TWoN Book 2 Chapter 2 Part 1

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.

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Site administrative account, so probably Corwin, Felix or DD-B.

0 thoughts on “TWoN Book 2 Chapter 2 Part 1”

  1. Here’s my attempt:

    Smith says (as I read it):
    “Though the whole goods in a merchant’s shop must by no means be placed in his own stock reserved for [his] immediate consumption, they may [be placed] in [the stock reserved for private consumption] of other people, who […] may regularly replace their value to him, together with its profits, without occasioning any diminution either of his capital or of theirs.”

    That sounds to me like he’s saying that the portion of the circulating capital that is ready to do its thing as a final consumable is net revenue to the society, even if it is not yet net revenue to any individual.

    The half-sawn boards in the sawmill are part of the sawyer’s circulating capital (materials), but certainly not part of the sawyer’s net revenue, because they aren’t ready to sell. It will take the application of more circulating capital to realize their revenue. More subtly, even when the sawmill work is finished, the boards aren’t yet *revenue* because they must still be transported, stored, marketed, etc. Until the transaction takes place, they still require circulating capital from the sawyer to get to that transaction point. Thus, even “finished goods” in inventory are not really finished, from a circulating capital point of view, and are thus not revenue.

    But for the society overall, the wholly-sawn, ready-to-be-sold boards are free to enter the society’s stock of fixed capital, either as part of the sawyer’s capital stock, or by being sold to someone else. Does that make them societal net revenue? Apparently.

    (I wonder if Smith thought that the circulating capital required to achieve the sale is a zero-sum transaction from the society’s point of view — “without occasioning any diminution in their net revenue”. That works for transportation costs, but not for spoilage, transshipment losses, etc.)

  2. First, re Smith’s opening paragraph and your comment on “the greater part of commodities.” Read through to the end of the paragraph again. Some commodities resolve into only two of his three stated parts (wages & stock), and a few resolve into just one (wages). So he does in fact cover “every commodity” with his three-part breakdown.

    Second, re Smith’s p. 236 and your puzzlement over the circulating capital of individuals being excluded from net revenue. To me, the individual side isn’t where the question comes in. You’ve paraphrased Smith as saying that any provisions &c not immediately consumed can be sold, but his exact language is that provisions withdrawn from circulating capital go either to maintaining fixed capital or into “the stock reserved for immediate consumption.” Same thing he said in Ch. II.1, where he further made it clear that “stock reserved for immediate consumption,” by definition, “affords no revenue or profit.” It’s for in-house consumption only. So the real issue is, what’s different at the societal level? I’m guessing our answer lies in the aggregation of economic activity. As Smith says, distributed across all of society, the maintenance of circulating capital “withdraws no portion of the annual produce from the net revenue.”

    Any circulating capital that’s consumer-ready, and isn’t put into maintaining fixed capital, is going to end up as *somebody’s* personal-consumption stock. On an individual level, however, that somebody is usually a buyer. At time of sale, the subject goods no longer count as circulating capital (see Chapter II.1 again), and their necessary component materials must be replaced if the originating individual wants to remain in business.

  3. “which I do just to keep things net”


    I’m really enjoying your summaries. I read this years ago, but I don’t recall making a great effort to understand it. Remembering myself at the time, the goal was most likely to quote from it pretentiously (or better yet, to be seen carrying it).

  4. Okay, you two. That helps. Thanks. I think I’m getting a glimmering. I’m going to reread some more until I get confused again.

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