The Wealth of Nations
Book 2, Chapter 1
the Division of Stock
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Chapter 1 Summary
If a man's stock will not maintain him for more than a few days or weeks, he will consume it as sparingly as he can, while endeavoring to replace it, through labor, before it is all consumed. His revenue is in this case derived from his labor only. This is the situation for most of the working poor in all countries.
If, however, he has sufficient stock to maintain him for months or even years, he will endeavor to derive a revenue from the stock he does not need for his immediate consumption, reserving only the stock he needs until his revenue begins to come in. His stock is divisible into two parts. The part he uses to derive a revenue is called his capital. The other covers his immediate consumption, and consists first of the portion of his whole stock originally reserved for this purpose; secondly, of his revenue; and thirdly, purchases such as clothes and furniture.
There are two ways in which capital may be employed to yield a profit. Firstly, it may be employed in raising, manufacturing or purchasing goods, which are then sold on at a profit. This is called circulating capital. Secondly, it can be invested in the improvement of land, the purchase of useful machines and trade tools. This is called fixed capital.
Different occupations require different proportions of fixed and circulating capital. A merchant's capital is circulating. A portion of the capital of every manufacturer will be fixed, in terms of the instruments of his trade; the greater part of the capital is circulated either in the wages of the workforce, or in purchase of materials, and is repaid by in price of the work.
The portion of a farmer's capital invested in agricultural material is fixed; the portion used for wages and the upkeep of his staff is circulating capital. Dairy cows that are not for sale but for milk production, are fixed capital; their maintenance is circulating capital.
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