The Wealth of Nations · Chapter
IX: Of the Profits of Stock explained
Smith examines the factors influencing the profits of stock, arguing that increasing wealth raises wages but lowers profits due to competition.
What happens
Smith examines the factors influencing the profits of stock, arguing that increasing wealth raises wages but lowers profits due to competition. He uses historical interest rates as a proxy for profit rates, tracing legal interest from Henry VIII to Queen Anne, and compares profit and wage levels across England, Scotland, France, and Holland. He also discusses how new territories or trades can temporarily raise profits, and contrasts high profits in declining economies like Bengal with low profits in fully stocked societies.
Themes in this chapter
Self-Interest and the Invisible Hand
Competition among merchants driven by self-interest lowers profits, illustrating the invisible hand mechanism.
Social Class and Inequality
Discusses how profits and wages differ between towns and country, and between rich and poor countries.
Wealth and Money
Analyzes the relationship between stock, profit, interest, and national wealth.
Role of Government
Reviews historical legal regulations on interest rates and their effectiveness.
Characters to notice
- Adam Smith
Author and narrator of the chapter, analyzing profits of stock.
- Henry VIII
His 37th year statute declared all interest above 10% unlawful.
- Queen Elizabeth I
Her 13th year revived Henry VIII's statute on interest.
- Great Britain
Mentioned regarding capital stock not being diminished by the late war.
- Holland
Compared as a richer country than England, with lower interest rates and higher wages.
- The Dutch
Implied in the discussion of Holland's economy.
Key passages
“The increase of stock, which raises wages, tends to lower profit.”
As capital accumulates, wages rise but profit margins shrink.
Core relationship between stock, wages, and profit.
“It may be laid down as a maxim, that wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it.”
Interest rates reflect profit opportunities: high potential profits lead to high interest rates.
Smith uses interest as a proxy for profit.
“Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.”
Accumulated capital grows faster than small capital; the initial accumulation is the hardest part.
Illustrates the compounding advantage of wealth.
“The great fortunes so suddenly and so easily acquired in Bengal and the other British settlements in the East Indies, may satisfy us that, as the wages of labour are very low, so the profits of stock are very high in those ruined countries.”
High profits in Bengal stem from low wages and economic exploitation, indicating a ruined economy.
Contrasts high profits in declining regions with low profits in advancing ones.