Book II, Chapter I, 1

ON THE NATURE, ACCUMULATION, AND USE OF STOCK.

INTRODUCTION.

In a rudimentary state of society, where there is no division of labor, exchanges are rare, and each person provides everything for himself, no stock need be accumulated or stored in advance to carry on society's business. Each person tries by his own industry to meet his needs as they arise. When hungry, he goes into the forest to hunt; when his coat wears out, he clothes himself in the skin of the first large animal he kills; and when his hut begins to collapse, he repairs it as best he can with the nearest trees and turf.

But once the division of labor is firmly established, the produce of a person's own labor can meet only a very small share of his occasional needs. By far the greater share is met by the produce of other people's labor, which he purchases with the produce—or, equivalently, the price of the produce—of his own. Yet he cannot make this purchase until the produce of his own labor has both been completed and sold. A stock of goods of various kinds must therefore be stored somewhere, enough to maintain him and provide the materials and tools for his work until, at least, both events have taken place. A weaver cannot devote himself wholly to his particular trade unless a stock has already been stored somewhere, whether in his own possession or another's, sufficient to maintain him and provide the materials and tools of his work until he has both finished and sold his cloth. Such accumulation must plainly precede his devoting his industry for so long to this particular occupation.

Just as the accumulation of stock must, by its nature, precede the division of labor, so labor can be divided ever further only as stock has first been accumulated in ever greater quantities. The quantity of materials that the same number of people can work up increases greatly as labor becomes more finely divided; and as each worker's operations are gradually simplified, various new machines are invented to ease and shorten them. As the division of labor advances, therefore, keeping the same number of workers constantly employed requires the prior accumulation of the same stock of provisions and a greater stock of materials and tools than would have been needed in a more rudimentary condition. But the number of workers in each trade generally increases as labor is divided within it—or rather, it is the increase in their number that allows them to sort themselves into classes and subdivisions in this way.

Just as accumulating stock is necessary in advance to bring about this great improvement in the productive powers of labor, so accumulation naturally brings about the improvement. A person who uses his stock to maintain labor necessarily wants to employ it so as to produce as much work as possible. He therefore tries both to distribute tasks among his workers in the most suitable way and to furnish them with the best machines he can invent or afford to buy. His ability in both respects generally corresponds to the extent of his stock, or the number of people it can employ. Thus the quantity of industry in a country grows with the stock that employs it; and, as a result of that growth, the same quantity of industry produces a much greater quantity of work.

Such, in general, are the effects of increasing stock upon industry and its productive powers.

In the following book I have tried to explain the nature of stock, the effects of its accumulation into different kinds of capital, and the effects of the various uses of those capitals. The book has five chapters. In the first, I have tried to show the different parts or branches into which the stock of an individual or a great society naturally divides. In the second, I have tried to explain the nature and operation of money, considered as one particular branch of society's general stock. Stock accumulated as capital may be employed by its owner or lent to someone else. In the third and fourth chapters I have tried to examine how it operates in each situation. The fifth and final chapter concerns the different immediate effects that the various uses of capital have on the quantity of national industry and on the annual produce of land and labor.

ON THE DIVISION OF STOCK.

When a person's stock is only enough to maintain him for a few days or weeks, he seldom thinks of drawing revenue from it. He consumes it as sparingly as possible and tries, through his labor, to acquire something to replace it before it is entirely consumed. His revenue in this case comes solely from his labor. This is the situation of most of the laboring poor in every country.

But when he possesses enough stock to maintain him for months or years, he naturally tries to draw revenue from most of it, reserving for immediate consumption only enough to support him until that revenue begins to arrive. His entire stock is thus divided into two parts. The part from which he expects this revenue is called his capital. The other supplies his immediate consumption and consists, first, of the portion of his total stock originally reserved for this purpose; or, second, of his revenue, whatever its source, as it gradually comes in; or, third, of things bought with either of these in previous years but not yet entirely consumed, such as clothes, household furniture, and the like. One or more of these three items makes up the stock people ordinarily reserve for their immediate consumption.

There are two distinct ways to employ capital so that it yields its employer revenue or profit.

