The Wealth of Nations

Book 2, Chapter 5

the Different Employments of Capitals

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Chapter 5 Summary

Though all capital is destined for the maintenance of productive labor, the quantity of labor that can be employed for a specific amount of capital will vary depending on the type of employment, in the same way the value that employment adds to the annual produce of the land and the labor of the country.

Capital may be employed in four different ways:

  • procuring the crude products required for a society’s use and consumption;
  • manufacturing and preparing those products for consumption;
  • transporting the crude or manufactured products from their places of origin to those where they are wanted;
  • dividing particular portions of either into smaller portions to suit occasional demands from those who want them.

  • The capital of the retailer replaces, together with its profits, that of the merchant from whom he purchases goods, thereby enabling him to continue his business.

    The capital of the wholesale merchant replaces, together with their profits, the capitals of the farmers and manufacturers from whom he purchases the crude and manufactured produce he deals in, thereby enabling them to continue their respective trades.

    Part of the capital of the master manufacturer is employed as fixed capital in the instruments of his trade and replaces, together with its profits, that of the craftsmen from whom he purchases them. Part of his circulating capital is employed in purchasing materials and replaces, with their profits, the capitals of the farmers and miners from whom he purchases them. But a great part of it is distributed among the workmen he employs.

    Capital invested in agriculture not only enables a greater quantity of productive labor than the same amount of capital employed in manufacturing, but adds much greater value to the annual produce of the land and labor of the country and to the real wealth and revenue of its inhabitants. Of all the ways in which capital can be employed, this is by far the most advantageous to society.

    The revenue of all the inhabitants of a country will be in proportion to the value of the annual produce of their land and labor. The activity that adds the greatest value to annual produce is agriculture—as demonstrated by the rapid growth in wealth of American colonies, which focus primarily on agriculture. They have no manufacturing businesses, with the exception of private family-run household businesses managed by women and children. The greater part of America’s export and coastal trade is conducted with the capital of merchants located in Britain. Even the retail stores and warehouses in some provinces, notably Virginia and Maryland, belong to UK merchants.

    All forms of wholesale trade can be categorized into three types:

  • Home trade, involving internal purchase and sale of produce of industries within that country.
  • Foreign trade, involving the purchase of foreign goods for home consumption.
  • Carrying trade, involving transactions of commerce of foreign countries, or trade of surplus produce from one country to another.

  • When an industry’s produce exceeds demand, the surplus must be marketed abroad, in exchange for something for which there is a demand. The land and labor of Britain generally produce more than the demand of the home market requires; the surplus is therefore marketed abroad, in exchange for something for which there is a demand at home. About 96,000 hogsheads of tobacco are purchased annually in Virginia and Maryland with part of the surplus produce of British industry, but Britain does not require more than 14,000; if the remaining 82,000 cannot be exported and sold in exchange for something more in demand at home, importation of these products must cease, and with it the productive labor of all the inhabitants of Britain currently employed in preparing the goods with which these 82,000 hogsheads are purchased annually.

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