TWoN Book 2 Chapter 5

Capital may be used 1. procuring rude produce, 2. manufacture commodities from rude produce, 3. transporting commodities, or 4. dividing commodities into salable proportions (retail).  Each of  these is necessary for the other, and for society as a whole.

Note: Smith does love to divide things up into categories, doesn’t he?  I suspect he studied Aristotle.

Page 302: …if it was produced spontaneously, it would be no value in exchange…”

Page 303:  “It is not the multitude of ale-houses, to give the most suspicious example, that occasions a general disposition to drunkenness among the common people; but that disposition arising from other causes necessarily gives employment to a multitude of ale-houses.”  I can’t help but wonder if the relationship isn’t more dialectical than he expresses; but that is only in passing.  His point, in terms of prime cause, is certainly valid.

“The persons whose capitals are employed in any of those four ways are themselves productive laborers.”  This is interesting, because he here uses a far broader definition of  ‘laborer’ than he has used anywhere else in the book so far; where before he made a distinction between the laborer and the one who owned the tools and the raw produce upon which the laborer worked, here he says the latter is also a laborer.  Interesting change, and one that gives the impression of someone palming a card, though for what purpose I can’t yet see.

Page 304: “His capital employs too the sailors and carriers who transport his goods from one place to another, and it augments the price of those goods by the value, not only of his profits, but of their wages.”  In other words, transporting a commodity to a place where it can be sold adds value.  This appears to contradict his earlier explanation of value which is something inherent in the commodity itself; because if it is, as he says, inherent in the commodity, then moving it to a different, more profitable market, ought not to change it’s value (even though, it will naturally change it’s price).  I wonder if he will resolve this contradiction later, or if he even realizes it is there.

Page 305: Here he discusses nature as laborer, which broadens the definition even more, as now labor is not an exclusively human characteristic, but nature “labors” as it causes plants to grow.  Compare this with his discussion of labor in book one.  “This rent may be considered as the produce of those powers of nature, the use of which the landlord lends to the farmer.”   Now ground-rent is payment for the labor of nature!  Yet earlier, ground-rent was it’s, unique attribute, one of the categories (along with wages and profit) that go to make up the cost of a commodity.  Labor must, indeed, labor mightily to do all of these things, some of which contradict each other.

Page 306:” Of all the ways in which a capital can be employed, it [agriculture] is by far the most advantageous to society.”  This was almost certainly true at one time, but it is far from universal.

Page 309:”Where the Americans, either by combination or by any other sort of violence, to stop the importation of European manufactures, and, by thus giving a monopoly to such of their own countrymen as could ;manufacture the like goods, divert any considerable part of their capital into this employment, they would retard instead of accelerating the further increase in the value of their annual produce, and would obstruct instead of promoting the progress of their country towards real wealth and greatness.”  Uh…not so much.

Page 313: “That part of the capital of any country which is employed in the carrying trade, is altogether withdrawn from supporting the productive labor of that particular country, to support that of some foreign countries.”  Not sure about this.  If France pays an English shipping country to bring goods to China, is not the capital invested in the English shipping company, for which the company makes a profit, increasing the wealth of England?  Or am I missing his point?

Page 314: “The number of sailors and shipping which any particular capital can employ, does not depend upon the nature of the trade, but partly upon the bulk of goods in proportion to their value, and partly upon the distance of the ports between which they are to be carried; chiefly upon the former…The capital, therefore, employed in the home-trade of any country will generally give encouragement and support to a greater quantity of productive labor in that country, and increase the value of its annual produce more than an equal capital employed in this latter trade of consumption; and the capital employed in this latter trade has in both these respects a still greater advantage of an equal capital employed in the carrying trade.”

In the last chapter, I spoke of Smith, in some sense, having predicted the world wars, or at least pointing out the significant factors that lead to them.  Here it is even more strongly, on page 315: “When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abraod, and exchanged for something for which there is a demand at home.  Without such explortation, a part of the productive labor of the country must cease, and the value of its annual produce diminish.”

Page 316: “The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the cause of it.”  This makes perfect sense.  If a nation is producing much, then it will generate businesses for exporting that much.

TWoN Book 2 Chapter 4

This chapter deals with the particular characteristics of stock (capital) when it is lent at interest.  He spends some time explaining why it should be lent to those who will invest it in productive ventures, rather than to those who will spend it; but this part doesn’t interest me a great deal.

