Capital Stock Analysis in The Wealth of Nations

Capital stock is an accumulated reserve of wealth that can be invested for profit, lent out at interest, or used to meet the owner’s subsistence needs. Large-scale investment in both fixed and circulating capital is necessary to drive the division of labor forward because it enables companies to scale, specialize, and compete. Smith dedicates Book II to exploring how people accumulate, invest, and grow capital stock (which he frequently calls “stock” but is more often just called “capital” today).

Capital Stock Quotes in The Wealth of Nations

The The Wealth of Nations quotes below are all either spoken by Capital Stock or refer to Capital Stock. For each quote, you can also see the other terms and themes related to it (each theme is indicated by its own dot and icon, like this one:

As the price or exchangeable value of every particular commodity, taken separately, resolves itself into some one or other, or all of those three parts [wages, profits, and rent]; so that of all the commodities which compose the whole annual produce of the labour of every country, taken complexly, must resolve itself into the same three parts, and be parcelled out among different inhabitants of the country, either as the wages of their labour, the profits of their stock, or the rent of their land. The whole of what is annually either collected or produced by the labour of every society, or, what comes to the same thing, the whole price of it, is in this manner originally distributed among some of its different members. Wages, profit, and rent, are the three original sources of all revenue, as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

Page Number and Citation: 74

Explanation and Analysis:

Every fixed capital is both originally derived from, and requires to be continually supported by, a circulating capital. All useful machines and instruments of trade are originally derived from a circulating capital, which furnishes the materials of which they are made, and the maintenance of the workmen who make them. They require, too, a capital of the same kind to keep them in constant repair.

No fixed capital can yield any revenue but by means of a circulating capital. The most useful machines and instruments of trade will produce nothing, without the circulating capital, which affords the materials they are employed upon, and the maintenance of the workmen who employ them. Land, however improved, will yield no revenue without a circulating capital, which maintains the labourers who cultivate and collect its produce.

Related Symbols: The Pin Factory

Page Number and Citation: 359

Explanation and Analysis:

It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country. [...] The gold and silver money which circulates in any country, and by means of which, the produce of its land and labour is annually circulated and distributed to the proper consumers, is, in the same manner as the ready money of the dealer, all dead stock. It is a very valuable part of the capital of the country, which produces nothing to the country. The judicious operations of banking, by substituting paper in the room of a great part of this gold and silver, enable the country to convert a great part of this dead stock into active and productive stock; into stock which produces something to the country.

Page Number and Citation: 409

Explanation and Analysis:

No equal capital puts into motion a greater quantity of productive labour than that of the farmer. Not only his labouring servants, but his labouring cattle, are productive labourers. In agriculture, too, Nature labours along with man; and though her labour costs no expense, its produce has its value, as well as that of the most expensive workmen. [...] The labourers and labouring cattle, therefore, employed in agriculture, not only occasion, like the workmen in manufactures, the reproduction of a value equal to their own consumption, or to the capital which employs them, together with its owner’s profits, but of a much greater value. Over and above the capital of the farmer, and all its profits, they regularly occasion the reproduction of the rent of the landlord. This rent may be considered as the produce of those powers of Nature, the use of which the landlord lends to the farmer.

Related Characters: Farmers, Landlords

Page Number and Citation: 462–463

Explanation and Analysis:

As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Related Symbols: The Invisible Hand

Page Number and Citation: 572

Explanation and Analysis:

The man who employs either his labour or his stock in a greater variety of ways than his situation renders necessary, can never hurt his neighbour by underselling him. He may hurt himself, and he generally does so. Jack-of-all-trades will never be rich, says the proverb. But the law ought always to trust people with the care of their own interest, as in their local situations they must generally be able to judge better of it than the legislature can do.

Related Characters: Farmers, Grain Inland Traders, Wholesalers

Page Number and Citation: 669

Explanation and Analysis:

It is not, therefore, the poverty of the colonies which occasions, in the greater part of them, the present scarcity of gold and silver money. Their great demand for active and productive stock makes it convenient for them to have as little dead stock as possible, and disposes them, upon that account, to content themselves with a cheaper, though less commodious instrument of commerce, than gold and silver. [...] In those branches of business which cannot be transacted without gold and silver money, it appears, that they can always find the necessary quantity of those metals; and if they frequently do not find it, their failure is generally the effect, not of their necessary poverty, but of their unnecessary and excessive enterprise. It is not because they are poor that their payments are irregular and uncertain, but because they are too eager to become excessively rich.

