Book II, Chapter V, 1

OF THE DIFFERENT EMPLOYMENTS OF CAPITALS.

Although all capital is ultimately destined to maintain productive labor alone, equal capitals set very different quantities of such labor in motion according to how they are employed. The value their employment adds to the annual produce of the country’s land and labor varies just as widely.

Capital may be employed in four ways: first, to obtain the raw produce annually needed for society’s use and consumption; second, to manufacture and prepare that raw produce for immediate use and consumption; third, to carry raw or manufactured produce from places where it is plentiful to places where it is needed; or, finally, to divide portions of either into parcels small enough to meet the occasional needs of those who want them. The capital of those who undertake to improve or cultivate lands, mines, or fisheries is employed in the first way; that of master manufacturers in the second; that of wholesale merchants in the third; and that of retailers in the fourth. It is difficult to imagine a use of capital that does not fall under one of these four headings.

Each of these four ways of employing capital is essential either to the existence or expansion of the other three, or to the general convenience of society.

Unless capital were employed to supply raw produce in some abundance, neither manufacturing nor trade of any kind could exist.

Unless capital were employed to manufacture the part of the raw produce that needs considerable preparation before it is fit for use and consumption, that produce would either never be produced, for lack of demand, or, if it arose spontaneously, would have no exchange value and could add nothing to society’s wealth.

Unless capital were employed to carry raw or manufactured produce from where it is plentiful to where it is needed, no more of either could be produced than the neighborhood could consume. The merchant’s capital exchanges the surplus produce of one place for that of another, encouraging the industry and increasing the enjoyments of both.

Unless capital were employed to break up and divide portions of raw or manufactured produce into parcels small enough for the occasional needs of those who want them, everyone would have to buy more of the goods he needed than his immediate needs required. If butchers did not exist, for example, everyone would have to buy a whole ox or sheep at once. This would generally inconvenience the rich, and the poor still more. If a poor workman had to buy a month’s or six months’ provisions at once, he would have to move much of the stock he employs as capital in the tools of his trade or the furnishings of his shop, which brings him revenue, into the part of his stock reserved for immediate consumption, which brings him none. Nothing could be more convenient for such a person than being able to buy his subsistence day by day, or even hour by hour, as he needs it. He can thereby employ almost all his stock as capital and furnish work of greater value. The profit he makes in this way more than offsets the extra price that the retailer’s profit adds to the goods. The prejudices of some political writers against shopkeepers and tradespeople are wholly groundless. Far from needing to tax them or restrict their numbers, we cannot multiply them enough to harm the public, though they may harm one another. The quantity of groceries that can be sold in a particular town, for example, is limited by demand in that town and its neighborhood. The capital employed in the grocery trade, therefore, cannot exceed what is needed to buy that quantity. If that capital is divided between two grocers, their competition will tend to make both sell more cheaply than if one held it all; divided among twenty, it will make competition greater still, and make their combining to raise the price that much less likely. Their competition may ruin some of them, but guarding against this is the concern of those involved, and can safely be left to their judgment. It cannot harm either consumer or producer; on the contrary, it must tend to make retailers sell more cheaply and buy at higher prices than if one or two people monopolized the entire trade. Some retailers may sometimes entice an impressionable customer to buy what he does not need. This evil, however, matters too little to warrant public attention, nor would limiting their numbers necessarily prevent it. It is not the multitude of alehouses, to take the most suspicious example, that produces a general inclination to drunkenness among ordinary people; rather, that inclination, arising from other causes, necessarily provides business for a multitude of alehouses.

Those whose capital is employed in any of these four ways are themselves productive laborers. When properly directed, their labor becomes embodied and realized in the material or salable commodity on which it is spent, generally adding to its price at least the value of their own maintenance and consumption. The profits of the farmer, manufacturer, merchant, and retailer all come from the price of goods that the first two produce and the last two buy and sell. Equal capitals employed in these four ways, however, immediately set in motion very different quantities of productive labor and increase by very different proportions the value of the annual produce of the land and labor of the society to which they belong.