On page 292 he says, “Almost all loans at interest are made in money, either of paper, or of gold and silver.  But what the borrower really wants, and what the lender really supplies him with, is not the money, but the money’s worth, or the goods which it can purchase…By means of the loan, the lender, as it were, assigns to the borrower his right to a certain portion of the annual produce of the land and labor of the country, to be employed as the borrower pleases.”

The point being that the amount of money that can be loaned is not determined by the value of the money, but “by the value of that part of the annual produce which, as soon as it comes either from the ground, or from the hands of the productive laborers, is destined not only for replacing a capital, but such a capital as the owner does not care to be at the trouble of employing himself.”  What strikes me about this is that, in some ways, the limiting factor becomes the resources of the lender (usually expressed in interest), but the controlling factor is the use the borrower wishes to make of it.  This is especially interesting when we consider the latter stages of capitalism, when finance capital assumes control over industrial capital.

He then goes on to discuss how certain money might be used several times, being lent, spent, lent again, spent again, and so on among different lenders and borrowers.  This seems to be intended to reinforce his earlier point about why money cannot be counted as part of nation’s wealth.

On page 294 we find: “The increase of those particular capitals from which the owners wish to derive a revenue, without being at the trouble of employing them themselves, naturally accompanies the general increase of capitals; or, in other words, as stock increases, the quantity of stock to be lent at interest grows gradually greater and greater.”   And then, further down, “As capitals increase, in any country, the profits which can be made by employing them necessarily diminish.”  These points are significant as yet another reason why capitalism, as a system, must constantly expand.  Indeed, someone could make an argument that Adam Smith predicted the World Wars without stretching the truth too awfully much.

Page 296: “Any increase in the quantity of silver, while that of the commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal.  The nominal value of all sorts of goods would be greater, but their real value would be precisely the same as before.”   Very true.  The value of a commodity consists in the amount of labor embodied in it, and this labor may be expressed as gold, silver, paper, or in terms of other commodities.   “The wages of labor are commonly computed tye quantity of gold and silver which is paid to the laborer.  When that is increased, therefore, his wages appear to be increased, though they may sometimes be no greater than before.  But the profits of stock are not computed by the number of pieces of silver with which they are paid, but by the proportion which those pieces bear to the whole capital employed.”

He then goes on to discuss the relationship between the interest of money and the profits of stock (ie, loan rates are closely tied to return on investment from agriculture or manufacture).

It is interesting to note, at the bottom of page 298, that Smith is in favor of having a legal limit to interest rates.  He proposes that this limit be just a little above the lowest market rate.  Smith could not have predicted the volatility of the money markets; with interest rates fluctuated as they do today, such a plan is impractical.  But it is interesting that Smith proposes it.

Page 299: “No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made.”  Because money, being a commodity like any other, has its price (expressed, like anything else, in terms of labor), and if the law requires a rate below its cost, no one will lend it, or else they will circumvent the law (which, by increasing the risk, will increase the cost).

Still on 299, this is very interesting: “The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest.”  Is that still true?  If so, why?  Much of this feels like a relic of the past–that is, at the time Smith was writing, we were just emerging from a feudal monarchical system where land (ownership and production) formed the entire basis of the economy; he was poised on the brink, as it were, of an economy based on commodity production.  I think this explains why he sees such importance in land.  Not long afterward, the question became: lend money at interest, or invest in manufacture?  But at the end of the 18th century, we still aren’t quite there.

TWoN Book 2 Chapter 3

This chapter deals with the accumulation of capital.  The second half of the chapter isn’t especially interesting to me, as it concerns itself with the way an individual might spend his capital (luxeries or production, and the kind of luxeries) and the effect this has on the capital of the nation.  Today, the issue is much more the degree of concentration of wealth in a few hands, and much less whether those with wealth spend it on feasts or expensive trinkets.

The first half of the chapter is more interesting in terms of the economic laws.  On page 270 he writes: “There is one sort of labor which adds to the value of the subject upon which it is bestowed: there is another which has no such effect.”  In the first category he includes farmers and manufacturers; in the second servants.  Later, he implies this also includes opera-singers, opera-dancers, lawyers, churchmen, &c.

