His book_ The Nature and Origin of Public Wealth
Smith’s great book The Wealth of Nations had several editions each larger than the ones before. The 4th edition came out in 1789, the year before his death. Smith himself did the edit and failed to include any mention of factory production, of which by then there were many examples. ..In fact, Sir Richard Arkwright was knighted in 1786 at which time his several cotton mills provided work for tens of thousands producing cotton thread and cloth.
By then also James Watt had added an external condenser to the Newcomen engine, then insulated the cylinder so it was always hot. This cut fuel use by nearly 75% over a typical engine which had not changed much since the first one was erected in 1712. The firm of Boulton & Watt installed over 325 of these engines between 1775 and 1800, many in cotton mills (making thread) and textile mills (weaving cloth).
The Earl of Lauderdale’s book came out fifteen years after that 4th edition. In it he dismisses two of Smith’s major theses: _the labour theory of value; _and the central role of the division of labour. ..Indeed, Lauderdale has a better conception of value; and for him capital has the key role in accounting for the growing abundance of commodities. ..He felt that Smith had given much too much credit in that regard to specialisation.
Of Value:
Smith has a labour theory of value where the amount of labour needed to produce an object ultimately sets the value of it. Also, the value of labour tends to be stable over time, and so it may be used as a standard against which to measure the values of other items. This is more a matter of faith than of statistics, any evidence being rather scanty.
Lauderdale took exception to all this, claiming that nothing possesses real, fixed, or intrinsic value, and labour did not do so. ..Instead, what establishes the value of an object is —1st, that people desire to possess it and will pay to do so. This entails that it must have some degree of scarcity: ..for were it as abundant as water in a wet clime, anyone could have it for free. —2nd: the quantity of the object relative to the demand for it, sets the value or price of an object.
Lauderdale’s explanation rings true, while Smith’s labour theory seems forced and unconvincing.
David Hume, though congratulating Smith on finally bringing out his great book, did not endorse the labour theory of value, saying price was determined by the quantity and demand. ..He died shortly after… [Indeed, fearing what Hume might say about it likely delayed the book’s publication.]
The Division of Labour:
So key a factor is this for Smith that he begins his great book with it, and soon makes an enormous claim on its behalf, saying in effect {paraphrased for brevity}: __ “The great increase in output of all the divers arts is consequent upon the division of labour, which occasions, in a well~governed society, a general opulence that extends even to the lower strata of the people: ..for every worker has a great quantity of his own productions which may be exchanged for those of many others.” [ch 1, paragraph10]
Notice that this presumes self~employment of said workers, with or without helpers, and needs be craft industry — handicraft production small in scale despite the ‘great quantity’ claimed as the output of each.
But Lauderdale points out there is nothing new about specialisation in work, and it alone cannot account for the upsurge in quantities of commodities so apparent during the 1700s. ..Regarding the dexterity acquired in performing the same labour — something Smith sees as one benefit of the division of labour — he quotes Xenophon, who wrote circa 330 B.C.E:
“It is impossible that a man practising a variety of trades will be expert in them all, but in great cities where many have a want for each article, an individual has a sufficient living by exercising a single trade — and even not the whole of that, as one makes shoes only for men, another only for women. Sometimes even, one man does only stitching the shoes, another cutting them out, or joining the pieces together. Anyone who is confined to one simple aspect of the work must necessarily come to execute it in the best manner.”
Mandeville _predates Smith by several decades. ..In his 2nd volume of the Fable of the Bees, issued in 1729, the only bit of interest to economics is in dialogue six:_ “No number of men, when once they enjoy quiet, and none need fear a neighbour, will be long without learning to divide and subdivide their labour.”
As Smith later did, he invokes an imaginary scenario: …..Even in a primitive society “if one will wholly devote himself to making bows and arrows, whilst another builds huts, and another provides food, and someone makes garments, they not only become useful to one another, but the employments themselves will receive much greater improvements.”
And also a contemporary observation: _ “I am persuaded that even the plenty we have of clocks and watches, as well as the exactness and beauty they may be made of, are chiefly owing to the division that has been made of that art into many branches.”
Lauderdale notes that by law in some places trades were made hereditary, as was the case in Egypt, in parts of India, and among the Incas of Peru. “But the inconveniences of this system are apparent, and it has been generally condemned.” [pp 282-5] __He also in an appendix provides the Xenophon quote in the original Greek, with a translation of it.
Still, even today in 2020 custom holds in some places that when a son is sufficiently adept in the family trade, having participated in it since childhood, that he takes it over and the father retires, even if he has yet to reach the age of fifty. ..Such a custom assures the continuity of trades and has merit, provided changes in technique are admitted.
