chapter Smith starts another line of inquiry, which is also external to economic technology, but, like the problem of psychical motivation in general, it could not be ignored, even at his preliminary stage of research. It is strictly an essay in anthropology. The facts in the case, quite independent of our apprehension of them, are in their degree responsible for many social differences, while more or less definite theories about the facts are shaping both abstract sociological doctrines and concrete social programs. He says:

The difference of natural talents in different men, is, in reality, much less than we are aware of, and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom and education…. By nature a philosopher is not in genius and in disposition half so different from a street porter, as a mastiff is from a greyhound, or a greyhound from a spaniel, or this last from a shepherd's dog.⁸

These propositions, taken by themselves, are identical with clauses in the doctrines of nearly all the modern revolutionary philosophers. They are taken for granted by most of the extreme socialists. The truth or error of the propositions is not before us for discussion in this argument. The significant point is that Smith instinctively perceived the close relation between the technological problems of wealth, and the anthropological and psychological and social problems of people.

Chapter III elaborates the thesis that, "as it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited to the extent of that power, or, in other words, by the extent of the market."

In one sense this proposition is strictly physical. It is no more to be disputed than the proposition that the pressure of water at the bottom of a tube is in proportion to the height of the water in the tube.

On the other hand, Smith does not hint at the broad scope of the question, What makes a market? This is a sociological problem in the most extensive sense. Its answer must come from knowledge of the whole gamut and the most refined combinations of human desires. Li Hung Chang is reported to have said that, if he could persuade every man in China to add a couple of inches to the length of his shirt-tail, he could create a market for all the cotton grown in America. The population of China is not necessarily a market for American cotton. By a decree of the imperial government, if Great Britain could be induced to acquiesce, China might cease to be a market for opium, etc., etc. While, therefore, this chapter contains a very important principle of economic technology, it leaves untouched the much more important sociological question of the origin and variation of markets….

Chapter IV, on "The Origin and Use of Money as a Medium of Exchange," does not probe farther into the sociology and psychology of money than is necessary for immediate explanation of the obvious phenomena of exchange. It therefore has the same relation to ultimate sociology and psychology that a mechanic's explanation of the advantages of lubricating oils would have to physics and chemistry. The chapter contains illustrations in abundance of the psychological nature of the forces that have originated and modified the use of money through varied estimates of convenience. The point of view, however, is exclusively that of the technique of the economic cycle—production, exchange, division of labor, widening of the market, more production, more division of labor, more widening of the market, etc., etc.

At the close of the chapter the author enters upon that thus far unbounded sea of troubles, the theory of value.

We discover at a glance, in the light of the economic discussion of nearly a century, that Smith's treatment of the subject was on a relatively superficial plane. That is, he was discussing the technique, not the psychology, nor the logic, nor the sociology, of money. This appears at once in his forms of expression; e.g.:

What are the rules [sic] which men naturally observe in exchanging them [goods] either for money or for one another, I shall now proceed to examine. Three rules [sic] determine what shall be called the relative or exchangeable value of goods.

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called "value in use," the other, "value in exchange." … In order to investigate the principles which regulate the exchangeable value of commodities, I shall endeavour to show, first, what is the real measure of this exchangeable value; or wherein consists the real price of all commodities; secondly, what are the different parts of which this real price is composed, or made up; and lastly, what are the different circumstances which sometimes raise some or all of these different parts of price above, and sometimes sink them below their natural or ordinary rate; or what are the causes which sometimes hinder the market price, that is, the actual price of commodities from coinciding exactly with what may be called their natural price.⁹

Three chapters follow, on the subjects thus proposed. It is easy to point out, at this late day, that we open up the whole unknown world of the psychology and sociology of value when we begin to observe that some tribes will exchange their goods for wampum, and some for paper promises to pay, and some for gold only. It is easy to find in Adam Smith's discussion the points at which paths lead farther into the by-ways of these subjects than he felt impelled to pry. As a matter of fact, however, we have to follow the whole nineteenth-century history of economic theory, up to the point where we find John Stuart Mill declaring that the theory of value had been settled, and then through another generation, which encounters more difficulties than ever in the theory of value—we have to review this whole evolution, to be aware of the full measure of difference between the technological treatment of value in The Wealth of Nations, and the problems that present themselves to modern philosophers when they attempt to formulate the phenomena of money and of value in terms of their ultimate relations.

