| Wealth of Nations Home Book I Book II Chapter I Chapter II Chapter III |
Chapter I
DIVISION OF STOCK Vocabulary for this chapter: Contemptible - OBSOLETE DEFINITION: Despised; scorned; neglected; abject. Chapter Summary: To begin this chapter, Smith notes that poor laborers who only have enough stock to survive on for a couple days seldom try to sell that stock for a profit. When somebody has enough stock to live on for a number of months or years, they may try to make a profit on that, and they divide their stock into two parts. The frist part is what they intended to sell, and is called capital, and the second part is what they intend to live on. The capital can be employed in two different ways. First it can be used to buy and then resell goods or labor, which is called circulating capital. The problem Smith notes with this is that the purchases made do not yield much use until they are again re-sold for a profit. The second type is for improving the land or buying machinery, and is called fixed capital. Different trades naturally require different amounts of the two capitals. For merchants, Smith notes that almost all of their capital is circulating. But somebody like a tailor only has fixed capital, and some industries require huge amounts of fixed capital like iron working or mining. As far as farmers go, their tools are fixed, but their hired laborers (and livestock) and their maintenance is circulating. As far as countries go, their capital is divided up into three portions. The first is what is used for immediate consumption, and includes food, clothing, furniture, and even houses (despite the fact that they can take hundreds of years to become fully consumed). The second is the fixed capital of the society which consists of machines, buildings that generate revenue such as a store or factory, improved agricultural lands, and acquired and useful abilities of the society which involve education. The third type of capital in a society is the circulating capital. This involves physical money, the stock of the merchants, the materials necessary to make food, clothes, furniture, and buildings, and items that are finished, but still held by the manufacturer. Of the four circulating capital cases, the last three are almost always eventually taken out of circulation and end up as fixed capital, or capital for immediate consumption. For fixed capital to generate any profit, circulating capital must be employed in it for repairs and to give it raw materials, and both fixed and circulating capital exist to augment the stock for immediate consumption. Circulating capital thus must constantly be replenished with resources derived from nature (farms, mines, fisheries), and even money itself needs to be replenished when it gets lost and worn out. The circle is not done there though, those farms, mines, and fisheries need to be maintained with circulating stock as well, and it keeps going on and on in circles forever. Smith then argues that given equal fertility in some land, their produce will be in proportion to the capital invested in them. Likewise given equal capital, their produce will be in proportion to their fertility. He then argues that as long are there is a secure, and lawful society, a man would have to be crazy not to employ all of his available stock, either for immediate consumption, or to make a future profit. But in countries where lawlessness abides, one must hide and conceal their stock instead of investing it." Book II<---- ---->Chapter II |