The Wealth of Nations · Chapter
I: Of the Division of Stock explained
Smith distinguishes between stock reserved for immediate consumption and capital intended to yield revenue.
What happens
Smith distinguishes between stock reserved for immediate consumption and capital intended to yield revenue. Capital is further divided into fixed capital (machines, buildings, land improvements, acquired abilities) and circulating capital (money, provisions, materials, finished goods). He explains how these capitals interact, with fixed capital ultimately derived from and supported by circulating capital, and both serving to maintain and augment the stock for immediate consumption. The chapter also notes that in insecure societies, people may hoard stock rather than invest it.
Themes in this chapter
Division of Labor
Though not explicit, the classification of capital into fixed and circulating underpins the specialization of labor by providing the tools and materials necessary for divided tasks.
Wealth and Money
The chapter defines how stock and capital generate wealth, with money as a part of circulating capital that facilitates exchange.
Characters to notice
- The Employer
Discussed as the recipient of profit from fixed and circulating capitals, such as the farmer and master artificer.
- A Workman
Mentioned in the context of acquired abilities as a form of fixed capital, and as a laborer whose maintenance is part of circulating capital.
- The Master
Referenced as the master tailor, shoemaker, weaver, and manufacturer whose capital includes fixed instruments and circulating wages and materials.
- The Proprietors
Implied as owners of profitable buildings and land improvements that yield rent.
Key passages
“When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it.”
If a person's resources only cover a short period, they focus on subsistence rather than investment.
Introduces the basic motivation for capital accumulation.
“There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer.”
Capital can generate profit either by circulating (being sold and replaced) or by being fixed (remaining in the owner's possession).
Core distinction between circulating and fixed capital.
“Every fixed capital is both originally derived from, and requires to be continually supported by a circulating capital.”
Fixed capital originates from and depends on circulating capital for its creation and maintenance.
Highlights the interdependence of the two capital types.