At the same time, one might easily mistake the first paragraph of the fifth chapter for a royal road, instead of an untrodden path, into the broadest realms of social philosophy. If one did not know the sequel, one might with good reason surmise that an earlier Karl Marx had been discovered. In this paragraph Smith is certainly nearer to the fundamental theorem of Marx than to the major premises of economic theory and practice at the present time, at least in England and the United States. The paragraph reads as follows:

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. But after the division of labour has once thoroughly taken place, it is by the very small part of these with which a man's own labour can supply him. The far greater part of them he must derive from the labour of other people, and he must be rich or poor according to the quantity of that labour which he can command, or which he can afford to purchase. The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities.¹⁰

We shall have occasion to observe presently how Smith restrained himself from following this clue in the direction which Marx afterward took. We may notice, in passing, that, although Smith very distinctly reiterated the same theorem when discussing the wages of labor (Chap. VIII), he approached it as an explanation of the problem of value in general and of price in particular. It did not occur to him as a class question at all. He was in the course of explaining the mechanism of civilized exchanges, and his assumption was that the mechanism was working normally. He was not searching for a clue to a situation which he considered abnormal. Practically no grievances were alleged against the essential structure of the economic system. Such charges as were brought against social arrangements at this time were principally political in form, whatever might have been their implicit economic content. The antithesis of labor and capital, as social categories, was at that time virtually unknown. Labor and capital were purely economic categories, and could be treated as abstractions, whether on the debit or credit side of the reckoning, without provoking class prejudice. Precisely the opposite was the case when Marx wrote, and this was at all events an important factor in deciding that in Marx's hands a labor theory of value became directly a class issue instead of a mere technical distinction.

Then we must make note of another effect upon Smith's mind of the presumption that the system which he tried to explain was operating normally. That is, he was phenomenally unconscious, as it appears after a century of closer analysis, that commonplace, everyday exchanges could not be accounted for by his extremely naïve theory of price. It would be easy for us to make an a-priori argument to the effect that a man so wise as he could not possibly have overlooked, as he did, some of the plain gaps between the facts and his explanation; but the reason is evidently to be found in his disregard of the artificial and arbitrary social arrangements by which civilization complicates the simple order of human actions. In other words, when he attempted to explain the phenomena of price, his logical process seems to have been, first, a generalization of the simplest conceivable exchanges of the products of labor into the type of all exchanges. Then, instead of using that generalization merely as a search hypothesis—i.e., to guide a complete induction—he used it as a principle for explaining all exchanges deductively. Of course, this amounts logically to begging the question with respect to every case of exchange which is not used as a means of testing the generalization. That is, such a principle once adopted for such use is a blind leader of the blind. It glosses over the facts instead of exposing them….

When Smith says, for instance, "Labour was the first price, the original purchase money that was paid for all things,"¹² he overpersuades himself, more than he is aware, that the same is true in the same degree in all purchases. For our present purpose it is enough to point out that the result was an intolerable vagueness and approximateness in his theory of exchanges. Thus he says:¹³

The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people.¹⁴

It is by no means clear precisely what Smith meant by these propositions, but any version that might be proposed would be ruled out, as an adequate formula of exchanges, by types of cases which could not be so explained. This, however, has been the theme of a voluminous economic literature for nearly a century. Our argument does not call for an examination of the progress of analysis on this point. We may simply note, by way of illustration, that no formulation of the mere mechanism of economic exchanges can possibly express the essential facts of value and price. These are phenomena resulting from more than one variable. They are psychical and social as well as mechanical. There is probably a certain minute portion of the "toil and trouble" element in every case of value, but whether it is the "toil and trouble" which it actually costs the producer to produce it, or the "toil and trouble" which it would cost the purchaser to produce it, or the "toil and trouble" to which the purchaser would be liable if he had to go without it, actual exchanges in civilized society could not be expressed uniformly in terms of either concept. "Toil and trouble" as an equivalent for the term "labor expended in production" can in very few cases be an equally approximate measure of the reason why the seller sells and why the buyer buys. Value or price sometimes has one ratio to the labor-cost of production or of reproduction, and sometimes a quite different ratio. These familiar considerations may be summed up in the platitude: Price or value is a phenomenon of two chief variables; viz., first, the conditions governing the supply, and, second, the conditions governing appreciation as a factor of demand.¹⁵

In a word, Smith's attempt at an explanation of price and value credited labor-cost with too exclusive significance; or, to express the same thing from the other point of view, it failed to make due allowance for the subjective and social factors in value and price. All this has meanwhile been made evident by the economists themselves, though it is equally evident that the last word has not been said, and that the psychologists and sociologists have a function in tracing the facts to their ultimate elements.