First, it may be employed to grow, manufacture, or buy goods and then resell them at a profit. Capital employed in this way yields its employer no revenue or profit while it remains in his possession or retains the same form. A merchant's goods yield him no revenue or profit until he sells them for money; the money yields him just as little until he exchanges it again for goods. His capital continually leaves him in one form and returns in another; only through this circulation, or succession of changes, can it yield any profit. Such capitals may therefore properly be called circulating capitals.

Second, capital may be employed to improve land, purchase useful machines and instruments of trade, or acquire similar things that yield revenue or profit without changing hands or circulating any further. Such capitals may properly be called fixed capitals.

Different occupations require very different proportions of fixed and circulating capital.

A merchant's capital, for example, is entirely circulating capital. He has no need of machines or instruments of trade, unless his shop or warehouse is counted among them.

Some of every master artisan's or manufacturer's capital must be fixed in the instruments of his trade. In some trades, however, this share is very small, and in others very large. A master tailor needs no instruments beyond a set of needles. A master shoemaker's instruments are a little, though only a little, more expensive. A weaver's cost considerably more than a shoemaker's. By far the greater part of the capital of all such master artisans, however, circulates either as wages for their workers or as payment for their materials, and is repaid, with a profit, in the price of the finished work.

Other kinds of work require much greater fixed capital. In a large ironworks, for example, the furnace for smelting ore, the forge, and the slitting mill are instruments of trade that cannot be built without very great expense. In coalworks and mines of every sort, the machinery needed to draw out water and serve other purposes is often still more costly.

The part of a farmer's capital employed in agricultural instruments is fixed capital; the part employed in the wages and maintenance of his laboring servants is circulating capital. He profits from the first by keeping it and from the second by parting with it. The price or value of his working animals is fixed capital, like the value of his farming instruments; their maintenance is circulating capital, like the maintenance of his laboring servants. The farmer profits by keeping the working animals and parting with what maintains them. Both the price and the maintenance of animals bought and fattened for sale rather than work are circulating capital. The farmer profits by parting with them. A flock of sheep or herd of cattle in a breeding country, acquired neither for work nor for sale but to earn a profit from its wool, milk, and offspring, is fixed capital. The profit comes from keeping the animals. Their maintenance is circulating capital: profit comes from parting with it, and it returns in the price of the wool, milk, and offspring, along with its own profit and the profit on the animals' entire price. The full value of seed, too, is properly fixed capital. Though it moves back and forth between the ground and the granary, it never changes hands and therefore does not properly circulate. The farmer profits not by selling it but by increasing it.

The general stock of a country or society is identical with the stock of all its inhabitants or members and therefore naturally divides into the same three portions, each with its distinct function or purpose.

On the Nature, Accumulation, and Use of Stock

Introduction

In an early society without a division of labor, people rarely exchange things. Each person provides everything for himself, so no one needs to build up a stock of supplies in advance to keep the society’s work going. Each person works to meet his needs as they arise. When he is hungry, he hunts in the forest. When his coat wears out, he wears the skin of the first large animal he kills. When his hut starts to fall apart, he repairs it as well as he can with the nearest trees and turf.

Once the division of labor is firmly established, a person’s own work meets only a small part of his needs. He meets most of them by buying the products of other people’s labor. He pays with what he has produced, or with the money he gets for it. But he cannot buy those things until he has finished and sold his own product. Someone must therefore have stored up enough goods to support him and provide the materials and tools he needs until both things have happened. A weaver cannot devote himself entirely to weaving unless he or someone else has already stored up enough to support him and provide his materials and tools until he has finished and sold his cloth. That stock must be built up before he can spend so much time on this particular occupation.

Stock must be built up before labor can be divided. Labor can then be divided further only as more stock is built up beforehand. As tasks become more divided, the same number of people can work up far more materials. Each worker’s tasks become simpler, and people invent new machines to make those tasks easier and quicker. So, as the division of labor advances, keeping the same number of workers constantly employed calls for a stock of food as large as before and a larger stock of materials and tools than a less developed society needed. These must be stored up in advance. Usually, though, the number of workers in each trade also grows as its work is divided. Or, more precisely, having more workers allows them to sort themselves into specialized groups and divide their tasks further.

