Book II, Chapter III, 1

Of the Accumulation of Capital, or of Productive and Unproductive Labor.

One kind of labor adds value to the thing on which it is expended; another does not. The former, since it produces value, may be called productive labor; the latter, unproductive labor. [Certain highly learned and ingenious French authors have used these words in a different sense. In the last chapter of the fourth book, I shall attempt to show why their sense is improper.] Thus a manufacturer's labor generally adds to the value of the materials he works on both the value of his own maintenance and that of his master's profit. A domestic servant's labor, by contrast, adds value to nothing. Though the manufacturer receives his wages in advance from his master, he actually costs him nothing: the value of those wages is generally recovered, along with a profit, in the increased value of the thing on which the labor is spent. But the maintenance of a domestic servant is never recovered. A man grows rich by employing many manufacturers; he grows poor by maintaining many domestic servants. The labor of servants nevertheless has value, and deserves its reward no less than the labor of manufacturers. But the manufacturer's labor fixes and embodies itself in a particular object or saleable commodity that endures for at least some time after the labor is finished. It is, as it were, labor accumulated and stored up, available for use on another occasion if needed. That object, or equivalently its price, can later set in motion an amount of labor equal to that which originally produced it. The domestic servant's labor, in contrast, fixes or embodies itself in no particular object or saleable commodity. His services usually perish at the very moment they are performed and seldom leave any value behind with which an equal amount of service could afterward be obtained.

The labor of some of society's most respected orders, like the labor of domestic servants, produces no value and does not fix or embody itself in any lasting object or saleable commodity that remains when the labor is done and could later purchase an equal quantity of labor. The sovereign, for example, together with all the officers of justice and war serving under him, the whole army and navy, are unproductive laborers. They serve the public and are supported by part of the annual produce of other people's industry. Their service, however honorable, useful, or necessary, produces nothing that can later procure an equal amount of service. The protection, security, and defense of the commonwealth that their labor supplies this year will not purchase its protection, security, and defense next year. This class must also include some of the gravest and most important professions, as well as some of the most frivolous: clergy, lawyers, physicians, writers of every kind, actors, buffoons, musicians, opera singers, opera dancers, etc. The labor of the humblest among them has a value determined by the same principles as every other kind of labor; that of the noblest and most useful produces nothing that could subsequently purchase or procure an equal amount of labor. Like an actor's declamation, an orator's speech, or a musician's tune, the work of them all perishes at the instant of its production.

Productive and unproductive laborers alike, as well as people who do no labor at all, are supported by the annual produce of the country's land and labor. However great this produce may be, it cannot be infinite; it must have limits. Therefore, the smaller the share used in any year to support unproductive people, the more remains for productive people, and next year's produce will be correspondingly greater; the larger that share, the less remains, and next year's produce will be correspondingly smaller. Apart from the spontaneous produce of the earth, the whole annual produce is the result of productive labor.

The whole annual produce of every country's land and labor is doubtless ultimately intended to supply its inhabitants' consumption and provide them with revenue. Yet when it first emerges from the ground or from the hands of productive laborers, it naturally divides into two parts. One part, frequently the larger, is initially intended to replace a capital—to renew the provisions, materials, and finished goods drawn from that capital. The other constitutes revenue either for the owner of the capital, as profit on his stock, or for someone else, as rent on his land. Thus one part of the produce of land replaces the farmer's capital, while another pays his profit and the landlord's rent, providing revenue both for the capital's owner as profit on his stock and for another person as rent on his land. Likewise, one part of the produce of a large manufactory, always the greater part, replaces the capital of the person who undertakes the work; the other pays his profit and thus provides revenue to the owner of that capital.

The part of a country's annual produce that replaces capital is never immediately used to support anyone but productive workers. It pays only the wages of productive labor. The part immediately destined to constitute revenue, whether profit or rent, may support either productive or unproductive workers.

A man always expects whatever portion of his stock he uses as capital to return to him with a profit. He therefore uses it only to support productive workers; after serving as capital for him, it becomes revenue for them. Whenever he uses any of it to support unproductive workers of any kind, he withdraws that portion from his capital at once and places it in the stock he reserves for immediate consumption.