When Smith touches upon the relation of wealth to anything beyond the immediate technicalities of economic processes, his propositions affect the modern reader as relatively less applicable to the real world of today than they were to his own time…. They are approximations to truth, but the approach was so much closer when he wrote, that, under the operation of present conditions, some of the paragraphs, when applied to our world, read almost like satire….

In Chapter VI, on "The Component Parts of Commodities," we come upon a turn of the argument which it is by no means easy to understand or to appraise. The first reason for this is that we cannot be sure how clearly Smith drew the distinction between what is and what ought to be in the processes of industry. That is, it is by no means certain that he always confined himself to bare analysis of the occurrences in commerce, and we are not always able to tell when he wanted to be understood as merely formulating the facts, and when he adds to the facts his own appraisals.

For instance, speaking of labor, in an "advanced state of society," he says: "In this state of things, the whole produce of labour does not always belong to the labourer."²¹ As a bald statement of fact, this is literally true. Does Smith, or does he not, mean to imply that the extent to which it is true is strictly in accordance with equity? We can answer this question only vaguely. Smith certainly had no thought of any such radical injustice as Marx afterward alleged in this connection. It is not certain that he would assert that there was any injustice at all in the system of distribution operated by the society of his day. This in spite of the fact that in certain concrete cases, like those of the colliers or the salters, he protested against abuses. He had not generalized such items into an indictment against the industrial system at large. Apparently he assumed that the more complicated system of production, consequent upon division of labor, automatically invented a corresponding system of distribution, in which the reward of each participant in production was assigned in strict ratio with the value of his labor in creating the product. Whether he would have asserted precisely this or not, if the question had been distinctly proposed, it is evident that in his mind there was not yet a problem of distribution which was not settled in advance by the technique of production…. Smith goes on to say:

Neither is the quantity of labour commonly employed in acquiring or producing any commodity the only circumstance which can regulate the quantity which it ought commonly to purchase, command or exchange for. And additional quantity, it is evident, must be due for the profits of the stock which advanced wages and furnished the materials of that labour.

We may not be able to divest our minds of associations formed by study of the economic literature since Adam Smith. We may do our best, however, to judge him for a moment, in the cold light of abstract logic, without reference to disturbing interests. We may claim to be attempting at least to think judicially when we call attention to a significant anomaly in this confident assertion. Is it not remarkable that, so soon after declaring labor to be "the real measure of the exchangeable value of all commodities,"²² Smith should feel at liberty to take for granted that profits are as evidently due to the capitalist as wages are to the laborer? To be sure, Smith has not in so many words said that labor is the only source of wealth. He has merely said that labor is the only real measure of wealth. At the same time, his language conveys the impression that in his mind the concepts "source" and "measure" were so associated that they amounted to the same thing. He said, a few pages later: "Wages, profit, and rent are the three principal sources of all revenue, as well as of all exchangeable value."²³ Again he remarks: "As in a civilized country there are but few commodities of which the exchangeable value arises from labour only….."²⁴

In Smith's mind the claim of capital to profits appeared as evident and immediate as the claim of labor to its wage. Not quite three-quarters of a century later, Marx launched his system of social philosophy centered about absolute denial of the claim of capital to profits.²⁵ Yet, as we have seen, the two men seem to have held nearly identical views of labor as the ultimate measure of right to wealth. How shall we account for the evolution of the classical political economy and Marxian socialism from so nearly identical conceptions of the relation of labor to wealth?

The truth probably is that Smith's views never actually approached quite so near to the major premise of Marx's system as would appear from the things which Smith left unsaid, or from the partially uncritical form of the things which he actually said. Judged by himself in other connections, as, for example, the propositions last cited, and Chapter IX, "Of the Profits of Stock," Smith never entertained a doubt that the payment of profits to capital is as strictly and fundamentally consistent with the natural order of things as the payment of wages to labor. Whether this state of things represented an undetected contradiction in Smith's mind, or whether it was merely an accident of incomplete formulation of his views, may never be decided. This much is obvious: If Adam Smith had introduced into economic theory a searching critique of the basis of the claims of capital to profits, Marx's economic doctrine would in all probability never have put in an appearance. If it had appeared, it could hardly, under the supposed circumstances, have been fathered by a man of Marx's intellectual power. If justice and only justice had meanwhile been done both to capital and to labor, in the way of working out a valid theory of when and why and in what proportion each deserves a share of the surplus product, Marx might still have become a socialist, but his socialism would certainly have had a different point of detachment from orthodox economic theory.

