A man’s stock consists of two parts – the part which provides him revenue (capital) and the part that meets
his immediate (consumption) needs. His capital may be employed in producing, manufacturing and purchasing goods – and selling them at a profit (
circulating capital). Or, his capital may be used in upgrading the land or purchasing useful machines (
fixed capital).
The general stock of any country is nothing else but the sum of the stock of all its inhabitants. It consists of the part (food, clothes and furniture) reserved for his consumption, the fixed capital (machines, buildings and acquired skills) which yields revenue to him, and the circulating capital (money, inventory, raw materials and finished goods) which yields revenue only by circulating. Circulating capital is regularly withdrawn – either to be used for consumption or to be converted to fixed capital. But the circulating capital must continuously be replenished, or it would soon become exhausted.
The purpose of both fixed and circulating capital is to increase a man’s stock; for this is the measure of his wealth and poverty. The stock, in turn, provides (present) enjoyment or (future) profit.
Money is the wheel of circulation, the instrument of commerce. The author stresses that a person’s revenue does not consist of that money – but in the power of purchasing or consuming goods that can be bought with that money. Money is only a medium to circulate inventories, raw materials and finished goods. Banks increase the trade and commerce of the country by making the capital both active and productive – and not by increasing its total amount.
Labor is of two sorts – that which adds value to the product (productive) and that which does not (unproductive). The labor of a productive worker gets fixed in a (sellable) product, whereas the labor of a servant does not. Thus, a man grows rich by employing workers, but grows poor by maintaining servants! The author says that the head of government, his ministers and the armed forces all constitute unproductive labor. They are public servants who are maintained by the hard work of other (productive) workers. The author says that we are more hard working than our ancestors, because (in present times) the funds available for employing productive labor are far greater than the funds available for maintaining idle or unproductive servants.
The produce of the land or labor is divided into two parts – the first part is used in replacing the circulating capital that had been withdrawn; and the second part consists of revenue to the owner of capital. Either in the form of his profit, or in the form of rent to some other person. Capital is increased by thrift / frugality and diminished by extravagance. What a person saves from his revenue, he adds to his capital; capital that is used for employing productive labor. The reason that we save is that we want to better our condition in the future. On the other hand, an (extravagant) person who spends more than his income eats into his capital. If the extravagance of some were not compensated by the thrift / frugality of others, the country would soon become impoverished!
The sole use of money is to circulate consumable goods. Inventory, raw materials and finished goods are bought and sold; and distributed to the end consumers. The quantity of money increases as the annual produce (of the country) increases. The greater the quantum of goods being circulated, the greater the quantity of money that will be required to circulate them. The author lays emphasis on the fact that the increase in money supply is the effect – not the cause – of greater prosperity. The annual produce of both land and labor can be increased by either increasing the number of productive workers or by increasing their productivity. And this can only be done by injecting additional capital.
The stock which is lent at an interest (to the borrower) is either used to employ productive workers, or for immediate consumption. This is the capital that the owner does not want to go to the trouble of employing himself. However, as the total amount of capital available in the country increases, the interest rates and the profits that can be derived from lending it correspondingly decrease.
Capital may be productively used in four ways:
i) In procuring the raw materials (farmers, miners)
ii) In manufacturing the products (manufacturers)
iii) In transporting the products from where they are available to where they are required (wholesale merchants)
iv) In distributing the products to the end consumers (retailers)