1.11 Formation and Multiplication of Capital
The previous chapter established that capital is necessary to initiate and perpetuate a productive activity, and it should be self-evident that, at the time of a purchase, any item is worth the price paid for it and should thus be considered of equal value: if you pay five dollars for a tool or some raw material, you still possess five dollars in value, it is merely embodied in the tool/material rather than in coinage.
It likely needs no explanation that value is consumed in production, in two different ways: raw materials are consumed entirely when it is transformed into finished goods. Tools become worn and blunted in the process of production.
Those productive acts that are genuinely productive result in creating more value, or at least creating equal value, to the capital that was invested in them. That is, the finished good should be worth more than the materials and the cost of restoring or replacing the tools used to make it.
It is possible the outcome is not so, and there may be instances in which the finished good is worth less. This is destructive, rather than productive, and such activity should be rectified or discontinued promptly.
The author considers a few methods a person might use their capital and their effect on "the condition of mankind":
- He may hoard it, even literally bury it. For the time that it is thus interred, the value is lost from the national capital, not to be regained until it is unearthed, at which time it has no more value than it did when it was removed.
- He may purchase useful items such as furniture or linen. His wealth in coin is transferred to the hands of others who provide these items, and by virtue of exchange the buyer obtains equal value, which remains preserved by the possession of them, though it will diminish with time and use until the items are worn out.
- He may squander it "upon an elegant entertainment." Some would consider this to be destructive, but the author points out that each piece of silver was used to purchase wine, food, gunpowder, and the services of those who prepared the event. As such, the squanderer loses this wealth and has no durable items to show for it, but the coin is returned to the market and remains in circulation.
- Finally, he may re-employ his capital by investing it in productive activity: to prepare another field for planting, to buy more materials for his workshop, and thus increase his productive capacity and future profit, such that the value of his investment is returned to him over and over in future. Society, meanwhile, benefits from the additional goods produced.
It is thus concluded that hoarding money removes wealth from society, spending it (even wastefully) transfers it from one party to another but does not increase or decrease the wealth of a society, and investing it increases the wealth of the investor and society alike.
(EN: Spending and investment are not so different as they might seem. In both cases, they encourage production - spending encourages the industry of others and investment supports one's own industry.)
While savings removes wealth from the market, it should not be entirely discouraged. The removal is but temporary, as saved wealth will re-enter the market in time. More importantly, as previously mentioned, starting a new venture requires a considerable amount of capital that, for most, must be slowly accumulated over time.
The wealth of a nation depends mainly on the "peculiar wants" of its people. Capital may be accumulated in plowing of fields and erecting factories, in the creating of more goods, or storing as coin and ingot. A developing nation may find ample opportunity to put capital to productive use, whereas in an established nation where the needs and desires of the people are amply satisfied, it will tend to accumulate in money as additional production is deemed unnecessary.
Any individual who already owns a process of industry (a farmer who owns fields, a carpenter who owns a shop) already has a ready means of investing any excess capital he gains. Those who are already in possession of great wealth have many options for investing in ventures. However, the great mass of people who have only their labor and depend on wages for their sustenance have little facility for making advantageous use of any surplus, as it occurs in small amounts. This need is filled by banks, who consolidate small amounts from many individuals to make loans to or direct investment in productive endeavors.
In most instances, the increase in capital is a slow progress: the producer must invest value in establishing an operation, and must continually lay out capital for materials, supplies, and maintenance. Some amount of capital is perpetually frozen in the productive process until the final product can be sold.
The profit of business is not merely in the revenue of the owner, but of the market he serves. By virtue of his production, society enjoys the use of a sum of goods it would not have had access to but for the producer's actions, and his revenue reflects the benefit he has delivered to his customers. But society likewise foregoes the capital that is invested in business during the time it is accumulated to begin the process and for the time it takes to render useful goods from materials that otherwise deliver little benefit.
The wealth of nations is often wrongly considered to be the excess of their production over their consumption, and the wealth of individuals is measured by the amount of money they have sitting idle. But again, idle money delivers no value until it is exchanged for items that deliver a benefit to the consumer - and in that way the money that is hoarded in a society does not reflect its wealth, but a detraction from it.
This brings the author to consider miserliness, and extreme of frugality where man hoard money and deny their wants and needs for the sake of amassing coinage. Such an individual may conserve a great stock of coin, but has an unenviable existence.
In this regard, the value that Smith and Turgot place on frugality seems ill conceived: the wealth of a society is not derived from the prevalence of individual frugality, but from the collective productive ability of its citizens.
He also remarks that hoarded wealth benefits a few, whereas production benefits the many, and lists a few of the conveniences and luxuries enjoyed by the working classes of industrialized nations that were well beyond the means of their agricultural ancestors. Even things as commonplace in the author's day as wallpaper and oil lamps were precious and rare in previous times.
Again, amassing capital with a purpose in mind is a different matter than hoarding it: it will eventually be returned to the public, and generally put to productive use. But even the miser who means to hoard wealth is but a temporary inconvenience to society - he will, in time, expire and his fortune will be passed to his heirs, and returned to the market.
There is but one activity that is truly destructive of capital: the transfer of capital from one man to another where nothing is given in exchange of it. This is accomplished by taxation and thievery, which contribute nothing to the public welfare as the capital taken is not the result of any productive activity or the reward for providing any sort of value to those from whom it is taken. While those who steal capital in this matter often are of a mind to spend it, it is "too common that wealth ill-gotten is ill-spent also."
There's a brief mention that amassing capital is a distinctly human characteristic, as the behavior of most species of animal is merely to consume, to make no savings, and certainly to find no better use for material than its immediate consumption. (EN: To what end this point is made, I have no idea.)