Profits, as the man on the street uses the word, is a blanket term which may include elements as heterogeneous as wages and graft and loot. To some of these elements one capitalist has as clear a title as the laborer has to his wage. To others of these elements another capitalist has no more title in equity than the bank-breaker has to his stealings. Smith did not feel the necessity of a critique of the title of capital to profits, because his attention was turned in the direction of the productive activities of capitalists, and their consequent title to their reward. Marx was intensely impressed by the political and commercial usurpations which sanctioned arbitrary claims of masters and denied some of the natural claims of workmen. In Marx's time it was becoming necessary to recognize the class cleavage between capitalists and laborers. The contrasts between their situations were so sharp that it was as easy for Marx to assume that the capitalist is not a laborer, and consequently not entitled to a wage in the form of profits, or otherwise, as it was three-quarters of a century earlier for Smith to assume that the capitalist is a laborer, and therefore entitled to a wage in the form of profits.²⁶ Unconsciously, and doubtless with equal intention to represent things as they are, both Smith and Marx started a fashion of pinning economic faith to a false universal. In the former case it was, "Every capitalist deserves profits." In the latter case it was, "No capitalist deserves profits." For purposes of analysis we may separate the logical from the moral elements in modern social theory and practice. Speaking, then, of the logical phase only, we may say that the phenomenon of Marxian socialism is merely, in Hegelian terms, the inevitable extreme antithesis of Smith's extreme thesis, and that inevitable criticism is now ascertaining the elements of truth in both false universals, and combining them in a synthesis that shall more closely approach a true universal….

The next following five chapters (VII–XI), on the general subject of the factors entering into the price of commodities, might furnish texts for many times that number of chapters on the social variants of "natural" and "market" price. If we should enter upon a subject of this sort, however, it should be with the latest economic formulas as the brief in view of which we should draw up our own plea. It would introduce unnecessary confusion if we should attempt to restate in sociological terms all of Smith's propositions about price. In the first place, they are primarily technological, not sociological. In the second place, they appear in present economic theory with much revision, so that to a considerable extent we should be wasting our strength trying to do over again much that the economists have meanwhile done, if we tried to restate Smith's doctrines in detail. Our cue at this point, therefore, is, first, to note that the argument now becomes relatively technical, with the extra-economic factors relatively negligible; second, that at the outset of this technical inquiry a prime sociological question is waived, and that this sociological question is ever present with us when we face our practical problems of correlating our economic systems with the remainder of our institutions. We must make this last statement more explicit.

At the beginning of Chapter VII Smith introduces the distinction between "natural" price and "market" price. He says:

There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter, partly by the general circumstances of the society [sic], their riches or poverty, their advancing, stationary or declining condition; and partly by the particular nature of each employment.

There is likewise in every society or neighbourhood an ordinary or average rate of rent, which is regulated too, as I shall show hereafter, partly by the general circumstances [sic] of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land.

These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.

When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labourer and the profits of the stock employed in raising, preparing and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.

The commodity is then sold precisely for what it is worth, or for what it really costs the person who brings it to market…..

The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with natural price.³²

As a rough and ready formal division, the distinction is of course perfectly familiar and obvious and necessary. When we attempt to apply it to a concrete case of price in a modern community, however, we encounter a difficulty, not with the formal principle of division, but with questions of fact which should determine the application of the principle. Perhaps the essence of the matter may be suggested by a mere verbal correction. If we substitute for the phrase "natural price" the term "customary price," we at once raise the question whether there is a difference between the two concepts. If we think the question through, there is little room for doubt that Smith's phrase harbors a fundamental fallacy. The "customary," in price as in other things, may be far from the "natural," if we mean by "natural" that which is most nearly in accord with the permanent or essential nature of things. For instance, suppose a community has for a generation been paying for its illuminating gas a price which includes a profit on watered stock equal to two or three times the market rates of interest on the actual capital invested. If we adopt the contention of the gas company that it is entirely within its rights in watering its stock and in treating the fictitious investment as though it were real, then it would make no difference whether we used the phrase "natural" or "customary" price. In other words, so soon as prices, whether in the element of rent, or profits, or wages, come to be in question on grounds of equity, it makes all the difference in the world with our decision how much of the variable and arbitrary "general circumstances of the society" we assume to be natural and necessary, and so inflexible factors of price.

