Productive labourers alone are employed out of capital;unproductive labourers,as well as those who do not labour at all,are all maintained by revenue.In advancing industrial communities,the portion of annual produce set apart as capital bearsan increasing proportion to that which is immediately destined to constitute a revenue,either as rent or as profit.Parsimonyis the source of the increase of capital;by augmenting the fund devoted to the maintenance of productive hands,it puts inmotion an additional quantity of industry,which adds to the value of the annual produce.What is annually saved is asregularly consumed as what is spent,but by a different set of persons,by productive labourers instead of idlers orunproductive labourers;and the former reproduce with a profit the value of their consumption.
The prodigal,encroaching onhis capital,diminishes,as far as in him lies,the amount of productive labour,and so the wealth of the country;nor is thisresult affected by his expenditure being on home-made,as distinct from foreign,commodities.Every prodigal,therefore,is apublic enemy;every frugal man a public benefactor.The only mode of increasing the annual produce of the land and labouris to increase either the number of productive labourers or the productive powers of those labourers.Either process will ingeneral require additional capital,the former to maintain the new labourers,the latter to provide improved machinery or toenable the employer to introduce a more complete division of labour.In what are commonly called loans of money,it is notreally the money,but the money's worth,that the borrower wants;and the lender really assigns to him the right to a certainportion of the annual produce of the land and labour of the country.
As the general capital of a country increases,so alsodoes the particular portion of it from which the possessors wish to derive a revenue without being at the trouble ofemploying it themselves;and,as the quantity of stock thus available for loans is augmented,the interest diminishes,notmerely "from the general causes which make the market price of things commonly diminish as their quantity increases,"butbecause,with the increase of capital,"it becomes gradually wore and more difficult to find within the country a profitablemethod of employing any new capital"--whence arises a competition between different capitals,and a lowering of profits,which must diminish the price which can be paid for the use of capital,or in other words the rate of interest.It was formerlywrongly supposed,and even Locke and Montesquieu did not escape this error,that the fall in the value of the preciousmetals consequent on the discovery of the American mines was the real cause of the permanent lowering of the rate ofinterest in Europe.But this view,already refuted by Hume,is easily seen to be erroneous."
In some countries the interest ofmoney has been prohibited by law.But,as something can everywhere be made by the use of money,something oughteverywhere to be paid for the use of it,"and will in fact be paid for it;and the prohibition will only heighten the evil of usuryby increasing the risk to the lender.The legal rate should be a very little above the lowest market rate;sober people will thenbe preferred as borrowers to prodigals and projectors,who at a higher legal rate would have an advantage over them,beingalone willing to offer that higher rate.(27)As to the different employments of capital,the quantity of productive labour put in motion by an equal amount variesextremely according as that amount is employed --(1)in the improvement of lands,mines,or fisheries,(2)in manufactures,(3)in wholesale or (4)retail trade.In agriculture "Nature labours along with man,"and not only the capital of the farmer isreproduced with his profits,but also the rent of the landlord.It is therefore the employment of a given capital which is mostadvantageous to society.Next,in order come manufactures;then wholesale trade --first the home trade,secondly theforeign trade of consumption,last the carrying trade.All these employments of capital,however,are not only advantageous,but necessary,and will introduce themselves in the due degree,if they are left to the spontaneous action of individualenterprise.
These first two books contain Smith's general economic scheme;and we have stated it as fully as was consistent with thenecessary brevity,because from this formulation of doctrine the English classical school set out,and round it the discussionsof more recent times in different countries have in a great measure revolved.Some of the criticisms of his successors andtheir modifications of his doctrines will come under our notice as we proceed.