Unproductive workers and people who do no work at all are all supported by revenue. This is either, first, the portion of annual produce originally destined to constitute someone's revenue as rent of land or profits of stock; or, second, the portion originally intended to replace capital and support productive workers alone, but which, once it reaches their hands, can be used beyond what they need for subsistence to support either productive or unproductive workers. Thus not only a great landlord or wealthy merchant but even an ordinary workman, if his wages are substantial, may keep a domestic servant. Or he may sometimes attend a play or puppet show, contributing to the support of one group of unproductive workers; or pay taxes, helping support another group, more honorable and useful, certainly, but equally unproductive. No part of the annual produce originally intended to replace capital, however, is ever turned toward supporting unproductive workers until it has set in motion its full complement of productive labor—all the labor it could set in motion in its particular use. A workman must earn his wages by working before he can spend any of them this way. That portion, moreover, is generally small: it consists only of his surplus revenue, of which productive laborers rarely have much. They generally have some, however; and in the payment of taxes their large numbers may partly compensate for the smallness of each contribution. The rent of land and the profits of stock are thus everywhere the chief sources of subsistence for unproductive workers. These are the two kinds of revenue whose recipients generally have the most to spare. Both could support productive and unproductive workers alike; yet their owners seem to favor the latter. A great lord's spending generally feeds more idle people than industrious ones. Though a wealthy merchant supports only industrious people with his capital, his spending—the use of his revenue—usually feeds the same sort as the great lord's.

The proportion of productive to unproductive workers in any country therefore depends greatly on the proportion between the part of annual produce destined, as soon as it comes from the ground or productive workers' hands, to replace capital and the part destined to constitute revenue as rent or profit. This proportion differs greatly between rich and poor countries.

In Europe's wealthy countries today, a very large share of the land's produce, often the largest, is destined to replace the capital of a prosperous, independent farmer; the remainder pays his profit and the landlord's rent. In former times, under feudal government, a very small share of produce was enough to replace the capital used in cultivation. This usually consisted of a few miserable cattle, sustained entirely by what uncultivated land produced of its own accord, and thus themselves countable among its spontaneous produce. These cattle generally belonged to the landlord, who advanced them to the people occupying the land. All the rest of the produce properly belonged to him too, whether as rent on his land or profit on this paltry capital. The occupiers were commonly serfs, their persons and possessions alike his property. Those who were not serfs were tenants at will; though the rent they paid was often nominally little more than a quit-rent, it in fact amounted to the whole produce of the land. Their lord could command their labor in peacetime and their service in war whenever he wished. Though they lived away from his house, they depended on him just as much as the retainers who lived in it. The whole produce of the land undoubtedly belongs to whoever can command the labor and service of everyone it sustains. In Europe today, the landlord's share seldom exceeds a third and sometimes does not reach a fourth of the land's whole produce. Yet rent in every improved part of the country has tripled and quadrupled since those early days; this third or fourth of today's annual produce is evidently three or four times larger than the whole produce was before. As improvement advances, rent increases in relation to the area of land but decreases in relation to its produce.

Large capitals now operate in trade and manufacturing throughout Europe's wealthy countries. In former times, the small amount of trade underway and the few rough, simple manufactures in operation required only very small capitals. These must nevertheless have yielded very high profits. Interest was nowhere below ten per cent., and profits must have been sufficient to pay that high interest. Now, in the improved parts of Europe, interest is nowhere above six per cent.; in some of the most improved parts it is as low as four, three, and two per cent. The portion of inhabitants' revenue derived from profits of stock is always far greater in rich countries than in poor ones, but only because stock is so much greater; relative to the amount of stock, profits are generally far smaller.

The part of annual produce destined, as soon as it comes from the ground or productive workers' hands, to replace capital is thus not only much greater in rich countries than in poor ones; it also bears a much higher proportion to the part immediately destined to constitute revenue, whether rent or profit. The funds set aside to support productive labor are not only much greater in the former countries than the latter, but are also much greater relative to the funds which could support either productive or unproductive workers, yet are generally directed toward the latter.