The medieval guild system was also all about specialisation of trades, exclusivity, secrecy about particular aspects of technique, and restricted entry into each guild. ..But Smith railed against such a system as restricting personal liberty, something he was most unwilling to ever see compromised. The “liberal” philosophy of individual freedom was always foremost with Smith.
Since such ‘division of labour’ had been practiced for centuries, how could it be held up as responsible for the abundance of commodities now? _Well, it could not is the simple answer. What was responsible, says Lauderdale, is the use of capital.
Capital is Creative?
Lauderdale felt that capital should be thought of as being creative, that machinery or tools allowed fewer workers to do what it would take many more to accomplish without their aid. He typically expressed this as capital supplanting labour. Of course, one could instead say assisting labour, but that would not suggest capital was creative.
As instance, the next passage from Smith was earlier than the one given above, and likely taken from the Encyclopedie of 1751 (according to a footnote added by Cannan, who editted a 1904 version of the great book). [Again, paraphrasing]
“The great increase of work a given number of people are capable of performing is due to the division of labour, which is owing —1st: to the increase in dexterity of each worker; —2nd: to the saving of time commonly lost in going from one task to another; and —3rd: to the invention of a large number of machines which facilitate and save labour, enabling one worker to do what once was the work of many.” ___Moreover, he claimed most machines were invented by such workers, so for Smith new machinery also arises from the ‘division of labour’.
Lauderdale_ counters: “Without machinery supplanting labour, no great progress could have been made.” [p286] Subsuming machinery under the banner of ‘division of labour’ was wrong.
“Nothing has a more powerful effect in misleading even the best understandings, than an anxious desire to maintain a favourite opinion, or to support a favourite theory … [as witness] the strained manner [about] the division of labour causing that universal opulence which fortunately prevails in many civilised societies. ..To impress this belief [instill it], the introduction of machinery has been considered a mere consequence of the division of labour and owing to it.” [p297]
Lauderdale relates an example in refutation of Smith’s position: “The progress made in Scotland in the art of distilling spirits affords a strong illustration of human ingenuity in saving labour:” [p300] **{see this below}
What is Capital really?
As for capital being considered creative, as Lauderdale insists …. the problem stems from the several ways in which the word ‘capital’ gets used. Basically, capital is money put to use to earn income. __As instance, if workers are paid to dig and manure a bed in which decorative flowers are grown, that money is household expenditure. Yet if the flowers are cut and sold, or sold as bedding plants, their bringing income turns the money spent into a business expense — an expenditure of capital it may be called, (working capital).
Land, Labour, and Capital are not categories of things being used, but categories of payments to be made to the owners thereof: rent to landlords; wages to workers; and returns on capital employed. This last was initially called profits going to the capitalist, which even then obscured its nature whenever a loan was also involved. __{see the item: Veblen on Factors of Production}
It is deeply misleading to think of these things in physical terms, for they are really financial terms, how any money spent in a business is to be accounted for. ..Here Lauderdale goes astray in thinking of capital mainly as physical assets, and rather mystically wants them considered creative in themselves. ..But such things as tools, machinery, wagons, canals, and so forth, do not create wealth save when they are in use. ..If they are at all productive, it is only with the application of labour.
A potter’s wheel is not productive unless a skilled potter is using it. A canal means nothing unless a barge or boat is using it. It contributes to public wealth only when being used. …Water may be so plentiful in a wet clime as to be free, but delivery to the user may carry a cost for such service — while the water itself may still be a free public good, the delivery of it is a private service (though, of course, it often is done by a collectively owned body).
Nonetheless, Lauderdale was right to claim Smith attributed far too much to the division of labour, when it was improved technology in use, and particularly new sorts of machinery, that gave such enlarged output. And this wrongness continues today, still being taught in intro Economics courses as gospel truth. ..Such courses are exercises in a quasi religion.
That example:
In 1785 a proposal was made to scrap existing duties and instead impose in Scotland an annual licence on every still at a fixed rate per gallon capacity in size. The overall tax collected was expected to be the same.
The London distillers had no objection, satisfied that the time of working stills with benefit was well known to be limited, and whoever tried to gain in point of time, discharging the still more than once daily, would lose upon their materials and the quality of the goods.
Two years after the change, these same London men made written complaint to the Treasury officials alleging that by the ingenuity of their new contrivances Scotch distillers were discharging their stills even forty times in a week … A later report said in 1799 that a 43 gallon still [200 litres] was being discharged over twenty times per hour without the quality of the spirit being impaired in any way.
“Yet, in this wonderful improvement in the manufacture of spirits, no aid was derived from the division of labour, nor could it be thought a possible resource.” [p301] ..No doubt outside technical expertise had been responsible for such improvement, and as such does not refute Smith, as he said the very existence of such experts was itself due to the division of labour within society.