Three Divisions of Stockby Adam Smith
Fixed Capital, Circulating Capital, and Stock for Consumption
1 When a man’s stock can only maintain him for a few weeks, he seldom thinks of deriving any revenue from it.
- He consumes it as sparingly as he can.
- He tries to acquire new supplies before it is consumed.
- In this case, his revenue is derived from his labour only.
- This is the state of most of the labouring poor in all countries.
2 But when he has enough stock to maintain him for months or years, he tries to derive a revenue from it. He reserves some for his consumption until this revenue comes in.
His whole stock is made up of two parts=
- His capital
- He expects this part to provide revenue
- His stock for immediate consumption
- This consists of:
- the stock that he means to consume,
- the stock that becomes his revenue, or
- the stock obtained in previous years which has not yet been consumed, such as clothes, furniture, etc.
The stock for immediate consumption can be one or a mix of these three.
3 Capital may yield a revenue or profit to its employer in two ways=
- 4 As Circulating Capital
This is employed in raising, manufacturing, or buying goods and selling them again with a profit. A Circulating Capital yields no revenue to its employer while it remains in his possession.
A merchant’s goods provide no revenue until he sells them for money.
- The money yields him little until it is exchanged for goods.
- His capital is continually going from him in one shape and returning to him in another.
- Only such successive exchanges can yield him any profit.
- 5 As Fixed Capital
This yields a revenue without changing masters or circulating any further. Examples are=
- land improvements
- useful machines
6 Different occupations require very different proportions of fixed and circulating capitals.
7 A merchant’s capital is a circulating capital. He uses no machines or instruments of trade other than his shop or warehouse.
8 A manufacturer’s capital must be fixed in the tools of his trade.
This part may be very small in some while very great in others.
- A tailor only requires needles as his tools.
- A shoemaker needs more expensive tools.
- A weaver needs more expensive tools than a shoemaker.
However, most of the capital of all such craftsmen are circulated in=
- the wages of their workers, or
- the price of their materials
They are repaid with a profit by the price of the work.
9 In other works, more fixed capital is required. For example=
- in a big ironworks, the furnace, forge, and slit-mill are very expensive instruments
- in coal-works and mines, the machinery for drawing out the water is even more expensive
10 A farmer’s agricultural tools are a fixed capital. He earns from his tools by keeping them.
The wages and maintenance of his labouring servants are a circulating capital. He parts with the wages that he gives to them and earns from their labour.
The price of his labouring cattle is a fixed capital. The farmer earns by keeping them.
The maintenance of his cattle is a circulating capital. He profits by parting with their maintenance.
Cattle, which are sold and not used for labour, are a circulating capital. The farmer profits by parting with them.
A flock of sheep or a herd of cattle used for wool and milk is a fixed capital. Profits are made by keeping them.
Their food is a circulating capital. Profit is made by parting with it to feed them, to then produce wool and milk for sale.
The whole value of the seed is a fixed capital. It goes backwards and forwards between the ground and the granary. But it never changes masters and does not circulate. The farmer profits by its increase, not by its sale.
11 The general stock of any society is the same with that of all its inhabitants. It naturally divides itself into the same three portions, each with a distinct function.