The Wealth of Nations

Book 2, Chapter 3

The Accumulation of Capital, or of Productive and Unproductive Labor

Download Preston's Free Checklist

Download Preston's free checklist. His checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With his checklist, you can find safe picks that protect and grow your principal. Additionally, Preston reads a lot of books and writes an executive summary for each book he reads. If you download his checklist, you will be added to his monthly e-mail list where he sends his book summaries. There are never any advertisements...ever. Here's an example of one of Preston's executive summaries, based on the book written by Billionaire Charlies Koch.

Chapter 3 Summary


Productive labor adds value to its subject; unproductive labor does not. A manufacturer adds value to the materials he works on. A house servant adds nothing. Although the manufacturer receives wages from his boss, he is actually maintained by his boss at no real cost since the value of his wages is covered, including a profit, by the value he has added to the subject on which he has worked.


The labor of some jobs, such as house servant, is unproductive of any permanent value in a society. The sovereign, with all the officers of justice and war who serve under him, and the whole army and navy, are unproductive workers. The protection, security and defense of the commonwealth do not generate a profit enabling the purchase this protection, security and defense the following year. Some professions involving unproductive labor are churchmen, lawyers, physicians, actors and musicians. None of these are productive laborers.


Productive and unproductive laborers, as well as the unemployed, are all maintained by the annual produce of the land and labor of the country. This produce must have certain limits.


The produce of the land, whether farmed or manufactured by productive laborers, can be divided into two parts. The first, the produce of the land, is used to replace the farmer's capital; the second pays his profit and the rent of the landowner, and thus provides a revenue both to the owner of the capital, as the profits of his stock, and to the person who owns the productive land, in the form of rent. In the case of a large business, the largest part goes towards replacing the capital of entrepreneur; the other pays his profit, and thus constitutes a revenue to the person who owns the capital. If his wages permit it, even a common laborer can hire a house servant, or perhaps spend his wages on entertainment, such as a theatre show; in this way, he contributes a share towards maintaining unproductive labor. Or he may pay taxes, thus contributing towards maintaining more useful, but equally unproductive, labor.


The proportion between capital and revenue regulates the proportion between industry and idleness. Wherever capital predominates, industry prevails; wherever revenue predominates, idleness prevails.


Capital is increased by frugality, and diminished by extravagance. Whatever a person saves from his revenue, he adds to his capital, and either employs it himself in hiring additional productive laborers, or enables another person to do so by lending it to him at interest, thus making a profit. As a person's capital can be increased only by what he saves from his annual revenue or profit, likewise a society's capital can be increased only in the same manner. Frugality, and not industry, is the immediate cause of the increase of capital. Industry, indeed, provides the subject which frugality accumulates; but whatever industry might acquire, if not saved up and stored through frugality, the capital would not grow.


What a frugal man saves annually can be used to hire additional productive laborers for the following year, but doing so means he will have to maintain this number of laborers in the years to come. If the extravagant spending of some were not compensated by the frugality of others, the extravagant spenders sponging off the industrious would lead to the country's impoverishment.


However we view the real wealth and revenue of a country, prodigal spenders can be seen as the public enemy, and frugal people as public benefactors. Imprudent and unsuccessful projects in agriculture, mining, fishing, trade and manufacturing also tend to diminish the funds destined for the maintenance of productive labor.


Great nations are sometimes impoverished by public extravagance and misconduct; almost the entire public revenue is employed in maintaining unproductive labor; lawyers, churchmen, army and navy generals, who in time of peace produce nothing and in time of war acquire nothing which can compensate for the expense of maintaining them. Such people are all maintained, therefore, by the produce of other men's labor.


The expense involved in leisure events such as festivals, where commodities are provided for a greater amount of people than those employed at the event, often result in as much as half of these commodities being thrown out afterwards, resulting in huge amounts of waste. If the expense invested in this entertainment had been put towards setting up a business of masons, carpenters, upholsterers, mechanics, etc., for example, a quantity of provisions of equal value would have been distributed among a still greater number of people, who would have bought them in monetary weight and not lost or thrown away a single ounce of them.


Next Chapter

Don't get lost in the Wall Street Fee-Factory

It's taken us a few years to finally figure out the right mix of tools that get results and save money. If you click on the toolbox, you'll see an article we wrote that lays-out the brokers and research tools we personally use.

Got Questions?


The Investor's PODcast

Get a free autographed copy of the Warren Buffett Accounting Book or Warren Buffett's Three Favorite Books. Simply submit your question to The Investor's PODcast. If your question gets answered on the air, the founders of this site, Preston Pysh and Stig Brodersen, will send you a free signed copy of their book!


The Warren Buffett Forum

Ask your question at the Buffett's Books money forum and interact with other smart investors like yourself. You won't find any day traders on this forum! Here's the link to The Warren Buffett Forum.