The proportion between these different funds necessarily shapes the prevailing character of a country's inhabitants, whether industrious or idle. We are more industrious than our ancestors because the funds supporting industry today are much greater in proportion to those likely to support idleness than they were two or three centuries ago. Our ancestors were idle because they lacked adequate encouragement to work. Better, as the proverb says, to play for nothing than to work for nothing. In towns devoted to trade and manufacturing, where capital employment chiefly supports the lower ranks, these people are generally industrious, sober, and prosperous, as in many English and most Dutch towns. In towns supported chiefly by a court's permanent or occasional residence, where spending revenue chiefly supports the lower ranks, they are generally idle, dissolute, and poor, as in Rome, Versailles, Compeigne, and Fontainbleau. Apart from Rouen and Bourdeaux, there is little trade or industry in any of the French towns that seat parliaments; their lower ranks, supported chiefly by spending on the part of judges and litigants, are generally idle and poor. The considerable trade of Rouen and Bourdeaux appears to result entirely from their locations. Rouen necessarily serves as the entrepot for nearly all the goods brought from foreign countries or France's coastal provinces for consumption in the great city of Paris. Bourdeaux likewise serves as the entrepot for the wines grown along the Garronne and its tributaries, one of the world's richest wine regions, apparently producing the wine best suited to export and to foreign tastes. Such favorable locations necessarily attract substantial capital by offering it abundant employment; the employment of this capital accounts for the industry of both cities. In France's other parliamentary towns, little more capital seems to be employed than is necessary to supply their own consumption—that is, scarcely more than the least capital that can find employment there. The same may be said of Paris, Madrid, and Vienna. Of those three cities, Paris is by far the most industrious, but Paris itself is the principal market for all the goods manufactured there, and supplying its own consumption is the main purpose of all its trade. London, Lisbon, and Copenhagen are perhaps the only three European cities that both permanently house a court and can also be called trading cities, trading not only to supply themselves but to supply other cities and countries. All three occupy exceptionally favorable sites, naturally suited to be entrepots for much of the merchandise destined for consumption far away. In a city where substantial revenue is spent, it is probably harder to employ capital profitably for any purpose other than supplying that city's consumption than in a city whose lower ranks have no support beyond the employment of such capital. The idleness of most of those supported by spending revenue probably corrupts the industry of those who ought to be supported by capital employment, making the employment of capital there less profitable than elsewhere. Before the Union, Edinburgh had little trade or industry. When the Scottish parliament stopped meeting there, and the principal Scottish nobility and gentry no longer had to live there, Edinburgh became a city with some trade and industry. It remains, however, the seat of Scotland's chief courts of justice and of the boards of customs and excise, etc. A substantial revenue is therefore still spent there. In trade and industry it falls far behind Glasgow, whose inhabitants are supported chiefly by the employment of capital. It has sometimes been observed that the inhabitants of a large village, after making considerable progress in manufacturing, have grown idle and poor when a great lord took up residence in their neighborhood.

On the Accumulation of Capital, or Productive and Unproductive Labor.

One kind of labor adds value to what it works on; another does not. Because the first produces value, we can call it productive labor and the second unproductive labor. [Some learned and ingenious French writers use these terms differently. In the last chapter of the fourth book, I will try to show why their meaning is wrong.] A manufacturing worker, for example, usually adds enough value to the materials to cover the worker's own upkeep and the employer's profit. A household servant's work, by contrast, adds value to nothing. The employer advances the manufacturing worker's wages, but the worker does not really cost the employer anything. The increased value of the finished material generally pays back those wages with a profit. The cost of supporting a household servant is never paid back in this way. A person grows rich by employing many manufacturing workers but poor by keeping many household servants. A servant's labor still has value and deserves payment just as a manufacturing worker's does. But a manufacturing worker's labor is fixed in a particular object or saleable product that lasts at least some time after the work is done. It is as though some labor has been stored for use on another occasion if needed. The object, or the money received for it, can later pay for as much labor as it originally took to make it. A household servant's labor is not fixed in any saleable object. The service usually disappears the moment it is given. It seldom leaves any value that could later buy an equal amount of service.

