1.9 The Profits of Stock
(EN: Smith's use of the term "stock" seems a bit ambiguous. In some instances, he seems to mean stock in the sense of raw materials that can be used to produced goods, and in others he seems to mean it in the sense of finished goods that have not yet been sold. I'd like to use more specific terms to disambiguate, but run the risk of misinterpreting what nature of "stock": he means at any given time.)
In general, the same factors that influence the wages of labor influence the prices of stock, though there is some difference in the way in which the two manifest one another, and the variance caused when the two do not rise and fall together.
Stock, Labor, and Profit
When there is an increase in the availability of materials, the price of those materials falls, but the price of labor to transform them to finish goods increases because the need of such labor increases. In general, this results in an increase in the availability of finished goods, which has the effect of decreasing their price.
The net effect of decreased revenue and increased revenue more than offset the savings on the price of obtaining raw materials, resulting in a net loss of profit to producers, and this is exacerbated by competition, as existing suppliers increase their production and new suppliers are attracted by the availability of cheap materials.
In more populous areas, it requires a greater amount of materials to supply the demand of the many consumers than it does in a less populous area. But the wages of labor in a larger town are generally higher due to competition for labor. Smith asserts that this decreases "the profit of stock."
(EN: It seems a bit odd to me to draw such a distinction - the cost of production is both labor and materials, and it seems that the proportions change - less for material and more for labor in a more heavily populated area - but this would not seem to necessarily decrease the profit of production as a whole. So I'm not sure if the consideration is meaningful if the entire equation is not considered. I'm also not convinced that it is entirely accurate in all industries - it seems to me the cost of cotton would be less in a rural community where it is grown rather than in a larger town to which it has to be transported.)
The depletion or diminution of stock has the correspondingly opposite effect: less materials means less ability to manufacture, hence less need for labor, hence a falling price for labor. The "profit of stock" used to calculate the return on materials alone then rises.
Interest Rates as an Indicator of Productivity
Because the factors that must be considered to determine the productivity of a nation are numerous - one must calculate the productivity of every business in every industry - Smith suggests that the rate of interest for borrowing can be substituted as an indicator of productivity.
By his reckoning, the more profitable it is to produce, the higher the interest rate a producer will be willing to pay to borrow capital to invest in production. That is, if the interest rate is set at 8%, the producer must predict being able to make enough to pay back the amount loaned, plus that percentage, to profit by borrowing money. If he cannot, the interest rate must be lowered to a level at which he can borrow for production or else he won't borrow. An dif he is able to make a higher return by production, he will be amenable to paying a higher rate to borrow capital.
There is some mention of the efforts by the state to control the rate of interest by setting a maximum amount that could be lawfully charged to borrow money (though no such effort has ever been made to encourage interest rates upward). The net effect was to discourage lenders from making funds available to producers, even when they would have been willing to pay a higher rate to obtain capital, and ultimately a decrease in production of goods that led to less employment fewer goods produced, and the general misery of the population when interest rates were restricted.
But since the removal of such restrictions, there has been constant growth in the British economy: producers are able to obtain capital, laborers are able to find employment, a greater amount of goods have been able to be produced, and the general welfare has increased. Moreover, the rate of interest has fluctuated, but generally remained moderate in spite of a lack of legal controls, largely by virtue of the borrowers' collective wisdom in refusing to pay a rate of interest that exceeds their ability to profit by borrowing money.
Smith follows with a comparison of interest rates among England, Scotland, France, and North America, generally demonstrating that the production of goods in each country is tied to the rate of interest: the greater the volume of goods being produced, the higher the interest rate. This, I suppose, is meant as evidence of the theory that interest rates are determined by the profitability of production.
(EN: Additional examples follow, but they add nothing to the fundamental theory disclosed above.)