Book II, Chapter III, 2

The proportion between capital and revenue, then, seems everywhere to govern the proportion between industry and idleness. Where capital predominates, industry flourishes; where revenue predominates, idleness does. Every increase or decrease in capital therefore tends naturally to increase or decrease the actual amount of industry, the number of productive workers, and consequently the exchangeable value of the annual produce of a country's land and labor—the real wealth and revenue of all its inhabitants.

Capital grows through frugality and shrinks through extravagance and mismanagement.

Whatever a person saves from revenue is added to capital. He either uses it himself to maintain additional productive workers or enables someone else to do so by lending it at interest, that is, for a share of the profits. Just as an individual's capital can grow only through savings from annual revenue or annual gains, so the capital of a society—which is simply the capital of all its members—can grow only in the same way.

Frugality, not industry, is the immediate cause of an increase in capital. Industry supplies what frugality accumulates; but no matter what industry might earn, capital would never grow if frugality did not save and store it up.

By enlarging the fund intended to maintain productive workers, frugality tends to increase the number of workers whose labor adds value to the material on which it is spent. It therefore tends to increase the exchangeable value of the annual produce of the country's land and labor. It sets more industry in motion, adding further value to the annual produce.

What is saved each year is consumed just as regularly as what is spent each year, and in nearly the same time; but it is consumed by different people. The part of his revenue that a rich man spends each year is, in most cases, consumed by idle guests and household servants, who leave nothing in return for what they consume. The part he saves, being promptly employed as capital for the sake of profit, is consumed in the same fashion and nearly the same time, but by laborers, manufacturers, and artisans, who reproduce the value of their annual consumption with a profit. Suppose his revenue is paid in money. Had he spent all of it, the food, clothing, and lodging it could buy would have gone to the former group. By saving part of it, which he or another immediately employs as capital for the sake of profit, he necessarily reserves for the latter group the food, clothing, and lodging that part can buy. Consumption is the same; the consumers are different.

With what he saves each year, a frugal man not only provides for additional productive workers in the following year; like the founder of a public workhouse, he establishes, as it were, a perpetual fund to maintain an equal number for all time. The permanent allocation and purpose of this fund may not be secured by any explicit law, trust right, or deed of mortmain. It is nevertheless always secured by a very powerful principle: the clear and obvious interest of everyone who ever owns any share of it. No part can afterward be used to maintain anyone but productive workers without an obvious loss to the person who diverts it from its proper purpose.

The spendthrift diverts it in precisely this way. By allowing expenses to exceed income, he eats into his capital. Like someone who diverts the revenue of a charitable foundation to irreverent purposes, he pays the wages of idleness out of funds that his forebears' frugality had, as it were, consecrated to maintaining industry. By reducing the funds intended to employ productive labor, he necessarily reduces, so far as it lies within his power, the labor that adds value to its materials and, consequently, the value of the annual produce of the entire country's land and labor—the real wealth and revenue of its inhabitants. If the extravagance of some were not offset by the frugality of others, every spendthrift, feeding the idle with the bread of the industrious, would tend not only to beggar himself but to impoverish his country.

Even if all the spendthrift's expenses went toward domestically made goods, with nothing spent on foreign goods, the effect on society's productive funds would be the same. Every year, some food and clothing that ought to have maintained productive workers would instead maintain unproductive ones. Each year, therefore, there would still be some reduction in the value that the annual produce of the country's land and labor would otherwise have attained.

It may be said that since these expenses are not for foreign goods and cause no export of gold and silver, the same amount of money remains in the country. But had the food and clothing consumed by unproductive workers been distributed among productive ones, those workers would have reproduced the full value of their consumption, together with a profit. The same amount of money would equally have remained in the country, and goods for consumption of equal value would also have been reproduced. There would have been two values instead of one.

