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Book 1, Chapter 5
Themes
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
In simple societies without private capital stock or landholdings, people exchange goods based on the type and amount of labor involved in obtaining them, and whoever performs the labor wholly owns whatever they produce. But when people start to accumulate stock, they hire others to perform that labor, then take a portion of everything that labor produces as profit. Profits are not just the wages associated with managing others’ labor. Rather, profits depend on the amount of capital invested and the rate of return. Later, once all land has become privatized, landlords start demanding rent for the use of natural materials that were once freely available. Thus, the price of commodities has three parts: labor, profit, and rent. While agricultural products like grain include all three, rent plays a smaller part for some commodities that are manufactured in factories, and there is no rent at all for some commodities like fish.
Book II will focus in much more depth on the way people accumulate and invest capital. For now, Smith’s point is simply that the formation of capital is what allows societies to transition from small-scale bands to large, organized civilizations, because capital allows people to organize productive activity at a large scale. This process transforms the economic structure of society, dividing it into workers, capital owners, and landlords (who respectively live off of labor, profit, and rent). This three-part division can be seen as an extension of the division of labor, and it is the foundation for the rest of Smith’s analysis. It would be easy to mistake Smith’s analysis of capital for a defense of capitalism, a system in which capital is privately owned and managed. While this system did emerge in part because of Smith’s work, and he’s rightly associated with it today, all kinds of large-scale economic systems (including anarchism and communism) also involve the accumulation, investment, and management of capital.
Themes
A nation’s overall revenue also consists of these three categories: wages from labor, rent from land, and profit from stock (including interest, the profit from lending one’s stock to someone else). Often, different people depend on these different revenue sources: laborers live on wages, landlords on rents, and investors on profit. But many people mix more than one of these sources, such as farmers who own the land they plant and artisans who purchase their own materials. In more developed economies with more specialized divisions of labor, rent and profit make up most of the price of commodities and the value that each worker produces is much more than the cost of their labor. Thus, such an economy should grow rapidly from year to year—depending on the proportion of idle people who consume goods and services but do not work to produce them.
Much of the rest of The Wealth of Nations will deal with how to maintain the proper balance of wealth and power among workers, investors, and landlords. This discussion is another important dimension of Smith’s work that contemporary economists too often overlook in favor of his analysis of prices, free trade, and supply and demand. As Smith emphasizes, he divides society and its revenue into these three groups not because everyone must strictly belong to only one of them, but rather because this is the best framework for analyzing the structure of the economy as a whole. Rent and profit predominate in advanced societies because rents depend on the overall health of the economy (which drives the demand for land), while profits depend on the efficiency of production (which grows higher the more an economy develops). Meanwhile, the people who control capital try to keep wages as low as possible.
Themes