Page Number and Citation: 1202–1203

Explanation and Analysis:

Capital Stock Term Timeline in The Wealth of Nations

The timeline below shows where the term Capital Stock appears in The Wealth of Nations. The colored dots and icons indicate which themes are associated with that appearance.

...through a division of labor. The proportion of people who work depends on a nation’s capital stock, so Book II will explain how this capital stock is formed and how it... (full context)

In simple societies without private capital stock or landholdings, people exchange goods based on the type and amount of labor involved... (full context)

...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... (full context)

...their ordinary rates. Thus, landlords, workers, and/or investors will correspondingly withdraw their land, labor, and/or capital. This will reduce the amount of the commodity produced and supplied in the market, until... (full context)

...this from happening in the real world: “the appropriation of land and the accumulation of stock.” (full context)

...without having to organize. This tends to happen when a country has extra money and capital sitting around—or surplus revenue (more income than its people need to survive) and surplus stock... (full context)

...profit levels rise as they conquer new territories or absorb new industries, as their existing capital stock gets spread more thinly among a broader range of business opportunities. In this situation,... (full context)

...of Europe’s fortunes are made in towns, not the countryside. This dynamic constantly draws more capital and labor to towns—where it’s easier for people to organize into corporations. This is why... (full context)

...is because, as town industries grew larger and more profitable, they accumulated more and more capital stock, which they invested back into their operations. This increased competition, reducing prices and profit... (full context)

...and final way that policy drives wage and profit inequalities is by preventing labor and capital from moving freely across different places and employments. Apprenticeship prevents people from switching occupations and... (full context)

England’s Poor Laws further restrict labor and capital by requiring that each parish support its own poor people. The laws make it extremely... (full context)

...and gold is the cost of wages plus the ordinary rate of profit on the capital required to mine and sell them. But their highest price is determined mainly by scarcity.... (full context)

...directly: the real value of the land’s produce increases, but not of the labor or capital required to work it, so the difference goes to rent. Manufacturing improvements raise the rent... (full context)

Before the division of labor, there is no need for stock: people simply do what they can to get what they want. They feed, clothe, and... (full context)

When people only have enough stock to maintain themselves for days or weeks, they simply try to stretch it out for... (full context)

There are two kinds of capital: circulating capital, or capital used to produce or obtain goods that are sold for profit,... (full context)

Like an individual’s stock, a society’s stock is also made of three parts: circulating capital, fixed capital, and a... (full context)

...these provisions, raw materials, and unsold products get sold, they either go to replenish the stock reserved for consumption, or they get invested into fixed capital. In turn, this fixed capital... (full context)

...the cost of management and repairs, and which goes into the reserve for consumption or capital improvements). Similarly, a country’s gross revenue is everything its land and people produce, while its... (full context)

The expense of maintaining circulating capital—producing new provisions, raw materials, and unsold products to replace those that have been turned into... (full context)

...money supply (or the coins in circulation) is similar to the cost of maintaining fixed capital, as they both enable the rest of the economy to function. Thus, the cost of... (full context)

...paper than they should. Yet banks should never lend merchants all or most of the capital they need to operate, as this will never produce adequate returns in the moderate term.... (full context)

...to the government in 1694, and it has grown steadily since, loaning money, enlarging its capital stock by selling shares, and paying dividends to its shareholders. It is “a great engine... (full context)

...its laborers, both productive and unproductive. One part of this produce goes to replace the capital stock used up in production, which means it must go to productive labor. (However, once... (full context)

Thus, the proportion of revenue that goes to replace capital helps determine the ratio of productive to unproductive labor. This portion is high in 18th... (full context)

People can grow their capital by saving a portion of their annual revenue to invest. This enables them to employ... (full context)

Increasing a nation’s annual produce requires additional capital stock. Nearly all countries steadily increase their capital stocks and revenues during peacetime. England grew... (full context)

Lenders treat the stock they lend with interest as capital. Borrowers generally use it as capital, but they sometimes... (full context)