The work of some of society's most respected groups resembles that of household servants in this respect. It produces no value fixed in a lasting, saleable object that could later pay for an equal amount of labor. A sovereign, the officers of justice and war serving that sovereign, and the entire army and navy are unproductive laborers. They serve the public and are supported by a share of what other people's industry produces each year. Their services may be honorable, useful, or necessary. Yet those services produce nothing that can later pay for an equal amount of service. This year's work of protecting and defending the country cannot buy protection and defense next year. This group also includes some of the most serious and important professions and some of the most frivolous: clergy, lawyers, physicians, writers of every kind, actors, buffoons, musicians, opera singers, opera dancers, etc. Even the least respected of these workers does valuable work whose price follows the same principles as the price of any other labor. Yet even the most respected and useful produces nothing that can later buy an equal amount of labor. The work of all these people vanishes as soon as it is done, like an actor's speech, an orator's address, or a musician's tune.

Productive workers, unproductive workers, and people who do no work are all supported by what the country's land and labor produce each year. However large that output is, it has limits. The more of it that supports unproductive people in any year, the less is left to support productive workers, and the smaller the next year's output will be. If less supports unproductive people, more is left for productive workers and the next year's output will be greater. Apart from what the earth produces by itself, all yearly output results from productive labor.

Everything a country's land and labor produce each year is ultimately meant for its inhabitants to consume and to receive as revenue. Yet when this output first comes from the ground or the hands of productive workers, it naturally falls into two parts. One part, often the larger, replaces capital: it renews the provisions, materials, and finished goods taken from that capital. The other provides revenue, either to the owner of that capital as profit on stock or to another person as rent for land. Part of a farm's output, for instance, replaces the farmer's capital. The rest pays the farmer's profit and the landlord's rent, giving revenue to both. Likewise, one part of a large factory's output, always the larger part, replaces the owner's capital. The rest pays the owner's profit and provides revenue on that capital.

The part of a country's yearly output that replaces capital is immediately used only to support productive workers. It pays only their wages. The part immediately intended to provide revenue, whether as profit or rent, can support productive or unproductive workers.

When someone uses a portion of stock as capital, he expects to get it back with a profit. He therefore uses it only to support productive workers. After it has served as his capital, it becomes their revenue. If he uses any of it to support unproductive workers, that part immediately leaves his capital and becomes stock set aside for immediate consumption.

Unproductive workers and people who do no work are all supported by revenue. One source is the part of yearly output originally intended as someone's revenue, either land rent or profit on stock. Another source is the part originally meant to replace capital and support productive workers. Once those workers receive it, however, they can spend anything beyond what they need to live on productive or unproductive workers. Thus even an ordinary worker with substantial wages, not just a great landlord or a rich merchant, may keep a household servant. He may sometimes go to a play or a puppet show and help support one group of unproductive workers. Or he may pay taxes and help support another group that is more honorable and useful but just as unproductive. Still, no part of the yearly output originally meant to replace capital supports unproductive workers until it has set in motion all the productive labor it could support in its original use. Workers have to earn their wages by doing the work before they can spend any of those wages this way. The portion they can spend is usually small. It is only their spare revenue, and productive workers seldom have much of that. They generally have some, though. When they pay taxes, their large numbers can partly make up for their small individual payments. So rent from land and profits on stock are everywhere the chief sources of support for unproductive workers. People receiving these two kinds of revenue generally have the most to spare. They could use either kind to support productive or unproductive workers. Yet they seem to favor the latter. A great lord's spending usually feeds more idle people than industrious ones. A rich merchant supports only industrious people through his capital, but by spending his revenue he usually feeds the same kind of people as a great lord.

The balance between productive and unproductive workers in a country thus depends heavily on the balance between two parts of its yearly output. The first part is set aside to replace capital as soon as it leaves the ground or the hands of productive workers. The second becomes revenue as rent or profit. That balance differs greatly between rich and poor countries.