The retailer’s capital replaces, along with its profits, the capital of the merchant from whom he buys goods, enabling that merchant to continue his business. The retailer himself is the only productive laborer it immediately employs. His profit makes up the entire value that the employment of his capital adds to society’s annual produce of land and labor.

The wholesale merchant’s capital replaces, along with their profits, the capitals of the farmers and manufacturers from whom he buys the raw and manufactured produce in which he deals, enabling them to continue their respective businesses. Chiefly through this service he indirectly helps maintain society’s productive labor and increase the value of its annual produce. His capital also employs the sailors and carriers who transport his goods from place to place, and increases the price of those goods by the value not only of his profits but of their wages. This is all the productive labor it immediately sets in motion, and all the value it immediately adds to annual produce. In both respects its effect is considerably greater than that of the retailer’s capital.

Part of a master manufacturer’s capital is employed as fixed capital in his tools and machinery, replacing, along with its profits, the capital of the craftsman from whom he buys them. Part of his circulating capital purchases materials, replacing, along with their profits, the capitals of the farmers and miners from whom he buys them. But a large part is always distributed, annually or within a much shorter time, among the various workmen he employs. It increases the value of those materials by their wages and by their employer’s profits on the entire stock of wages, materials, and tools employed in the business. It therefore immediately sets in motion far more productive labor, and adds far more value to the annual produce of society’s land and labor, than an equal capital in the hands of any wholesale merchant.

No equal capital sets in motion more productive labor than a farmer’s. Not only his working servants but his working cattle are productive laborers. In agriculture, moreover, Nature labors beside man; though her labor costs nothing, its produce has value no less than that of the most costly workmen. The most important agricultural operations seem designed not so much to increase Nature’s fertility, though they do that too, as to direct it toward producing the plants most profitable to man. A field overgrown with briars and brambles may often yield as much vegetation as the finest cultivated vineyard or cornfield. Planting and tilling often regulate rather than rouse Nature’s active fertility; after all their labor, much of the work still falls to her. The laborers and working cattle employed in agriculture therefore bring about, as manufacturing workmen do, the reproduction of a value equal to their own consumption, or to the capital that employs them, together with its owner’s profits; but they also bring about the reproduction of a much greater value. Beyond the farmer’s capital and all its profits, they regularly reproduce the landlord’s rent. That rent may be regarded as the produce of Nature’s powers, whose use the landlord lends the farmer. It rises or falls with the supposed extent of those powers—in other words, with the land’s supposed natural or improved fertility. It is Nature’s work left over after deducting or compensating everything attributable to man’s work. It is seldom less than a fourth, and often more than a third, of the entire produce. No equal quantity of productive labor employed in manufacturing can ever bring about so great a reproduction. There Nature does nothing and man does everything; the reproduction must always be proportional to the strength of the agents who bring it about. Capital employed in agriculture therefore sets in motion not only more productive labor than an equal capital employed in manufacturing, but, in proportion to the productive labor it employs, also adds much more value to the annual produce of the country’s land and labor—to the real wealth and revenue of its inhabitants. Of all uses of capital, it is by far the most advantageous to society.

The capitals employed in a society’s agriculture and retail trade must always remain within that society. Their employment is confined almost to a particular spot: the farm and the retailer’s shop. In general, though there are exceptions, they must also belong to residents of that society.

A wholesale merchant’s capital, by contrast, seems to have no fixed or necessary residence anywhere. It may wander from place to place wherever it can buy cheaply or sell dearly.

A manufacturer’s capital must, of course, remain where manufacturing takes place, but that place is not always fixed by necessity. It may often be far from both the source of the materials and the place where the finished product is consumed. Lyons is very distant both from the places supplying materials for its manufactures and from those consuming them. Fashionable people in Sicily dress in silks made in other countries from materials produced in Sicily itself. Some of Spain’s wool is manufactured in Great Britain, and some of the resulting cloth is subsequently sent back to Spain.