...this makes little sense, as the availability of more silver doesn’t change the proportion between capital and profit (and thus the interest for lending money). If more goods circulated in a... (full context)

Lastly, land prices depend on interest rates because people with excess capital who don’t want to manage it themselves have two choices: they can give loans with... (full context)

Depending on how it is used, the same amount of capital can command different quantities of labor and add different amounts of value to a nation’s... (full context)

These four groups use their capital stock in different ways. Retailers spend their capital buying goods from wholesalers, which replaces the... (full context)

Manufacturers use their capital to buy the instruments (fixed capital) and materials (circulating capital) that they need to make... (full context)

Most countries simply don’t have enough capital to cultivate all their land, reach their manufacturing potential, and transport all goods to market.... (full context)

...both directions, buying one commodity and selling another. For domestic wholesale trade, both sources of capital are within the country, but for international trade, only one is. International voyages also cover... (full context)

...countries over-import and re-export goods, like Britain with tobacco. When a country has even more capital than it needs to support its productive labor and total consumption, that capital tends to... (full context)

People with capital decide where to allocate it based only on profit margins, and not on what is... (full context)

...by producing goods for more distant markets. Since manufacturing is still a safer use of capital than foreign commerce, a country’s agriculture sector tends to grow first, then manufacturing, and then... (full context)

...as possible, but not to improve the land, because this would mean investing their own capital for the landlord’s benefit. Eventually, a new farming system took hold, with farmers using their... (full context)

...These policies make farming an undesirable profession and dissuade manufacturers and wholesalers from shifting their capital into agriculture. So do rules against grain exportation and limits on domestic trade. (full context)

...safe and prosperous, while the countryside remained poor and violent. City people started accumulating a stock of resources and strategically directing it towards economically productive activities. Hardworking farmers moved from the... (full context)

...they can never dream of making a fortune in agriculture, and they don’t have enough capital to succeed in trade or manufacturing. (full context)

...Only Italy managed to turn its manufacturing and commercial success toward agricultural improvements. In general, capital built through commerce and manufacturing does not truly benefit a nation in the long term... (full context)

...such policies just reallocate its resources toward particular activities. People generally prefer to invest their capital near home and in the industries that produce the most value. Since the best way... (full context)

...as imported produce, and they are hurtful if they lead a country to invest its capital in producing something that would be cheaper to import, instead of in more productive industries.... (full context)

...power, and influence over Parliament. When their businesses fail, these manufacturers sell off their circulating capital, but they lose the value of their fixed capital. But the slower taxes fall, the... (full context)

...foreign-produced goods—including gold and silver—it will benefit less, since its revenue will go to replace capital employed abroad. Nevertheless, it still benefits: in terms of real value, its revenue will still... (full context)

...unprofitable kinds of trade that couldn’t survive otherwise, and subsidizing such trade squanders the nation’s capital. Without bounties, merchants will simply switch to more profitable kinds of trade. Britain’s grain bounty... (full context)

...but they would quickly start growing in real terms because they would trade their “dead stock” (excess gold and silver) for useful goods, thereby transforming it into “active stock” (capital that... (full context)

...manufactured goods, for which monopolies and bounties do increase real prices (but also waste society’s capital by funneling it into a losing trade). (full context)

...bounties: they encourage better production techniques instead of changing “the natural balance of employments” and capital investment. (full context)

...can work more efficiently and produce goods for a lower price if they dedicate their capital and attention to a single activity, rather than splitting it between two. (full context)

...had a harmful effect, while the manufacturing policy may have actually accelerated the division of stock and labor. But both policies unjustly violated people’s natural liberty. Specifically, the grain policy discouraged... (full context)

...reality, wholesale merchants support farmers and manufacturers by permitting them to specialize, invest all their capital in efficient production, and sell off their goods and rude produce immediately rather than waiting... (full context)

...on the Portugal trade could have easily found other equally profitable ways to invest their capital. (full context)

England’s exclusive trade with its colonies led other foreign powers to withdraw their capital from them, which caused more English capital to flow into them. Prices rose, but so... (full context)

...because distances are shorter, so goods can circulate back and forth faster, and the same capital can yield profits more frequently. But Britain’s exclusive trade with its colonies has supported a... (full context)