Moreover, the same quantity of money cannot remain long in a country where the value of the annual produce is declining. Money's only use is to circulate consumable goods. Through it, provisions, materials, and finished products are bought and sold and distributed to their proper consumers. The amount of money that can be used each year in a country must therefore be determined by the value of the consumable goods circulated there each year. These goods must be either the immediate produce of the country's own land and labor or goods purchased with some portion of that produce. Their value must therefore fall as the value of that produce falls; and with it falls the amount of money that can circulate them. But the money thrown out of domestic circulation each year by this annual decline in produce will not be left idle. Its owner's interest demands that it be employed; finding no employment at home, it will be sent abroad despite every law and prohibition to purchase consumable goods that may be useful at home. For a while, its annual export will thus supplement the country's annual consumption beyond the value of its own annual produce. What was saved from that produce in prosperous days and used to buy gold and silver will help support consumption for a little while in adversity. In this case the export of gold and silver is the effect, not the cause, of decline, and may even ease its hardships for a little while.

Conversely, the amount of money in every country must naturally rise as the value of its annual produce rises. The greater value of the consumable goods circulated each year in society will require more money to circulate them. Part of the increased produce will thus naturally be used to buy, wherever they can be found, the additional gold and silver needed to circulate the rest. An increase in those metals is, in this case, the effect of public prosperity, not its cause. Gold and silver are purchased everywhere in the same way. The food, clothing, lodging, revenue, and maintenance of everyone whose labor or stock brings them from mine to market are the price paid for them in Peru as much as in England. A country able to pay that price will never long be without the amount of those metals it needs; nor will any country long retain an amount it does not need.

Whatever we imagine a country's real wealth and revenue to consist of—whether the value of the annual produce of its land and labor, as plain reason suggests, or the quantity of precious metals circulating within it, as common prejudice supposes—on either account every spendthrift appears a public enemy, and every frugal person a public benefactor.

The effects of mismanagement are often the same as those of extravagance. Every ill-judged, unsuccessful venture in agriculture, mining, fishing, trade, or manufacturing likewise tends to diminish the funds intended to maintain productive labor. Although in each such venture only productive workers consume the capital, their ill-judged employment prevents them from reproducing the full value of what they consume. There must therefore always be some reduction in what would otherwise have been society's productive funds.

It is rare, however, for the circumstances of a great nation to be much affected by the extravagance or mismanagement of individuals: the excess or imprudence of some is always more than offset by the frugality and sound conduct of others.

As for extravagance, the impulse to spend is the passion for present enjoyment. Though sometimes fierce and very hard to restrain, it is generally passing and occasional. But the impulse to save is the desire to improve our condition—a desire that, though generally calm and dispassionate, comes with us from the womb and does not leave us until the grave. In the whole interval between those moments, there is perhaps scarcely a single instance in which anyone is so perfectly satisfied with his circumstances as to wish for no change or improvement whatever. An increase in fortune is the means by which most people plan and hope to improve their condition. It is the most common and obvious means; and the likeliest way to increase one's fortune is to save and accumulate part of one's earnings, either regularly each year or on some extraordinary occasion. Thus although the impulse to spend prevails in almost everyone on some occasions, and in some people on almost every occasion, in most lives, taken as a whole, the impulse to save seems not merely to predominate but to predominate greatly.

As for mismanagement, prudent and successful ventures everywhere far outnumber ill-judged and unsuccessful ones. Despite all our complaints about frequent bankruptcies, the unfortunate people who suffer one form only a very small fraction of everyone engaged in trade and every other kind of business—perhaps not much more than one in a thousand. Bankruptcy is perhaps the greatest and most humiliating calamity that can befall an innocent person. Most people therefore take adequate care to avoid it. Some, to be sure, do not; just as some do not avoid the gallows.