All the mooted social questions of today over economic claims of various classes are to a greater or less degree contests over the claim that vested or customary rights are natural rights. There is never a question between democracy and privilege, especially if the privilege has actually been exercised, in which it is not contended, openly or tacitly, on the side of the privilege, that the privilege is in accordance with the eternal nature of things. At this moment the extreme "stand-patters" on the subject of the American tariff do their best to make their fellow-citizens believe that the bonus which the law gives them is a price which they have as natural a right to collect of the consumer as the laborer has to collect his hire. The men who have fixed railroad rates in the past want perpetual freedom to make rates without governmental control, and they claim that such freedom is "natural," while governmental control is unnatural.

That is, all the conventionalities which fix the standard of living in a given community may for a long time be taken for granted, and accordingly the wage of unskilled labor may be less for a month in Russia than the wages for the same class of labor may be for an eight-hour day in some parts of the United States. The Russian employer and the American employee could not be brought to an agreement as to which of these rates of wages, if either, represented the "natural" price of labor. So far as the bookkeeping of a particular industry is concerned, or the conditions of competition in a given market, customary price may be treated as "natural" price. But the moment price becomes a moral question, by being brought into the arena of conflict between groups with antagonistic interests in distribution, then the previous question is always in order; viz.: How much of customary market valuation is not natural but unnatural? To what extent have the conventionalities of society interfered with the natural equilibration of the claims of all the members of society?

Again we must remind ourselves that at Adam Smith's time there was a minimum of occasion for imagining that there could or should ever be any considerable modification in the laws of property in Great Britain. British institutions, on their strictly economic side at least, as distinguished from the politico-economic phases as involved in such a question as restricted or free foreign trade, must have seemed to Smith nearly as firmly settled as the rock-bound coasts of the kingdom. It cost him no stretch of the imagination, no stultification of mind or conscience, to assume that the customary social stratification, from landed gentlemen to navvy, was in rough correspondence with natural law. In the middle of the nineteenth century, on the contrary, especially in Germany, doubts had already disturbed such sunny satisfaction. Today the operation of the same principles which Smith took for granted produces anomalies which no judicially minded person can overlook. We have come to understand that there are really three categories of price, instead of two. We may call these "customary price," "market price," and "normal price." The last phrase means just what the words might have meant to Adam Smith, minus the implication that the third and the first categories necessarily correspond. Everyone who perceives that the last valuation of everything in this world must be in terms of people, not in terms of commodities, is beginning to draw the inference that there is always an open question whether the current scale of prices takes sufficient account of human values to approach as near as possible to normal prices.

I am not at all sure that socialists of the Marxian or any other type are really nearer in sympathy than Adam Smith was to the practical application of the human measure of value. Socialism seems to be, in fact, in the aggregate, less a contention for application of deeper moral principles, than a contention for admission of a larger number of people to a share in the dividends of the moral principles than now prevail in society. Socialism does not seem to be really a program of more respect for men, but rather of respect for more men. So far as it goes, even this is an impulse in the direction of more authentic democracy. More radically democratic, however, than any socialistic principle, is the perception that the capacity of people to convert material goods and opportunities into higher values is the last measure of price which it is possible to apply. It is always an open social question whether there are artificial and arbitrary restrictions of the equal freedom of all to exercise this capacity. So far as a disposition to entertain this question is an item in "the general circumstances of the society," a force is at work tending either to strengthen prices, because they approximate a scale dictated by due appraisal of human values, or to rearrange prices with more regard for the human term in the calculation.

There is no fig-leaf of economic shame discreetly drawn over Smith's admission that all the products of labor belonged to the laborer till private property in land and the accumulation of stock made a new situation.³³ Although Smith regarded these as artificial, in a sense contrasted with primitive, it does not seem to have occurred to him that they were artificial in a sense opposed to his term "natural" any more than the division of labor itself. There was nothing to excuse about one of these phenomena more than about all. In spite of keen vision for what he would regard as the accidents of a system which was essentially rational or "natural," in spite of such details as that, "We have no acts of parliament against combining to lower the price of work; but many against combining to raise it,"³⁴ Smith accepted the ground-plan of British economic institutions as unassailable. The inferences drawn by Marx from premises so nearly identical with those of Smith would have seemed to the latter so preposterous that he was under no sort of embarrassment in stating those premises with perfect frankness. No social phenomena had appeared to make Smith doubt that in general the capitalist's claim to profits and the landlord's claim to rent is as clear as the laborer's claim to wages. In other words, slightly varying our previous statement, Smith did not doubt that the wage system was essentially a righteous system, in spite of the fact that it permitted a part of the product to go to the landlord, and another part to the capitalist….