...colonial trade’s monopoly effects outweighed its benefits: their colonies were so rich and fertile that capital fled their manufacturing sectors, which shut down. (full context)

...makes the economy grow. In this way, merchants’ high profits gradually eat away at society’s capital, impoverishing it, as in Spain and Portugal. In contrast, merchants in places with low profit... (full context)

...than they yield in revenue. Their dazzling riches lead people to mistakenly put all their capital into it, when it is naturally better to invest capital in activities that are near... (full context)

The mercantile system disrupts this natural distribution of capital, and this effect is the strongest in Europe’s trade with America and the East Indies.... (full context)

Company monopolies are often justified on the grounds that only companies have enough capital to support the East India trade. But this is wrong: in a country wealthy enough... (full context)

...This indirectly supports landlords and farmers by enabling them to focus their time, energy, and capital on agriculture. (full context)

...for lower and lower prices. This grows the surplus of rude produce, manufactured goods, and capital, which eventually enables nations to start exporting goods and competing with one another. (full context)

...they give a monopoly to domestic manufacturers and merchants, whose profit rates rise. This draws capital away from agriculture at a stage when land improvement is still the most productive investment... (full context)

...they don’t produce a surplus like farmers, they still generate enough revenue to replace their capital investment and living expenses. This distinguishes them from truly unproductive labor, like menial servants and... (full context)

Indeed, societies naturally invest their capital in the most productive way available to them, so every well-intentioned system that tries to... (full context)

There are two kinds of companies: regulated and joint-stock companies. Regulated companies control a certain branch of trade and allow any merchant to join... (full context)

In joint-stock companies, people pool their resources and become co-owners. These joint-stock companies are not the same... (full context)

...failed due to competition, but Parliament allowed it to continue trading with some of its capital until 1701. Its officials also kept privately trading goods, and their competition made the second... (full context)

Joint-stock companies tend to encourage waste and corruption, start unjust wars, and fail unless they have... (full context)

...of Revenue which may peculiarly belong to the Sovereign or Commonwealth.” The sovereign can own stock, which it can lend or invest. In tribal herding societies, like the Tartars (Turks) or... (full context)

...pawn shop and Pennsylvania issues paper credit similar to banknotes, using land as collateral. But stock and credit are too “unstable and perishable” to fund a government long-term. (full context)

...the sovereign’s expenses. Britain’s land tax applies to all land, houses, and interest earned on capital stock, but it still doesn’t cover the state’s revenue. As private people manage land better... (full context)

“Article II. Taxes upon Profit, or upon the Revenue arising from Stock.” Profit has two parts. One part is interest, which pays back the stockowner’s investment at... (full context)

...mistake, because calculating interest earnings is very difficult and invasive, and people may take their capital stock out of the country to avoid taxes. Countries that have tried to tax stock... (full context)

...on net worth after establishing a new government—which was meant to be a tax on capital. (full context)

France does tax the profits of agricultural stock. Historically, it taxed common people who owned land but not nobles, who were too powerful... (full context)

“Appendix to Articles I and II. Taxes upon the Capital Value of Land, Houses, and Stock.” Taxes on the transfer (sale or inheritance) of land and real estate are easy to... (full context)

...transfer taxes harm the national revenue, as they increase the state’s revenue by taking away capital stock that would otherwise be invested in productive labor. Transfer taxes are unequal, since some... (full context)

...will lend this money to the sovereign because they generally have access to lots of capital. If they already trust the government to protect their property, they will certainly trust it... (full context)

Some have defended England’s national debt by suggesting that this brought more capital into the country, but they are wrong. British creditors already had this capital—they just chose... (full context)

Since war debt shifts some of the nation’s land and capital from private to public ownership, it reduces landlords’ investment in land improvements and encourages capital... (full context)

...they’re growing so fast that buying up gold and silver seems like a waste of capital. For foreign trade, Virginia and Maryland mainly pay in tobacco, while the northern colonies use... (full context)

The Wealth of Nations

Adam Smith

Capital Stock Term Analysis

Capital Stock Quotes in The Wealth of Nations

Capital Stock Term Timeline in The Wealth of Nations