Building up stock is necessary before these great improvements in labor’s productive powers can happen. It also naturally leads to them. A person who uses his stock to support workers wants them to produce as much as possible. He tries to assign them the most suitable tasks and give them the best machines he can invent or afford. His ability to do both generally depends on how much stock he has, or how many people it can employ. So a country’s stock does more than increase the amount of work done by employing more people. As it grows, the same amount of labor produces much more.

These are the general effects of growing stock on labor and its productive powers.

In this book I will explain what stock is, what happens when it builds up into different kinds of capital, and what happens when those kinds of capital are used in different ways. The book has five chapters. In the first, I explain the parts into which an individual’s stock, or an entire society’s stock, naturally divides. In the second, I explain what money is and how it works as one part of society’s total stock. The owner can use stock built up as capital, or lend it to someone else. In the third and fourth chapters, I examine how it works in each case. The fifth and last chapter covers the different immediate effects of using capital in different ways on the amount of work done in a nation and on the annual product of its land and labor.

On the Division of Stock

When a person has only enough stock to live on for a few days or weeks, he rarely expects it to bring in revenue. He uses it as sparingly as possible and works to get something to replace it before it runs out. His labor alone provides his revenue. This is how most working poor people live in every country.

When he has enough stock to live on for months or years, he naturally tries to earn revenue from most of it. He keeps only enough for his immediate use to support him until that revenue arrives. His stock thus has two parts. The part he expects to earn revenue from is his capital. The other part meets his immediate needs. It consists, first, of the part of his stock originally set aside for this purpose; second, of whatever revenue he receives as it comes in; or, third, of things bought with either of these in earlier years that have not been used up, such as clothes and household furniture. What people keep for their immediate use consists of one, some, or all of these three things.

Capital can be used in two ways to bring its user revenue or profit.

First, it can be used to grow, make, or buy goods and then sell them at a profit. Capital used this way earns its owner nothing while he still holds it or while it keeps the same form. A merchant’s goods earn him nothing until he sells them for money. The money earns him nothing until he trades it for goods again. His capital keeps leaving him in one form and returning in another. Only by moving through these successive changes can it earn him a profit. Such capital can aptly be called circulating capital.

Second, capital can be used to improve land, buy useful machines and tools, or acquire similar things that bring in revenue or profit without changing owners or circulating further. Such capital can aptly be called fixed capital.

Different occupations need very different proportions of fixed and circulating capital.

A merchant’s capital, for example, is entirely circulating capital. He needs no machines or tools for his trade unless we count his shop or warehouse.

Every master craftsperson or manufacturer must put some capital into the tools of the trade as fixed capital. This share is very small in some trades and very large in others. A master tailor needs only some needles. A master shoemaker’s tools cost a little more, but not much. A weaver’s cost considerably more than a shoemaker’s. Yet most of these masters’ capital circulates in their workers’ wages or in materials. They get it back, with a profit, in the price paid for their work.

Other kinds of work need much more fixed capital. At a large ironworks, for example, the furnace that melts the ore, the forge, and the slitting mill are costly tools to build. In coal workings and mines of every kind, the machinery needed to pump out water and do other jobs often costs still more.

For a farmer, the capital used to buy agricultural tools is fixed capital; the capital used to pay and support his workers is circulating capital. He profits from the first by keeping it and from the second by giving it up. The value of his working animals is fixed capital, like the value of his farm tools. The cost of feeding them is circulating capital, like the cost of supporting his workers. He profits by keeping the animals and giving up what feeds them. Both the purchase price and the upkeep of animals bought and fattened for sale, not work, are circulating capital. He profits by selling the animals. In a region where animals are bred, a flock of sheep or herd of cattle kept neither to work nor to be sold, but to provide wool, milk, and offspring, is fixed capital. The farmer profits by keeping it. Its upkeep is circulating capital, from which he profits by giving it up. That expense comes back, together with its own profit and a profit on the animals’ entire price, through the sale of the wool, milk, and offspring. The whole value of seed is also properly fixed capital. Although it goes back and forth between the field and the granary, it never changes owners and so does not really circulate. The farmer profits not by selling the seed but by increasing it.

The total stock of a country or society is the combined stock of all its people. It naturally divides into the same three parts, each with a separate purpose.