[We] point out the probability that there would have been no Marxism, except as a political movement, if economic theory, from Adam Smith's time, had squarely faced the problem: What are the primary economic elements, and what are the accidental conventional elements, in our system of property rights? We should probably have been spared a large part of the confusion which permits certain types of social agitators to treat all private ownership of land as in principle and in practice absentee landlordism, and all private ownership of capital as in principle and in practice stock-watering and gambling. Modern sociology is a necessary protest as much against the extreme prejudice of the economists as of the socialists.³⁶

Notes

¹Account of the Life and Writings of Adam Smith, p. liv.

² The Lectures on Justice, etc…. contain nothing that affects this summary. The treatment is wholly historical and legal, in form and substance, except in Parts II and III, which might be classed as economic rather than legal or historical. At all events, the relation of the lectures to antecedent moral philosophy does not appear to have been unlike that of The Wealth of Nations of which … the lectures are virtually a first draft.

³ I, p. 11.

⁴ Mallock, Aristocracy and Evolution (London, 1898), opposes to what he is pleased to call sociology, on the one hand, and to an equally questionable version of socialism, on the other, a ponderous argument, drawn out through three hundred and eighty pages, the substance of which is merely a variation of this perception of the advantages of the division of labor. The thread of wisdom that runs through the book is entangled in a woeful snarl of irrelevance and inconsequence. His generalizations about sociology fall flat among sociologists, because he apparently bounds sociology by Herbert Spencer, Edward Bellamy, Benjamin Kidd, and Sidney Webb! His account of socialism is equally provincial. The great-man theory which he revises and recommends as a remedy for the errors of both, easily boils down to the fact of the advantages of specialization. This is all implicitly, and much of it expressly, in The Wealth of Nations; it has been exhibited much more voluminously by Tarde, although under the inadequate labels "imitation" and "invention;" it has been generalized most correctly by my colleague, Professor W. I. Thomas, in his interpretation "pace-making."

Mr. Mallock's volume is an ingeniously elaborated insinuation that the world is shrouding itself in darkness through failure to perceive that, of all specializers, the specializer in money-making is pre-eminently entitled to its forbearance, its admiration, and its fostering favor. The pathos of this appeal so overstimulates the "impartial spectator's" sense of humor that he is embarrassed in doing justice to the elements in the book which deserve serious attention.

⁵ P. 7….

⁷Moderne Kapitalismus, Vol. I, pp. xxv ff.

⁸ Pp. 16 f.

⁹ Pp. 28, 29.

¹⁰ Cf. Chap. VI, 4th paragraph, p. 48; also p. 50, 2d paragraph….

¹² P. 30.

¹³Ibid.

¹⁴ I refrain from turning any light from the "marginal utility theory" upon Smith. According to the outline of analysis of which this essay is a detail, that development must be noticed in its chronological order.

¹⁵ Cf. Simmel, "A Chapter in the Philosophy of Value," American Journal of Sociology, Vol. V, p. 577. For further concrete illustrations of the lack of precision in Smith's labor theory of value, see [Walter] Bagehot, Economic Studies, pp. 121 ff….

²¹ P. 50.

²² Chap. V, p. 30.

²³ P. 53.

²⁴ P. 54.

²⁵ I am referring, of course, to the Communist Manifesto, not to Capital.

²⁶ It is not true, and I do not assert, that Marx utterly overlooked the industrial function of the capitalist. He admitted it, but then he obscured it in such a way that it has been easy for his followers to ignore it, while supposing that they were following his teachings. Using the names of Smith and Marx to label tendencies for which they were partly responsible, I point out the mistaken assumptions of the tendencies, while I am aware that neither Smith nor Marx is justly to be charged with deliberately promulgating the extreme errors to which their theories have lent force….

³² Pp. 55, 56.

³³ Chap. VIII, p. 65.

³⁴ P. 67….

³⁶ The beginnings of the classical subsistence-minimum theory of wages, as contained in Chap. VIII of The Wealth of Nations, may be passed over in this discussion, for the reason that the technological aspects are made foremost, and the moral question is not allowed to emerge….