Great nations are never impoverished by private extravagance and mismanagement, though they sometimes are by public extravagance and mismanagement. In most countries all or nearly all public revenue is used to maintain unproductive workers. Among them are the members of a large and splendid court, a great ecclesiastical establishment, and great fleets and armies, who produce nothing in peacetime and in war acquire nothing that can compensate for the expense of maintaining them, even during the war. Producing nothing themselves, they are all maintained by the produce of other people's labor. If their numbers grow beyond necessity, they may consume so much of this produce in a particular year that not enough remains to maintain the productive laborers who should reproduce it the next. The next year's produce will therefore be smaller than the previous year's; and if the same disorder continues, the third year's will be smaller still. These unproductive workers, who should be supported by only part of the people's surplus revenue, may consume such a great share of their entire revenue that many people are forced to eat into their capital, the funds intended to maintain productive labor. All the frugality and sound conduct of individuals may then be unable to offset the waste and deterioration of produce brought about by this violent, forced encroachment.

Experience shows, however, that on most occasions this frugality and sound conduct are sufficient to offset not only individuals' private extravagance and mismanagement but government's public extravagance. Every person's steady, constant, unbroken effort to improve his condition—the original source of public and national wealth as well as private wealth—is often powerful enough to sustain the natural progress toward improvement despite both governmental extravagance and the gravest mistakes in administration. Like the unknown principle of animal life, it often restores health and vigor to the body despite both its illness and the doctor's absurd prescriptions.

The annual produce of a nation's land and labor can rise in value only by increasing either the number of productive laborers or the productive powers of those already employed. Plainly, the number of productive laborers cannot increase much except through an increase in capital, the funds intended to maintain them. Nor can the productive powers of the same number of laborers increase without either additions and improvements to machines and instruments that ease and shorten labor or a better division and distribution of employment. In either case, additional capital is almost always required. Only with additional capital can the manager of any undertaking provide better machinery for his workers or distribute their work more effectively. Where a job has many parts, keeping each worker constantly at one task requires much more capital than having each worker occasionally perform every part. When we compare a nation at two different periods and find its annual produce of land and labor plainly greater in the later one—its land better cultivated, its manufactures more numerous and flourishing, its trade more extensive—we may be sure its capital grew in the interval. The good conduct of some must have added more to it than the private mismanagement of others or the public extravagance of government took away. We will find this true of almost every nation in every reasonably quiet and peaceful period, even those without the most prudent or frugal governments. To judge rightly, however, we must compare periods sufficiently far apart. Progress is often so gradual that over short intervals improvement is imperceptible; and when a particular industry or district declines, as sometimes happens even while the country as a whole is flourishing, people often come to suspect that the nation's wealth and industry are in decline.

The balance between capital and revenue therefore seems to determine the balance between productive work and idleness everywhere. Where capital is greater, productive work thrives. Where revenue is greater, idleness thrives. So any rise or fall in capital tends to raise or lower the actual amount of productive work and the number of productive workers. It also changes the exchangeable value of the yearly output of a country's land and labor—that is, the real wealth and revenue of all its people.

Saving increases capital. Wasteful spending and poor management reduce it.

Whatever a person saves from his revenue becomes part of his capital. He either uses it himself to support more productive workers or lends it at interest so that someone else can do so. That interest is a share of the profits. An individual's capital can grow only through savings from his yearly revenue or gains. In the same way, a society's capital, which is the combined capital of its members, can grow only through savings.

Saving, not work, is the direct cause of an increase in capital. Work produces what saving puts aside. But however much work earns, capital will not grow unless people save and store some of it.

Saving increases the funds available to support productive workers. This tends to increase the number of workers whose labor adds value to what they work on. So it tends to raise the exchangeable value of a country's yearly output of land and labor. It sets more people to productive work, adding more value to that yearly output.