Whether the merchant whose capital exports a society’s surplus produce is native or foreign matters very little. If he is foreign, the society has necessarily one fewer productive laborer than if he were native, and its annual produce is lower by that one man’s profits. The sailors or carriers he employs may still belong to his country, to theirs, or to a third country, just as they might if he were native. A foreigner’s capital gives their surplus produce value just as a native’s does, by exchanging it for something demanded at home. It replaces the capital of the person producing the surplus just as effectively, and just as effectively enables him to continue his business. This is the chief service by which the wholesale merchant’s capital helps support productive labor and increase the value of the annual produce of the society to which he belongs.

On the Different Uses of Capital

All capital is meant to support productive labor. But equal amounts of capital can set very different amounts of labor to work, depending on how they are used. They can also add very different amounts of value to the country’s annual output from land and labor.

Capital can be used in four ways. First, it can obtain the raw products a society needs each year for its use and consumption. Second, it can manufacture and prepare those products for immediate use and consumption. Third, it can transport raw or manufactured products from places with a plentiful supply to places that need them. Fourth, it can divide portions of either kind of product into small quantities that meet buyers’ needs as they arise. The first use includes the capital of people improving or working land, mines, and fisheries. The second includes the capital of manufacturers. The third includes that of wholesale merchants, and the fourth that of retailers. It is hard to imagine any use of capital that does not belong to one of these four groups.

Each of the four uses of capital is necessary either for the other three to exist or grow, or for the general convenience of society.

Without capital used to supply raw products in sufficient quantities, neither manufacturing nor trade of any kind could exist.

Without capital used to prepare raw products that need substantial work before people can use them, those products would never be produced because nobody would want them in their raw state. Or, if nature produced them without human effort, they would have no value in exchange and would add nothing to society’s wealth.

Without capital used to carry raw or manufactured goods from where they are plentiful to where they are needed, producers could make no more of either kind than their neighbors could consume. A merchant’s capital exchanges the surplus output of one place for the surplus of another. It thus encourages work in both places and gives people in both more things to enjoy.

Without capital used to split raw or manufactured goods into the small quantities buyers need at a given time, everyone would have to buy more than they currently needed. If there were no butchers, for example, each person would have to buy a whole ox or sheep at once. That would be inconvenient for the rich and much more inconvenient for the poor. If a poor worker had to buy a month’s or six months’ provisions at once, he would have to move much of his stock from the tools and shop furnishings that serve as his capital and earn him revenue into supplies for his own immediate consumption, which earn nothing. Being able to buy food day by day, or even hour by hour, as needed is a great convenience for him. He can then use nearly all his stock as capital. That allows him to provide work worth more, and the extra profit he makes far outweighs the price added to his purchases by the retailer’s profit. Some political writers’ prejudice against shopkeepers and tradespeople has no foundation. There is no need to tax them or limit their numbers. However many there are, they cannot harm the public, though they may harm each other. For example, demand in a town and its surrounding area limits how many groceries can be sold there. Capital invested in grocery shops cannot exceed what is needed to buy that quantity. If two grocers divide this capital, competition will tend to make both sell more cheaply than one would. If twenty divide it, competition will be greater still, and they will be less likely to join together to raise prices. Competition may ruin some grocers, but that is their own concern and can safely be left to their judgment. It cannot harm consumers or producers. Instead, it tends to make retailers sell for less and pay producers more than if one or two people monopolized the whole trade. Some retailers might occasionally lure an easily persuaded customer into buying something he does not need. But this harm is too small to demand public attention, and limiting the number of retailers would not necessarily prevent it. To take the example most likely to raise suspicion, a large number of alehouses does not make ordinary people generally inclined to get drunk. Rather, an inclination caused by other things creates business for many alehouses.

People who use their capital in any of these four ways are themselves productive laborers. When properly directed, their work takes form in a saleable product. It generally adds to the product’s price at least the value of what they need to live and consume. Farmers, manufacturers, merchants, and retailers all receive their profits from the prices of goods: the first two produce them, and the last two buy and sell them. Yet equal amounts of capital invested in these four uses directly employ very different amounts of productive labor. They also increase the society’s annual output from land and labor by very different amounts.