“A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of servants.”  In Marxist terms, the latter are not performing labor because they are not adding value to a commodity; but I think Smith’s distinctions make sense; in any case, both Marx and Smith arrived at the same place in terms of use of capital to create value.  It is interesting that Smith ignores the profit made by, for example, the owner of the opera company by employing singers and dancers; apparently to him this does not constitute value, though clearly it does increase capital.

Further down on 270 he speaks of labor invested in machinery as labor stocked up and stored against later use.  This is profound, and helps to understand why machinery cannot, itself, increase the value of a commoodity, but only transfer it.  “That subject, or what is the same thing, the price of that subject, can afterwards, if necessary, put into motion a quantity of labor equal to that which had originally produced it.”  This is well known in physics, and seems to also apply to economics: machines can store, transfer, or alter the form of energy (or work, or labor), but cannot create it.  Where we depart from physics is that machinery can multiply the effect of labor by increasing its efficiency, but this is still qualitatively different from creating it.

Speaking again of lawyers, clergymen, prostitutes, and similar laborours: “Like the declamation of the actor, the harrangue of the orator, or the tune of the musician, the work of all of them perishes in the very instant of production.”  This has changed because of the improvement in technology to preserve information: now, a singer is able to add value to a commodity: a CD or DVD.  But even if the case has changed, his method is spot on.  (Sidenote: One might consider that pornographic film and video has changed some forms of prostitution from unproductive to productive labor; I wonder what Smith would say?)

Page 273: “The proportion, therefore, between the productive and unproductive hands, depends very much in every country upon the proportion between that part of the annual produce which, as soon as it becomes either from the ground or from the hands of the productive laborers, is destined for constituting a revenue, either as rent, or as profit.  This proportion is very different in rich from what it is in poor countries.”

This is very important in a couple of ways.  First, the difference between rich and poor countries consists in several things, but most importantly on the cultural level–by which I mean, specifically, the technological level: how productive is labor in that country?  To what extent can labor be multiplied?  The other interesting thing that came to mind is that it struck me, when he spoke of rent and profit, that is often treating those two things in the same way.  It is not so big a leap after all from Smith’s saying that ground-rent is a division of value (along with wages and profit) to saying that ground-rent and profit are among the ways that suprlus value is divided.

Page 281: “The value of consumable goods annually circulated within the society being greater, will require a greater quantity of money to circulate them.”

Page 283: “Such people, as they themselves producing nothing, are all maintained by the produce of other men’s labor.”  He is not speaking here of capitalists, but, notwithstandind their useful (and, in a market economy, necessary) role in production, he could be.

Page 284: “The productive powers of the same number of laborers cannot be increased, but in consequence either of some addition and improvement to those machiens and instruments which facilitate and abridge labor; or of a more proper division and distribution of employment.  In either case, addtional capital is almost always required.  It is by means of an additional capital only, that the undertaker of any work can either provide his workmen with better machinery, or make a more proper distribution of employment among them.”  Very nice!  That is, indeed, how a market economy works.  That’s why it is called capitalism.

TWoN Book 2 Chapter 2 Part 5

On page 251 he discusses what happens when a bank tries to circulate more currency than what the country can employ, and how the excess is almost immediately returned.  I suspect this is another area that is no longer applicable; at least directly.

Similarly, on page 254: “What a bank can with propriety advance to a merchant or undertaker of any kind, is not either the whole capital with which he trades, or even any considerable part of that capital; but that part of it only, which he would otherwise be obliged to keep by him unemployed, and in ready money for answering occasional demands.”  Not so much any more–banks have become completely intertwined in every branch of every industry.  Indeed, Lenin defined Imperialism as that stage of capitalism which is dominated by finance capital, with industrial capital taking a back seat.

He goes on in this vein for some time, cautioning banks against making loans which cannot be returned for many years.  Page 258: “It is not by augmenting the capital of the country, but by rendering a greater part of that capital active and productive than would otherwise be so, that the most judicious operations of banking can increase the industry of the country.”  I may be brushing over this too lightly, but it just seems to me to no longer apply.  Perhaps there would be value in tracing exactly when and how it stopped applying, and what the consequences are, but there’s no way I could pull that off.  A man’s got to know his limitations.

