An Inquiry Into the Nature and Causes of the Wealth of NationsBy: Adam Smith
Major Topic: Economics
Minor Topic: Politics
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BOOK TWO: On the Nature, Accumulation and Use of Stock
Introduction
In a pre-division of labor society there is not any need for stock since everyone simply works on whatever he needs to do to furnish the needs of life. However with the division of labor, a man's labor can only supply a very small portion of his needs. Most of his needs will be produced by other men and these needs will be purchased using his surplus. But there is a problem: this man will need to wait until his produce is sold to purchase his needs. Therefore a stock of his needs must be available to maintain this man until he sells his goods and is able to buy his needs.
Ontologically the saving up of stock must come before the division of labor and the division of labor can only be divided up to the limit of stock available to be advanced.
The person who advances the stock will naturally want to get as much productivity out of the stock as possible. This desire is usually best effected by the holders of the largest stock. This talent may be the cause of their having a larger stock to put to work.
As the amount of stock increases in a country so too does the amount of industry; and as more industry develops, much more productive work is carried out.
In this book the author explains the nature of stock, the effects of its accumulation into different types of capital and the effects of their use. In chapter one, the author writes about the different categories of capital. Chapter two deals with money as a type of stock. Chapter three deals with the use of capital by its owner; and in chapter four, by its borrower. In chapter five, the author explains the various uses and effects of capital.
Chapter One: On the Different Types of Stock
Most laborers have a few days or weeks of stock with which to supply their needs. With such a meager amount the laborers seldom look for ways to get revenue from their stock, rather they concern themselves with resupplying it before it runs out. However, if a man possesses stock on the order of months or years worth of his maintenance, he does try to find revenue from the greater amount, keeping only that amount that is needed for consumption in reserve, while waiting for the invested stock's revenue to come in.
Such a man's stock is broadly divided into three parts: the part that he invests to get revenue is called his capital and is divided into two parts: circulating capital and fixed capital. The other part, which supplies his consumption can be divided into three sub-parts: (1) that part that was intended to facilitate consumption, (2) income from any source (3) those things previously purchased which have not been totally consumed.
Capital can be used in two ways to make a profit and these two ways constitute its parts: Circulating capital refers to capital used to raise, manufacture or purchase goods for resale at a profit. Fixed capital refers to machines, tools of a trade, improvements in land and other things used to gain a profit without changing ownership. The proportion of fixed to circulating capital is dependent on the particularities of the enterprise.
These three broad parts of a man's stock; consumption stock, circulating capital and fixed capital; can also be applied as an aggregate at the national level.
Those things that the people need to live and from which they do not expect to make income constitute the first part: the national consumption stock. Among the constituents of this group are stocks of food, clothes, furniture, homes etc. which have been bought for consumption and not resale.
The national fixed capital, which makes a profit without changing ownership, consists of four categories: (1) all the machines and tools of trade that augment labor's productivity. (2) All buildings used to create a revenue. (3) all improvements of land. (4) All talents and education acquired by the people that can be used to earn a revenue.
The national circulating capital, which makes a profit only by changing ownership, consists also of four categories: (1) The money used to acquire the other three categories. (2) the provisions of the creators of simple goods meant for sale. (3) the stock of the inputs for finished goods before the goods are finished. (4) finished goods which are not yet sold.
All fixed capital was originally circulating capital and all fixed capital needs continual inputs of circulating capital both for maintenance and for earning a profit.
To increase the amount of consumption stock is the whole end and purpose of both fixed and circulating capital. The national consumption stock is that which provides the necessities, conveniences and amusements of life thus a nation's people are rich or poor according to the abundance or paucity of this stock.
All stock starts as circulating capital, therefore circulating capital must have a source else it would soon run dry. Circulating capital is supplied from three primary sources: the produce (1) of land, (2) of mines and (3) of fisheries. These three primary sources require both fixed and circulating capital to exploit. By so exploiting, profit is replaced immediately and in all of society.
Added on: 2010-05-29 07:04:15
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