Category: Steve

I have found places in this book where I respectfully differ with Mr. Smith.  They fall into two categories: 1. Those things which he couldn’t have understood simply because the information wasn’t available at the time he wrote (one cannot expect advanced metallurgy from a culture which just that morning discovered iron, or or full understanding of a market economy just as it’s gearing up), and 2. Occasional objections to his method, where it seems to me made complex, contradictory processes seem linear and mechanical (as for example when he speaks of acquiring stock coming first, then division of labor).

One trouble I’m having in this chapter is that I’m seeing what appear to be a different sort of error–false deductions and cases of ignoring significant data.  It seems to me that if I’m seeing those kinds of errors, I’m missing something; I am more likely to be mistaken about that kind of thing than he is.  All I can think of to do is try to grasp what he means, point to the mistakes I’m seeing, and hope some Smart Person can, using small words, help me figure out what I’m missing.

That said, let’s look at Page 236: “Money, therefore, is the only part of the circulating capital of society, of which the maintenance can occasion any diminution of their neat revenue.”  Doesn’t this ignore the cost of transport, payment of storage of finished commodities, and the cost of various middlemen, who, by definition, concern themselves with circulating capital?

Page 237: ” A certain quantity of very valuable materials, gold and silver, and of very curious labor, instead of augmenting the stock reserved for immediate consumption…is employed in supporting that great but expensive instrument of commerce, by means of which every individual in society has his subsistence, conveniencies, and amusements, regularly distributed to him in their proper proportion.”  Is this the answer to my point above?  That is, is he here referring to the market itself, as well as the infrastructure that supports it?

“…as the machines and instruments of trade, &c, which compose the fixed capital either of an individual or of a society, make no part either of the gross or of the neat revenue of either,; so money, by means of whichthe whole revenue of the society is regularly distributed among all its different members, makes itself no part of that revenue.  The great wheel of circulation is altogether different from the goods which are circulated by means of it.  The revenue of the society consists altogether in those goods, and not in the wheel which circulates them.

He becomes more specific about this point later.  His point is that money is the means whereby commodities circulate, and, in calculating the revenue of an individual or nation, one can count the money, OR the commodities one can purchase with the money, but not both.  As far as that goes, it makes sense.  The trouble is, money is a commodity.  Whether paper (which he discuses later) or heavy metals makes no difference.  Money in any case, has a use-value, an exchange-value, is interchangable, and was created for exchange.  That is the definition of a commodity.  What makes money unique is that it is the only commodity whose use-value is quantifiable–or, put another way, whose use-value is its exchange-value.  This permits us to exchange commodities using money as a medium, and thus it appears to be a separate thing, but it isn’t.  In actual practice, when determining the “net worth” of an individual, one takes into account the market value of that person’s possessions, AND that person’s money–no one suggests counting the possessions, the money, and what a person could buy with the money.

Smith is obviously making a point here, and it is a point I’m missing.

This chapter deals with money, and it makes my head hurt.

He begins by restating that the price of the “greater part” of commodities resolves itself into: wages of labor, profit, and rent.  His use of “greater part” here makes me wonder about the rest; unless I missed something, those are the only parts of price he has told us of; but that isn’t the point here, so we’ll let that go.

He then goes on to speak of the produce of an entire country: Page 223: “The whole price or exchangeable value of that annual produce, must resolve itself into the same three parts, and be parcelled out among the different inhabitants of the country, either as the wages of their labor, the profits of their stock, or the rent of their land.”  So far, so good.  If the value of each commodity thus resolves itself, so must the the total produce of a country.

He then speaks of dividing this produce of the country, as of an individual, into gross and net.  (Which he writes as gross and “neat” giving us the etymology of “net” which, in itself, is neat;  In quoting him, I’ll update the spelling, as I’ve done with a few other words here and there, which I do just to keep things net).

His use of gross and net is pretty straightforward, I think: Gross refers to whatever comes in, net to whatever value is left over after expenses.

Page 234: “The whole expense of maintaining the fixed capital, must evidently be excluded from the net revenue of the society.  Neither the materials necessary for supporting their useful machines and instruments of trade, their profitable buildings &c. nor the product of the labor necessary for fashioning those materials into the proper form, can ever make any part of it.  The price of that labor may indeed make a part of it; as the workmen so employed may place the whole value of their wages in their stock reserved for immediate consumption.  But in other sorts of labor, both the price and the produce go to this stock, the price to that of the workmen, the produce to that of other people…”

If I understand this correctly, he is saying that maintainance of fixed capital cannot be included in the net profit of a society.  If I am understanding correctly, this makes sense, in that maintainance of fixed capital, while in the long run producing profit, does not immediately provide income, but rather is an expense; and he is asserting that this is also true for the total profit of a society.

“The intention of the fixed capital is to increase the productive powers of labor, or to enable the same number of laborers to perform a much greater quantity of work.”  Yes, exactly.   By fixed capital here, we mean the means of production, and Smith correctly draws no distinction here between those means that take the form of machines, and those that take the form of land which is or has been made suitable for agriculture.

Page 235: “A certain quantity of materials, and the labor of a certain number of workmen, both of which might have been immediately employed to augment the food, clothing and lodging, the subsistence and conveniencies of the society, are thus diverted to another employment, highly advantageous indeed, but still different from this one.”  Right.  Makes sense.  Properly laid out investment in improving machinery does return a profit, but is nevertheless an expense and does not directly add to an individual’s or a country’s net.

Page 236: “But, thought the whole expense of maintaining the fixed capital is thus necessarily excluded from the net revenue of the society, it is not the same case with that of maintaining the circulating capital.  Of the four parts of which this latter capital is composed, money, provisions, materials, and finished work, the three last, it has already been observed, are regularly withdrawn from it, and placed either in the fixed capital of the society, or in their stock reserved for immediate consumption.  Whatever portion of those consumable goods is not employed in maintaining the former goes all to the latter, and makes part of the net revenue of the society.”

Any provisions, materials, and finished work that isn’t immediately consumed by those who produce it can be sold.  Okay.  He then continues, “The maintainance of those three parts of the circulating capital, therefore, withdraws no portion of the annual produce from the net revenue of the society, besides what is necessary for maintaining the fixed capital.”  I’m still fine.  Other than expenses for maintainance and that tiny portion which might be immediately consumed (the farmer eating some of his corn, the owner of textile factory keeping a few bolts of cloth), produce is available for sale (by circulating) and thus adds to a society’s net.

“The circulating capital of a society is in this respect different from that an individual.  That of an individual is totally excluded from making any part of his net revue, which must consist altogether in his profits.  But though the circulating capital of every individual makes a part of that of the society to which he belongs, it is not upon that account totally excluded from making a part likewise of their net revenue.”

Where I get lost is, why is the circulating capital of an individual excluded from making any part of his net revenue.  I’ve just reread chapter 1 of Book 2, which is where I should have figured that out, and I don’t get it.  I’m missing something important here.  The circulating capital of an individual consists of that portion of his stock that he exchanges.  Is Smith here making a distinction between *realizing* a profit, which happens in the marketplace, and *creating* a profit, which happens at the point of labor?  That would, indeed, make a great deal of sense, but I don’t think that’s what he’s saying.  Does anyone?  I’m lost.

I’ll hold off on continuing this chapter until I think I have some sort of understanding of this part, because after this it gets really tangled.