Chapter 2a

Money as Part of the General Stock of Society

by Adam Smith Icon

1 Book 1 showed that the price of commodities is made up of rent, wages, and profit.

  • There are some commodities which has a price made up of wages and profits only.
  • There are very few in which it consists in wages only.

The price of every commodity resolves itself into some one, or other, or all of these three parts. If it goes neither to rent nor wages, then it goes to somebody’s profit.

2 This is the case for every commodity taken both separately and complexly. The whole exchangeable value of that annual produce must resolve itself into the same three parts. It must be parceled out among the people either as=

  • rent,
  • wages, or
  • profits.

3 The total annual produce of a country is divided as a revenue to its inhabitants. The total revenue of all its inhabitants can be divided into:

  • a gross revenue, and
  • a net revenue.

This is just like a private farm’s=

  • gross rent,
  • net rent, and
  • total rent

4 The gross rent of a private farm is paid by the farmer.

The net rent* is what remains free to the landlord, after deducting the cost of management, repairs, etc.

  • It is what the landlord can spend or use as his stock for immediate consumption. His real wealth is in proportion to his net rent, not his gross rent.

*[Net Rent + Expences = Gross Rent paid by the farmer to the landlord]

A Society’s Real Wealth is in its Net Domestic Product, not its Gross Domestic Product

5 The gross revenue of everyone in a country makes up the entire produce of their land and labour.

The net revenue is what remains free to them after deducting the cost of maintaining their fixed and circulating capitals. The net revenue is their stock which they can reserve for their immediate consumption or spend on their subsistence, conveniences, and amusements, without encroaching on their capital.

Their real wealth is in proportion to their net revenue, not to their gross revenue.

6 The total cost of maintaining the fixed capital must be excluded from the net revenue of society.

The following cannot be part of the society’s net revenue=

  • the materials for supporting society’s useful machines, instruments of trade, and profitable buildings, and
  • the products and services needed to make those materials which support fixed capital.

The wages paid to create those materials may form part of the society’s net revenue if the workers spend all their wages on consumption. But in the labour that does not support fixed capital, both the wages and the produce go to society’s net revenue. The wages go to the workers’ consumption. The produce goes to the consumption of other people, whose subsistence, conveniences, and amusements, are increased.

7 The intention of the fixed capital is to increase productivity.

The same number of labourers and labouring cattle will raise more produce in an improved farm with the necessary buildings, fences, drains, communications, etc. than in an unimproved farm. In manufacturing, the same number of workers assisted with the best machinery, will create more goods than those with imperfect ones.

The cost of any fixed capital is always repaid with great profit.

  • This cost increases production to more than what is needed to support such improvements.
  • However, this support still needs a certain portion of that production.

The increase in productivity diverts labour and materials to a more advantageous employment. This is why all such improvements in mechanics are always regarded as advantageous to society.

With a simpler, improved machine, the labour previously used to maintain an old, complicated machine can now be used for more productive things.

Let us say that the owner of a big factory employs 1,000 workers to maintain his machinery.

  • If he can reduce this expence to 500, he will naturally employ the other 500 in buying more materials to be processed by more workers.
  • The production will naturally increase, providing more advantage and convenience for society.

8 The cost of maintaining the fixed capital in a country may be compared to the repairs in a private farm.

The cost of repairs may be needed to support the farm’s produce and the gross and net rent for the landlord. When such costs are reduced without reducing the produce, the gross rent remains same, but the net rent increases.

9 The cost of maintaining the fixed capital is excluded from the society’s net revenue.

The cost of maintaining the circulating capital is included in the society’s net revenue.

The last 3 parts of circulating capital are:

  • provisions,
  • materials, and
  • finished work.

These are regularly withdrawn and placed=

  • in the fixed capital, or
  • in the stock reserved for society’s immediate consumption.

The circulating capital used to maintain fixed capital all goes to the stock for consumption. It makes a part of the society’s net revenue.

The maintenance of provisions, materials, and finished work withdraws from the society’s net revenue only what is needed to maintain the fixed capital.

10 The society’s circulating capital in this respect is different from an individual’s circulating capital.

A person’s circulating capital is totally excluded from his net revenue.

  • His net revenue must all consist in his profits to be realized as his stock for consumption.

Every person’s circulating capital makes a part of his society’s total circulating capital.

  • But it is not totally excluded from making a part of his society’s net revenue.

A merchant must not consume all of the goods that he himself sells.

  • But they may be consumed by other people who pay for them, with profits, without reducing their capital or that of the merchant.

11 Therefore, money is the only part of the society’s circulating capital, of which the maintenance can reduce their net revenue*.

*[Translator’s note: Because money cannot be consumed nor be used for anything else]

12 The fixed capital, and that circulating capital called money, are very similar to one another in affecting the society’s revenue.

13 Those machines and tools incur a cost to build and support. That cost is a deduction from the society’s net revenue.

A country’s stock of money incurs a cost to collect and support.

Both costs are listed in the society’s gross revenue.

  • They are subtracted from the gross revenue to reveal the net revenue.

Some precious metals and labour are employed to support that great but expensive instrument of commerce, instead of being used for industrial or agricultural purposes to create goods for consumption. Money allows everyone to have their subsistence, conveniences, and amusements regularly distributed to them.

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