What people save each year is consumed just as surely, and almost as soon, as what they spend. But different people consume it. The portion a rich man spends each year is usually consumed by idle guests and household servants, who produce nothing in return. The portion he saves is immediately used as capital for the sake of profit. It is consumed in much the same way and almost as soon, but by laborers, manufacturers, and craftspeople. Their work replaces the value of what they consume each year and adds a profit. Suppose his revenue is paid in money. If he spent it all, the food, clothing, and lodging that money could buy would go to the first group. If he saves some, either he or another person immediately puts that part to work as capital for profit. The food, clothing, and lodging it buys must then go to the second group. The same amount is consumed, but by different people.

Each year's savings by a frugal man support more productive workers in the following year. They also establish, much like the founder of a public workhouse, a lasting fund to support the same number of workers in every later year. No law, trust right, or deed placing property in perpetual ownership necessarily protects this fund and reserves it for that purpose. But something powerful always does: the clear self-interest of everyone who will ever own a share of it. If any of it is later used to support anyone other than productive workers, the person who diverts it suffers a clear loss.

A wasteful spender diverts it in just this way. He spends more than his income and eats into his capital. He is like someone who uses the revenue of a charitable religious foundation for secular purposes. He pays for idleness with funds that his ancestors' frugality had, in a sense, set aside to support work. He reduces the funds available to employ productive labor. To the extent that he can affect it, he therefore reduces the labor that adds value to the things it works on. As a result, he reduces the value of the country's yearly output of land and labor, the real wealth and revenue of its people. If other people's savings did not offset such waste, every wasteful spender would feed idle people with the food earned by working people. He would tend to impoverish both himself and his country.

Even if a wasteful spender bought only goods made at home, and no foreign goods, the effect on society's funds for production would be the same. Each year, some food and clothing that should have supported productive workers would instead support unproductive ones. So the value of the country's yearly output of land and labor would be less than it otherwise would have been.

Someone might say that if the spender buys no foreign goods, no gold or silver leaves the country, and the amount of money there stays the same. But if productive workers had received the food and clothing consumed by unproductive people, they would have produced goods worth the full value of what they consumed, plus a profit. The same amount of money would still have stayed in the country, while an equal value of usable goods would also have been produced. There would have been two values rather than one.

Besides, the same amount of money cannot remain for long in a country whose yearly output is losing value. Money's only purpose is to circulate goods people can use. People use it to buy, sell, and distribute provisions, materials, and finished goods to their consumers. So the value of the consumable goods circulated each year determines how much money a country can use for that circulation. Those goods must either be the direct output of its own land and labor or be bought with some of that output. If the value of its output falls, the value of those goods falls too, along with the amount of money needed to circulate them. But the money pushed out of domestic circulation each year by declining output will not sit idle. Its owners want to use it. With no use for it at home, they will send it abroad despite laws and prohibitions, to buy consumable goods that may be useful at home. For a while, this yearly export of money will add to the country's yearly consumption beyond the value of its own yearly output. During prosperous times the country saved some of its output and used it to buy gold and silver. In hard times, that gold and silver can help support consumption for a little while. In this case exporting gold and silver is not the cause of the decline but its result, and may even ease its hardship for a short time.

Conversely, the amount of money in any country naturally grows when the value of its yearly output grows. A greater value of consumable goods circulates through society each year, so more money is needed to circulate them. Part of the added output will naturally go toward buying the extra gold and silver needed for this purpose, wherever it is available. The increased supply of those metals is thus a result of public prosperity, not its cause. Gold and silver are bought in the same way everywhere. The price paid for them, in Peru as in England, is the food, clothing, and lodging that support everyone whose labor or stock helps bring the metals from mine to market. A country able to pay that price will never long lack the amount of those metals it needs. Nor will any country long keep more than it needs.

So however we define a country's real wealth and revenue—by the value of its yearly output of land and labor, as plain reason suggests, or by the amount of precious metal circulating in it, as common prejudice supposes—the wasteful spender is an enemy of the public, and the frugal person benefits it.

