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.

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0 thoughts on “TWoN Book 2 Chapter 3”

  1. Well of course the opera house itself and its appurtenances are either fixed or depreciating capital, but sadly for economic common sense, people are willing to pay capital-equivalent tokens for the evanescent, intangible, and vanishing entertainment experience of opera, so capital value seems to manifest out of thin air, to which it may return if there is a fashion trend away from opera towards musicals or rap music….

    If capital cannot be destroyed by transferring it or its tokens (cash) around, then surely there is no great harm in purchasing service with capital tokens; there is after all nothing else to purchase services *with*, and you can’t just do without services.

    From your quotes, Smith seems to think that service-providers are mere drones. But it is obvious to me at least that services make society possible in the first place. Mere barter of goods is completely unsatisfactory to maintain even a primitive human society, much less a civilization. So if Smith derides service as valueless, he seems to be missing a major point.

  2. The value service provider contribute is diffuse diffuse than a manufacturer but still exist because of the creation of “place”. My house here in Austin (which touts itself as the live music capital of the world) has greater value because of it’s proximity to a community of artists, lawyers, tech support people and assorted other service providers. People expend large chunks of their resources to attend events of that community. Look at the people who can rent out their down town condo for exorbinant amounts during the week of SXSW.

  3. What he’s really talking about here is the question of what drives economic growth, formulated as why some countries are rich and others poor. Smith’s answer is that you drive economic growth by not throwing your money away on luxuries (such as hiring an army of servants or throwing lavish parties at the opera or eating all the food you grow). Instead, you should save (not consume) your earnings, and then plow the saved earnings back into making more things. This is foundational “Protestant Work Ethic” stuff.

    There may also be, laid underneath this, the production version of the gold standard. That is, the idea that real wealth rests on matter and the transformation of matter. Under such a worldview, products provide real economic value, while services are ephemeral. All the real money is in rearranging atoms, rather than performing actions for people or rearranging bits of information. Practical Marxism makes this same critical error when it assigns the value of the building to the masons who lay the bricks more than the architect who drew the plans.

    Over the course of the 20th century, we moved away from this idea. The largest component of economic value in the developed nations now consists of services. Lots of people spend their worklives as drivers, teachers, massage therapists or writers and are considered fully productive members of society–even though, in Smith’s terms, they aren’t producing anything.

    The question of saving vs. consumption is still a primary macroeconomic issue, not to mention an important issue at the microeconomic level of the household or firm, because it’s one of the drivers of economic growth.

  4. I’m also struggling a bit with Smith’s denigration of services — especially when he explicitly noted the importance of (say) having circulating capital to pay for shipment of your goods to where the buyers are. Surely that transportation is both a service and a contributor to the value of the good. Does it count as “rearranging matter” then?

    I can sort of see that, in a time when many people are cold, hungry, and homeless, any labor that is neither contributing to the production or distribution of food, clothing, or shelter, NOR contributing to making such production and distribution more efficient, is “wasted”. Is *that* what Smith is getting at? It seems like his boundary is not purely between goods and services, but rather between things that leave an improvement behind that can be exploited, and things that don’t.

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