Theories of economist Adam Smith: Nature of stocks


WHEN the stock which a man possesses is no more than sufficient to maintain him for a few days or weeks, he seldom thinks of deriving any revenue from it, but when he possesses enough to maintain him for months or years, he endeavours to derive a revenue from the greater part of it. The stock from which he derives revenue is called his capital.

There are two ways in which capital may be employed so as to yield a profit to its employer. First, it may be employed in raising manufacturing, or purchasing goods, and selling them again with a profit; this is circulating capital. Secondly, it may be employed in the improvement of land, or in the purchase of machines and instruments; and this capital, which yields a profit from objects which do not change masters, is called fixed capital.

The general stock of any country or society is the same as that of all its inhabitants or members and is, therefore, divided into three portions, each of which has a different function. The first is the portion which is reserved for immediate consumption, and so affords no revenue or profit. The second is the fixed capital, which consists of:

(a) All useful machines and instruments of trade which facilitate labour. (b) All profitable buildings, which procure a revenue, not only to their owner, but also to the person who rents them, such as shops, warehouses, farmhouses, factories, etc. (c) The improvements of land, and all that has been laid out in clearing, draining, enclosing, manuring and reducing it into the condition most proper for culture. (d) The acquired and useful abilities of all the inhabitants or members of the society; for the acquisition of such talents, by the maintenance of the learner during his training costs a real expense, which is a capital fixed in his person.

The third and last of the three portions into which the general stock of the society divides itself is the circulating capital, which affords a revenue only by changing masters. It includes;

(a) All the money by means of which all the other three are circulated and distributed to their proper consumers. (b) All the stock of provisions which are in the possession of the butcher, farmer, corn merchant, etc. and from the sale of which they expect to derive a profit. (c) All the materials, whether altogether rude, or more or less manufactured, for clothes, furniture and building, which are not yet made up into any of these shapes, but remain in the hands of the growers, manufactures and merchants. (d) All the work which is made up and completed, but is not yet disposed of to the proper consumers.

The substitution of paper in the place of gold and silver money replaces a very expensive instrument of commerce by one much less costly, and sometimes equally convenient. Circulation comes to be carried on by a new wheel, which costs less both to erect and to maintain than the old one.


THE greatest commerce of every civilized society is that carried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of paper which represents money. The country supplies the town with the means of subsistence and the materials for manufactures. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole subsistence from the country. And in how great a degree the country is benefited by the commerce of the town may be seen from a comparison of the cultivation of the lands in the neighbourhood of any considerable town with that of those which lie at some distance from it.

As subsistence is, in the nature of things, prior to convenience and luxury, so the rural industries, which procure the former, must be prior to the urban industries, which minister to the latter. The greater part of the capital of every growing society is therefore directed first to agriculture, afterwards to manufactures, and last of all to foreign commerce.

But this natural order of things has, in all the modern states of Europe, been in many respects entirely inverted. The foreign commerce of some of their cities has given rise to their finer manufactures, and manufactures and foreign commerce together have given birth to the principal improvements of agriculture. The customs which their original government introduced, and which remained after that government was greatly altered, necessarily forced them into this unnatural and retrograde order.

In the ancient state of Europe, after the fall of the Roman Empire, agriculture was greatly discouraged by several causes. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between towns and the country; the towns were deserted and the country was left uncultivated. The western provinces of Europe sank into the lowest state of poverty and the land, which was mostly uncultivated, was engrossed by a few great proprietors.

These lands might, in the natural course of events, have been soon divided again, and broken into small parcels by succession or by alienation; but the law of primo-geniture hindered their division by succession, and the introduction of entails prevented their being divided by alienation. These hindrances to the division, and consequently to the cultivation, of the land were due to the fact that land was considered as the means not of subsistence merely, but of power and protection.

In the ancient state of Europe the occupiers of land were all tenants at will, and practically slaves. To these succeeded a kind of farmers known at present in France by the name of 'metayers,' whose produce was divided equally between the proprietor and the farmer, after setting aside what was judged necessary for keeping up the stock, which still belonged to the landlord. To these, in turn, succeeded farmers properly so called, who cultivated the land with their own stock, paying a fixed rent to the landlord and enjoying a certain degree of security of tenure. And every improvement in the position of the actual cultivation of the soil is attended by a corresponding improvement of the land and of its cultivation.

After the fall of the Roman Empire, the inhabitants of cities and towns were not more favoured than those of the country. The towns were inhabited chiefly by tradesmen and mechanics, who in those days were of servile, or nearly servile, condition. Yet the townsmen arrived at liberty and independence much earlier than the country population; their towns became 'free burghs,' and were erected into commonalties or corporations, with the privilege of having magistrates and a town council of their own, of making by-laws for their own government, and of building walls for their own defence. Order and good government, and the liberty and security of individuals, were thus established in cities at a time when the occupiers of land in the country were exposed to every sort of violence.

The increase and riches of commercial and manufacturing towns thenceforward contributed to the improvement and cultivation of the countries to which they belonged in three different ways. First, by affording a great and ready market for the rude produce of the country. Secondly, the wealth acquired by the inhabitants of cities was employed in purchasing uncultivated lands and in bringing them under cultivation; for merchants are ambitious of becoming country gentlemen, and, when they do so, are generally the best of all improvers. And, lastly, commerce and manufactures gradually introduced order and good government, and with them as a logical consequence the liberty and security of individuals, among the inhabitants of the country.

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