Page 259, quoted mostly because I like it: “The commerce and industry of the country, however, it must be acknowledged, though they may be somewhat augmented, cannot be altogether so secure, when they are thus, as it were, suspended upon the Daedalian wings of paper money, as when they travel upon the solid ground of gold and silver.”

He then goes on to discuss the reglulation of banks by government, arguing that small denominations of paper should be avoided, and admitting that some people may see such regulations as infringement upon personal liberty.  Page 263: “But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotic.  The obligation of bulding party walls, in order to prevent the communication of fire, is a violation of natural liberty, excactly of the same kind, with the regulations of the banking trade which are here proposed.”

He then asserts that paper money is exactly the same as gold and silver, under certain conditions: “issued by people of undoubted credit, payable upon demand without any condition, and in fact always readily paid as soon as presented.”

He discusses errors in the banking trade which no longer, I think, apply.  He talks about the North American colonies (most of which would no longer be colonies within a decade), and how these colonies attempted, by law, to declare certain paper currencies to be above their actual value, with Smith condems as, in essence, debtors attempting to steal from their creditors.  Page 266: “No law, therefore, could be more equitable than the act of parliament, so unjustly complained of in the colonies, which declared that no paper currency to be emitted there in time coming should be a legal tender of payment.”

Page 268: The proportion between the value of gold and silver and that of goods of any other kind, depends in all cases , not upon the nature or quantity of any particular paper money, which may be current in any particular country, but upon the richness of poverty of the mines, which happen at any particular time to supply the great market of the commercial world with those metals.”

Which brings us, at least, to the end of the this chapter.  I only hope that my confusion over much of what was covered here won’t interfere with my understanding further chapters, because if it does, I’ll have to go back to this one and try again, and I may jump off the Mendota Bridge instead.

TWoN Book 2 Chapter 2 Part 4

On page 244, Smith reiterates what he said before about not counting money when reckoning wealth.  This–both his reasoning and my problems with it–are covered in my earlier posts, so there’s no point my restating them.

On page 245 he talks about the substitution of paper for gold and silver, and from there discusses the proportion of money (gold, silver, and paper) that is in circulation at any given time to the total value of the produce of a nation.  He speaks in particular of the money destined for maintainance of industry.  What is interesting here is that he seems to be implying that money is often the limiting factor in production, on a national level, whereas earlier I thought he was saying that labor was the limiting factor.  I think I’m just confused here.

NB: Page 247: The phrase “discounting bills of exchange,” which is used a lot, means “advancing money upon them before they are due.”  Now, if I just knew what “bills of exchange” were, I think I’d have it.

On page 249 he gives an example, referring to “cash accounts” as practiced at the time in Edinburgh–basically automatic short-term loans, presumably for relatively small amounts.  He talks of how merchants without access to this cash account must keep funds on hand to pay bills as they become due.  Suppose the amount this merchant must keep in hand for lack of this account is five hundred pounds.  Then, “His annual profits must be less by all that he could have made by the sale of five hundred pounds worth more goods; and the number of people employed in preparing his goods for the market, must be less by all those that five hundred pounds more stock could have employed.”  Well yes, except that he is ignoring the interest the merchant must pay on that cash account as he uses it.  He is assuming that the interest he pays must be less than what 500 pounds invested in his business would bring in; I’m not sure that is always the case.

Further down.  “The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place, or which (the commerce being supposed the same) would circulate there, if there was no paper money.”  Here he is warning against putting into circulation more paper within a country than the amount of gold and silver that would circulate there.  This says nothing about circulation (of gold and silver) outside of the country, which, added to the paper circulating within, will be a significantly greater total than the amount of gold and silver.  His objection, then, is to excess currency within a country; not to producing currency in excess of that which is backed by precious metal.

On page 250 he mentions two expenses unique to bankers.  “First, in the expence of keeping at all times in its coffers, for answering the occasional demands of the holders of its notes, a large sum of money, of which it loses the interest; And, secondly, in the expence of replenishing those coffers as fast as they are emptied by answering such occasional demands.”  I’m having trouble seeing how those two things aren’t just two ways of saying the same thing.  Moreover, it seems that, in some sense, every business must have money on hand to meet occasional expenses, barring access to a “cash account” as discussed above (in which case, there is the replacement cost of the interest on the cash account).