In Europe's wealthy countries today, a very large part, often the largest part, of the land's output replaces the capital of a prosperous, independent farmer. The rest pays his profit and the landlord's rent. Long ago, under feudal government, very little output was needed to replace the capital used in farming. That capital usually consisted of a few poor animals fed entirely by plants growing on uncultivated land; the animals could therefore be counted as part of that natural output. They generally belonged to the landlord, who supplied them to those farming his land. All the rest of the output really belonged to the landlord too, as rent for his land or profit on his tiny capital. Most people farming the land were bonded laborers, and the landlord owned their persons and possessions alike. Those who were not bonded laborers were tenants who could be dismissed at will. Their nominal rent was often hardly more than a payment acknowledging the landlord's rights, but in reality they paid him the entire output of the land. Their lord could demand their labor in peacetime and their military service in wartime whenever he wished. They might live far from his house, but they depended on him as completely as the retainers who lived there. All the land's output surely belongs to the person who controls the work and service of everyone it supports. Today in Europe, a landlord's share seldom exceeds a third and sometimes is less than a fourth of the total output of the land. Yet rent in every improved area has tripled or quadrupled since those earlier times. This third or fourth of yearly output is apparently three or four times as large as the entire output used to be. As farming improves, rent rises with the area of land but falls as a share of its output.

In wealthy European countries, large amounts of capital now go into trade and manufacturing. In earlier times, the little trade and the few simple, rough manufacturing activities required only small amounts of capital. Yet they must have earned very large profits. Interest rates were nowhere below ten per cent., so profits must have been high enough to pay that much interest. Today, in Europe's more developed areas, interest is nowhere above six per cent. In some of the most developed, it is as low as four, three, and two per cent. Rich countries always get much more revenue from profits on stock than poor ones because their stock is much larger. But profit as a proportion of stock is generally much smaller.

So rich countries set aside far more of the output that comes from the ground or productive workers to replace capital than poor countries do. They also set aside a much larger share for that purpose relative to the portion that immediately becomes rent or profit. Their funds for supporting productive workers are much larger, both outright and compared with funds that can support either productive or unproductive workers but are usually spent on the latter.

The balance between these funds necessarily shapes how hardworking or idle a country's inhabitants tend to be. We work harder than our ancestors because the funds supporting industry are now much larger, compared with the funds likely to support idleness, than they were two or three centuries ago. Our ancestors had little incentive to work and so were idle. As the proverb says, it is better to play for nothing than work for nothing. In commercial and manufacturing towns, where capital provides most lower-ranking people's livelihood, they are generally hardworking, restrained, and prosperous. That is true of many English towns and most Dutch ones. In towns mainly supported by a royal court living there regularly or occasionally, revenue spending provides most lower-ranking people's livelihood. They are generally idle, undisciplined, and poor, as in Rome, Versailles, Compeigne, and Fontainbleau. Apart from Rouen and Bourdeaux, France's towns with parliaments have little trade or industry. Their lower-ranking inhabitants generally live on spending by court officials and the people who come to plead before them, and are idle and poor. Rouen and Bourdeaux owe their large trade entirely, it seems, to their locations. Rouen has to be the trading center for nearly all the goods brought from foreign countries or France's coastal provinces for consumption in the great city of Paris. Bourdeaux is likewise the trading center for wines grown beside the Garronne and the rivers flowing into it. This is one of the world's richest wine regions, and it seems to produce the wine best suited to export and to foreign tastes. Such favorable locations attract much capital because they offer it so many uses. The use of that capital makes those two cities industrious. France's other towns with parliaments seem to employ little more capital than they need to supply their own consumption—the smallest amount they could employ. The same can be said of Paris, Madrid, and Vienna. Paris is much the most industrious of those three cities, but it is itself the main market for the goods made there, and its own consumption is the main purpose of its trade. London, Lisbon, and Copenhagen may be the only three European cities that both house a court permanently and trade not just to supply themselves but also to supply other cities and countries. All three are exceptionally well placed to serve as trading centers for many goods intended for distant consumers. In a city where people spend a great deal of revenue, it is probably harder to put capital to profitable use in anything besides supplying the city itself than in a city where lower-ranking people live only on work funded by capital. The idleness of most people supported by revenue spending probably undermines the work habits of those who ought to live on work funded by capital. It makes investing capital there less profitable than investing it elsewhere. Edinburgh had little trade or industry before the Union. Once the Scotch parliament stopped meeting there and Scotland's leading nobles and gentry no longer needed to live there, the city developed some trade and industry. Still, Edinburgh remains home to Scotland's principal courts of justice, its customs and excise boards, etc., so a considerable amount of revenue is still spent there. It has far less trade and industry than Glasgow, where capital-funded work supports most inhabitants. People have sometimes observed that a large village, after making considerable progress in manufacturing, became idle and poor when a great lord moved into the neighborhood.