Capital and the Capitalists

Smith contributed several important concepts concerning the role of capital in the process of producing wealth and in economic development. He pointed out, first, that the present wealth of a nation depends upon capital accumulation, because this is what determines the division of labor and the proportion of the population engaged in productive labor. Second, Smith concluded that capital accumulation also leads to economic development.

In the midst of all the exactions of government, this capital has been silently and gradually accumulated by private frugality and good conduct of individuals, by their universal, continual, and uninterrupted effort to better their own condition. It is this effort, protected by law and allowed by liberty to exert itself in the manner that is most advantageous, which has maintained the progress of England towards opulence and improvement in almost all former times, and which, it is to be hoped, will do so in all future times.⁵

Third, individual self-interest coupled with the accumulation of capital leads to an optimum allocation of capital among the various industries.

Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of society, which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.⁶

One aspect of Smith's view of the role of the capitalist and capital accumula­tion needs further elaboration. It is clear that the capitalist plays the key role in the functioning of the economy. His pursuit of wealth and profits directs the economy to an efficient allocation of resources and to economic growth. The source of capital in a private property economy is savings by individuals. Smith believed that labor could not accumulate capital because the level of wages permitted only the satisfaction of immediate consumption desires. Members of the landowning class, he observed, have incomes sufficient to accumulate capital, but they spend them on unproductive labor to satisfy their immense desires for high living. It is the members of the rising industrial class, striving for profits, striving to accumulate capital to increase their wealth through saving and investment, who are the benefactors of society, Smith concluded. An unequal distribution of income in favor of the capitalists is therefore of tremendous social importance. Without an unequal distribution of income, economic growth is not possible, for the whole of the yearly output will be consumed.

Hbid., pp. 328-329. Hbid., p. 421.

The Impact of Smith on Policy

Adam Smith's fundamental contribution to economic theory was not a detailed theoretical analysis but a broad overview of the way in which a market economy allocates scarce resources among alternative uses. His major policy conclusion was that the government should follow a policy of laissez faire. The impact of this conclusion on economic policy in the industrialized world, especially in the United States, has been immense. It has become the economic ideology of our society, and we attempt to promote this view in the underdeveloped areas of the world. It is possible that no idea and no single writer have had more influence on the development of our economy and society.

THE NATURE AND CAUSES OF THE WEALTH OF NATIONS

In the first sentence of Wealth of Nations, Smith explained his conception of the nature of the wealth of nations. In so doing, he separated his views from those of the mercantilists and physiocrats.

The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.⁷

In a number of places throughout Wealth of Nations, Smith berated the mercantilists for their concern with the accumulation of bullion and identifica­tion of bullion with the wealth of a nation. Smith believed, in fact, that most mercantilists were confused on this issue. For him, wealth was an annual flow of goods and services, not an accumulated fund of precious metals. He also revealed an understanding of a link between exports and imports, perceiving that a fundamental role of exports is to pay for imports. Furthermore, in his opening sentence he implied that the end purpose of economic activity is consumption, a position he developed more fully later in the book. This further distinguishes his economics from that of the mercantilists, who regarded production as an end in itself. Finally, in emphasizing labor as the source of the wealth of a nation, he differed from the physiocrats, who stressed land.

Smith went on to suggest that the wealth of nations be measured in per capita terms. Today when it is said, for example, that England is wealthier than China, it is understood that the comparison is based not on the total output or income of the two countries but on the per capita income of the population. In essence, Smith's view has been carried forward to the present. In the same paragraph in which Smith stated that consumption is "the sole end and purpose of all production," he rebuked the mercantilists because in their system "the interest

⁷Ibid., p. lvii.

of the consumer is almost constantly sacrificed to that of the producer" and because they made "production, and not consumption . .. the ultimate end and object of all industry and commerce."⁸

So much for the nature of the wealth of nations. The rest of Smith's book is concerned with the causes of the wealth of nations, directly or indirectly—some­times very indirectly. Book I deals with value theory, the division of labor, and the distribution of income; Book II with capital as a cause of the wealth of nations. Book III studies the economic history of several nations in order to illustrate the theories presented earlier. Book IV is a history of economic thought and practice that examines mercantilism and physiocracy. Book V covers what today would be called public finance.

Date: 2015-02-03; view: 818