Poor management often has the same effect as wasteful spending. Every badly planned and unsuccessful venture in farming, mining, fishing, trade, or manufacturing tends to reduce the funds available to support productive labor. In these ventures, productive workers do consume the capital. But because it is badly used, they do not replace the full value of what they consume. Society therefore loses some of the funds it would otherwise have had for production.

Yet the waste or bad management of individuals can rarely have much effect on a great nation's circumstances. Other people's thrift and good management more than make up for some people's extravagance and poor judgment.

As for extravagant spending, the urge behind it is the desire to enjoy the present. That urge can be intense and hard to restrain, but it is usually temporary and occasional. The urge to save, by contrast, comes from the desire to improve our situation. This desire is usually calm, but it stays with us from birth to death. Perhaps scarcely anyone is ever so completely satisfied with his circumstances during his whole life that he wants no change or improvement at all. Most people hope to improve their situation by increasing their wealth. This is the most common and obvious way. The likeliest way to increase wealth is to save and build up some of what one earns, either regularly each year or on some special occasion. So although nearly everyone sometimes wants to spend, and some people want to spend almost all the time, most people over the course of a whole life seem far more inclined to save than to spend.

As for poor management, careful and successful ventures far outnumber badly judged and unsuccessful ones everywhere. We complain often about bankruptcies, but those who suffer them are only a tiny part of everyone engaged in trade and other businesses—perhaps not much more than one in a thousand. Bankruptcy may be the worst and most humiliating disaster that can happen to an innocent person. Most people therefore take enough care to avoid it. Some do not, just as some do not avoid the gallows.

Private waste and poor management never impoverish great nations, though public waste and poor management sometimes do. In most countries, all or nearly all public revenue supports unproductive people. These include the members of a large, splendid court and a large religious establishment, as well as large fleets and armies. In peacetime the fleets and armies produce nothing; in wartime they gain nothing that can make up for their cost, even during the war itself. Because these people produce nothing themselves, other people's labor supports them. If their numbers become unnecessarily large, they may consume so much of one year's output that too little remains to support the productive workers who should replace that output the next year. The next year's output will then be smaller, and if the problem continues, output in the third year will be smaller still. These unproductive people should be supported by only a portion of the people's spare revenue. But they may consume so much of their total revenue that many people must draw on their capital, the funds meant to support productive labor. Their forced use of capital may cause a loss and deterioration of output too great for all the thrift and good management of individuals to offset.

Experience shows, however, that private thrift and good management are usually enough to offset not only other individuals' waste and poor management but also government extravagance. Each person's steady, continual effort to improve his situation is the source of national as well as private wealth. This effort is often strong enough to keep a country moving toward improvement despite extravagant government spending and the greatest mistakes in administration. Like the mysterious principle of life in an animal, it often restores the body's health and strength despite both its illness and the doctor's foolish treatments.

A nation's yearly output of land and labor can gain value only by increasing either the number of productive workers or the amount each worker can produce. The number of productive workers cannot rise much unless capital rises too, increasing the funds that support them. The same number of workers can produce more only if their machines and tools are improved or added to, making work easier and shorter, or if work is divided and assigned more effectively. Either way, more capital is almost always needed. Only with additional capital can someone running an enterprise supply better machinery or assign work among employees more effectively. When a job has many parts, keeping each person working on one part all the time takes much more capital than having everyone work on different parts as needed. Suppose, then, that we compare a nation at two different times. If its yearly output of land and labor is clearly greater at the later time, its land is better cultivated, its manufacturing is more extensive and thriving, and its trade has expanded, we can be sure its capital has grown between those times. The good management of some people must have added more to it than others' poor management or government extravagance took away. This is what we find in almost all nations during reasonably peaceful times, even those without especially prudent or frugal governments. To judge it properly, though, we must compare times that are fairly far apart. Progress is often so gradual that it cannot be seen over a short interval. Sometimes particular industries or parts of a country decline even while the country as a whole prospers greatly. Such declines often make people suspect that the entire country's wealth and productive work are shrinking.