A retailer’s capital pays back the merchant from whom he buys goods, including that merchant’s profit, and enables the merchant to continue trading. The retailer himself is the only productive laborer this capital employs directly. His profit is the whole amount his use of capital adds to society’s annual output from land and labor.

A wholesale merchant’s capital pays back the farmers and manufacturers whose raw and manufactured products he buys, including their profits. This lets them continue their trades. That is the main way he indirectly supports society’s productive labor and increases the value of its annual output. His capital also employs the sailors and carriers who transport his goods. It adds both their wages and his profit to those goods’ prices. These are all the productive workers his capital directly employs and all the value it directly adds to annual output. In both respects, it does considerably more than a retailer’s capital.

A manufacturer uses some of his capital as fixed capital to buy tools. This pays back, including profit, the capital of the craftsperson who sells him those tools. He uses some of his circulating capital to buy materials, paying back, including profits, the capital of the farmers and miners who supply them. But a large part of his capital is also paid out to his workers each year, or over an even shorter time. Their wages and the manufacturer’s profits on the total stock of wages, materials, and tools invested in the business add to the materials’ value. His capital therefore directly employs far more productive labor than an equal sum held by a wholesale merchant. It also adds far more value to society’s annual output from land and labor.

No equal amount of capital employs more productive labor than a farmer’s. Both his hired workers and his working animals are productive laborers. In agriculture, nature works alongside people. Nature’s work costs nothing but produces things with value, just as the work of the highest-paid workers does. The most important tasks in farming seem aimed less at increasing nature’s fertility, though they do that too, than at directing it toward the plants most useful to people. A field covered with briars and brambles may often produce as much plant matter as the best-tended vineyard or cornfield. Planting and cultivation often guide nature’s active fertility more than they increase it. After all the human work, nature still has a large share of the work to do. So farming workers and animals do more than manufacturing workers do: they reproduce value equal to what they consume, or to the capital that employs them, along with their employer’s profits. They regularly reproduce a much greater value too. Beyond replacing the farmer’s capital and all its profits, they regularly produce the landlord’s rent. That rent can be seen as the output of nature’s powers, whose use the landlord lends to the farmer. It is larger or smaller depending on how great those powers are thought to be—in other words, on the land’s natural or improved fertility. It is what nature produces after everything attributable to human work has been deducted or paid for. Rent is rarely less than a fourth of the whole output, and often more than a third. No equal quantity of productive labor in manufacturing can reproduce so much value. In manufacturing, nature does nothing and people do everything. The value reproduced must therefore match the strength of the workers producing it. Capital in agriculture employs more productive labor than an equal amount in manufacturing. And for each amount of productive labor it employs, it adds far more value to the country’s annual output from land and labor, and to its people’s real wealth and revenue. Agriculture is by far the most beneficial use of capital for society.

Capital used in a society’s agriculture and retail trade must always remain within that society. Its work is tied almost to a particular location: the farm or the retailer’s shop. With some exceptions, it must also generally belong to people who live there.

A wholesale merchant’s capital, by contrast, seems to have no permanent or necessary home. It can move from place to place, wherever it can buy cheaply or sell for a high price.

A manufacturer’s capital must of course be located where manufacturing takes place. But that location is not always fixed by necessity. It may be far both from where the materials originate and from where the finished goods are used. Lyons is far from both the places supplying its manufacturers’ materials and the places buying their products. Fashionable people in Sicily wear silk made elsewhere from materials produced in Sicily itself. Some Spanish wool is made into cloth in Great Britain, and some of that cloth is then sent back to Spain.

It makes very little difference whether a merchant who exports a society’s surplus output comes from that society or another country. If he is a foreigner, the society has just one fewer productive laborer than if he lived there. Its annual output is smaller by only that one man’s profits. The sailors or carriers he hires can come from his country, from theirs, or from a third country, just as they could if he were a native. A foreigner’s capital gives value to their surplus output just as a native’s does: it exchanges that output for something people at home want. It also repays the capital of the person who made that surplus and enables him to stay in business just as effectively. This is the chief way a wholesale merchant’s capital supports productive labor and increases the annual output of the society to which he belongs.