Now I have dwelt on this hierarchy of wealth-producing employments in the system of Adam Smith, because it is on it that he mainly relies for the solution of the most important problem with which as a Free Trader he is confronted; - the problem, namely, as to how, if the monopoly of the Colonial trade was to be abolished, as he recommended, and men were left free to trade as they pleased, you could be sure that they would select just such employments for the investment of their capital as would be best for the wealth of the nation as a whole. And this is how he solves it. He says that the self-interest of the individual traders will naturally prompt them to do so. For would not everybody, he asks, if he had the chance, invest his capital in land rather than in manufactures, inasmuch as the former not only pays the ordinary profits of capital but a rent to the landlord besides, whereas the latter yields the ordinary rate of profit only? Would he not also naturally invest it in manufactures in preference to the trade of a wholesale merchant, inasmuch as in the former he not only has the advantage of a greater return of wealth, owing to his application of the principle of the division of labour, but he has a much quicker turn-over in his sales, owing to the time occupied in transport of goods in the latter case? In the same way would he not prefer an order from one of his own countrymen to one from a foreigner, both on account of the distance and the slowness of return of his capital, and the greater risk-in dealing with a foreigner! And finally would he not naturally prefer a regular foreign trade near home to a risky adventurous one in the Colonies or the East, where the capital required for filling up the cargoes for those distant voyages is great, the markets uncertain, credits insecure, and the final returns for the capital invested a matter of years rather than of weeks or months only? In this way, says Adam Smith, the natural instincts of the individual business man acting through his own self-interest will of themselves keep his business investments in harmony with that natural hierarchy and gradation of wealth-producing employments which he has laid down.

And his conclusion is, that if trade, both foreign and domestic, were absolutely free, each individual could be safely left to invest his capital as he thought best, without any chance of its endangering, or being out of harmony with, the best possible economic interests of the nation as a whole. But if it is pointed out to him that the rush of all available capitals into the Colonial trade, which was the least naturally wealth-producing in his hierarchy, would seem to negative this supposed natural harmony between the self-interest of the individual and the best economic interests of the nation, his answer again is ready and is emphatic: - the rush of capital into the Colonial trade was due entirely to the legal monopoly which it enjoyed, and which, with the false lure of high profits to a particular class, had like a bedizened courtezan seduced the individual capitalists of the nation from the true economic interests of the nation as a whole. And having disposed of this objection, Adam Smith proceeds to point out that the hierarchy of wealth-producing employments which he has laid down, and which if followed will be for the best economic interests both of individuals and of the nation to which they belong, will also be the best order to follow for each and every other nation, and for the world as a whole.

In other words, if all barriers to trade between the nations were to be thrown down, the investment of capital in each would follow the same order as in every other; and that order would be the one he has laid down, namely, first to invest all your available capital in the land until it overflows, then in manufactures until they also overflow, then in home trade, next again in direct foreign trade, and last of all in the distant Colonial trade and the Shipping trade to the Far East. So that for the world as a whole, as well as for each nation, and each individual in each nation, the best economic interests will be subserved by all doing the same things in the same order; by always postponing a foreign trade and a shipping trade to a home trade, whatever may be the special resources or geographical position of the particular nation fitting it for foreign trade, and however free that foreign trade may be of risk, or however enormous may be its profits owing to the monopoly which it may enjoy; whether that monopoly comes from conquest, or by law of the mother country, or by the quality and character of the goods which it can supply, and which are most in demand abroad.

Such then is the skeleton of organic principles which Adam Smith has enforced and illustrated with much insistence and reiteration in his classical chapters on the Colonial Trade in the 'Wealth of Nations'; and the impression which his arguments leave on the mind is that he is dealing with some low indeterminate form of industrial organism, which bears much the same relation to the highly organized, differentiated, and centralized industrial development of to-day, as the organization of a worm, say, bears to that of one of the higher mammalia. Indeed if we compare it, for the nonce, to a tape-worm, and the present day industry to one of the ordinary mammals, the analogy will not only be sufficiently exact, but will serve also as a kind of concrete image by which to hold together the various fallacies and illusions by which his argument is pervaded, as well as the opposing arguments with which we are to confront it. The head of the tape-worm, which reproduces from itself the whole worm when anything happens to sever the body from it, may fitly represent the land, as the most important agent not only in the production of wealth, but in its reproduction, should the manufactures and home or foreign trade from any cause suffer disaster; the segments of the worm in immediate proximity to the head may represent manufactures and the home trade, as being the nearest to the head in point of distance, and therefore of industrial vitality and productivity; while the remaining segments farther and farther from the head may represent the foreign trade carried further and further afield; the nearer segments representing the trade with France and the Baltic, the next with the Mediterranean, and the rest with the more and more distant ports of the American Colonies in the West, and the still remoter colonies and countries of the East. The relative distance, again, of the segments of the worm from the invigorating head, and the greater and greater depletion of its strength which any undue multiplication of the tail segments may be supposed to produce, are paralleled in Adam Smith by the progressively decreasing returns to capital and labour in long distance investments, and the greater and greater withdrawal of capital from the land, manufactures, and the home trade, during the years that elapse before the returns from these distant investments come in again; while the fact that a creature is of such low segmentary organization that the increased vitality of one part, far from increasing the vitality of the rest, will rather draw nutriment away from it, like an abnormally elongated tail, is paralleled in Adam Smith by the doctrine that the capital of a country is a rigid definite quantity divided into separate segments and distributed among different employments and occupations, and that all investments of it in any one or more of these employments, however reproductive, (especially if out of their due order, and at the tail end) must necessarily draw it away from the rest - a capital fallacy as we shall presently see.