The Wealth of Nations
Book 1, Chapter 9
the Profits of Stock
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Chapter 9 Summary
Fluctuations in profits of stock (assets) are influenced by the same factors that cause fluctuations in wages of labor and a society’s wealth; however, these factors affect one and the other very differently.
Increased stock (assets) will raise wages and lower profit. Competition between merchants tends to lower profit.
Although we can measure average wages, it is difficult to measure profits as they are affected by fluctuations in commodity prices as well as by competition. It may be possible, however, to estimate average profits of stock based on interest rates; as interest rates fluctuate, so do profits of stock.
Generally, more stock is required to trade within a large town than within a village. Profits in the large town will be lower than those in the village due to the higher number of competitors in the town. Wages will generally be higher in a large town than in a country village. In a thriving town, merchants with large amounts of stock often cannot find sufficient workmen and therefore bid against one another, which raises wages and lowers profits.
Wages of labor, interest rates, and consequently the profits of stock are higher in North American and West Indian colonies than they are in Britain. With more land than stock to cultivate, any stock employed in the purchase and improvement of such land must yield a very large profit; consequently, profitable employment enables the landowner to increase the number of staff he is able to pay a good wage.
The lowest rate of profit must always be more than sufficient to compensate for the occasional losses incurred when employing stock. This surplus amount is the only clear profit. In the case of borrowing money, the interest a borrower can afford to pay is measured according to the clear profit. The lowest interest rate must be more than sufficient to compensate for the occasional losses incurred by the lender.
Interest rates generally fluctuate in relation to this rate of clear profit, as profit rises or falls. In the case of a clear profit of 8% to 10%, it would be reasonable, in the case of a business loan, for half of it to go to interest.
The price of work tends to increase more in line with high profits than it does high wages. The rise of profit operates like compound interest; merchants often complain about the bad effects of high wages in terms of increased prices, yet say nothing about the bad effects of high profits.
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