2.3 Productive and Unproductive Labor and the Accumulation of Capital
Unproductive Labor
Smith differentiates between the "productive" labor of those whose efforts result in a tangible good and "unproductive" labor that does not. On the level of a single estate, the master profits by the productive labor of those he hires to tend his fields, but he does not profit from the labor of his household servants - and, in fact, his wealth is generally diminished by their employment.
Unproductive labor is not without value. The head of state, his judges and cabinet officers, and the whole of the military are unproductive, as are physicians, scholars, and the clergy. Their labor produces value, insofar as those who pay them value their service, but the value is consumed immediately. The distinction is merely that it does not produce a physical object.
In a state of society in which a person can by his own efforts produce only as much food as he needs to consume to sustain his own family, there is no capacity for unproductive citizens. However, once the labor of one can feed many, not all hands must be employed in food production: some may be employed in the production on non-essential goods, and others may be employed in non-productive occupations. Another possibility is for some to be entirely idle and still sustained by the work of others: children and the elderly need not engage in any work at all.
(EN: this does not consider the possibility that, rather than being split among separate persons, each citizen can, and generally does, divide his time among the three - some hours being spent on productive labor, some on nonproductive labor, and still others in no labor at all.)
Smith remarks that the difference between a poor nation and a wealthy one, or even within a single nation between times of wealth and poverty, is the productivity of labor, particularly for food crops: the more food can be developed with less labor, the greater the amount that can be diverted to producing other necessities, conveniences, and luxuries.
Revenue and Profit
When productive effort is undertaken, it must necessarily generate sufficient profit to be self-sustaining. If a productive operation does not obtain sufficient revenue to pay for the materials and labor it consumes to produce goods, it is not a sustainable endeavor and consumes rather than produces. Anything it produces above the amount needed to replenish what is consumed is a profit to the operation.
In addition to sustaining materials and productive workers, virtually every operation must also sustain a number of unproductive workers to handle various tasks necessary to business, but which at the same time have no direct impact on the development of a product. The wages of such individuals must also be paid before the operation can be considered to be profitable.
Smith reckons that this is what makes people of his time more productive than their forebears - primarily in that free laborers who work for their own profit are more motivated to be productive than those whose labor is given for the profit of others. Moreover, the more profit of a business that is reinvested in production contributes to greater productiveness.
Personal Wealth
Whatever part of income, whether from wages or profits of business, a person retains rather then spending, and it is most often thrift and parsimony rather than quantity of income that makes a man wealthy. A man with a high income, who spends all of it, accumulates less capital than another of modest means who saves a portion of his income.
Prudent use of capital is also a method of accumulating wealth. The portion of income an individual spends on consumption on nonproductive labor (servants, entertainment, etc.) reduces wealth, the portion that is merely set aside increases wealth by its own value, but the portion that is invested in productive activity returns to the investor greater than its own value, and continues to grow as long as it remains productively invested.
The wasteful extravagance of a prodigal individual "perverts" the value of productive work, but taking capital from productive operations to spend on idle pursuits. In diverting capital from productive use, he not only wastes his own resources, but deprives his society of the productive use that could have been made of them. Smith asserts that "every prodigal appears to be a public enemy, and every frugal man a public benefactor."
(EN: I have seen the counter-argument made that wasteful consumption harms only the spendthrift - that even if a person buys things and throws them away, he has still paid for their production, and deprives only himself of better utility of his capital. I'm not sure whether the argument is won or lost on that basis, but generally feel the point is moot - the right of the individual to dispose of his own capital outweighs the wishes of others to control the way in which he does so to their own preference.)
But in general, Smith believes that the "passion for present enjoyment" by wasteful consumption is "generally only momentary and occasional." The majority of men, at the majority of times, are prudent in their pursuit of the betterment of their own condition During the entirety of life, there are few instances in which a man is perfectly and completely satisfied with his condition such that he has no desire to make improvement.
There is also the waste of capital that occurs from well-intentioned but ill-conceived plans. The farmer who produces more crops than he can sell generates waste, as does the shop that produces merchandise that no-one wishes to buy. It is not the intention of individuals to do so, but this nonetheless occurs. But again, men are far more often judicious than foolish in their business endeavors.
Historically, there never has been a great nation impoverished by the wastefulness or foolishness of its citizens who act according to their own judgment and in the interest of their own welfare, though a few have been so damaged by the wastefulness or foolishness of its government. Even government that is overbearing rather than obviously corrupt can be detrimental to the welfare of the nation - as the more the government proposes to do, the more non-productive officials and employees must be supported through the taxation of the productive sectors of society.
Transference of Wealth Abroad
Smith returns to the notion that the wealth of a nation may be sent abroad by the purchase of foreign goods, which do nothing to contribute to the productive industries in one's own nation.
Returning to an earlier consideration: the transference of money overseas is not the same as the transference of wealth or capital overseas, because what is bought with it is equal in value to the money used to purchase it.
It can, however, be witnessed to support production overseas rather than production domestically. Consider the extreme circumstances in which the citizens of a nation purchase all of a good of a given kind from foreign markets. For example, if every Englishman were to prefer the wines of France, there would be no call for farmers to grow grapes in England.
(EN: This has largely occurred - whoever has heard of good English wine? And that, in turn, brings up the counterpoint: if domestic industry were capable of satisfying domestic demand with goods of better price and/or quality, there would be no demand for foreign goods. It is only when domestic product is of higher price and worse quality that there is any incentive to import. Moreover, the problem is largely an imaginary one: little concern is expressed over the trade of goods among two different towns, unless they are on opposite sites of an international border.)
National Wealth
The welfare of a nation can be increased by no other means than increasing the welfare of its citizens. The amount of wealth held by government is not analogous to the wealth of a people, but instead represents an amount of wealth taken from the people for use by the state.
The state may seek to increase the number of productive laborers, or increase the productivity of those already employed - but as shown previously, this is generally accomplished by increasing the capital invested in production. Also as shown previously, the need to produce is driven by the need to consume, which can be done only to the extent of the income earned by citizens.
The chief means by which government generates revenue is taxation, which undermines the wealth of the nation in both regards. The tax extracted from producers is not put to productive use in their operations, and the tax extracted from consumers is not used to purchase goods. Unless the government can put such funds to use in a manner more efficient than would the producers and consumers, taxation is a means to diminish, rather than increase, the wealth of a nation.
Smith goes into rather a long historical account of the economic conditions in England and other parts of Europe, the point of which seems to be that the prosperity of the people has waxed and waned over the centuries. There are evidence of past civilizations of significant wealth, and periods of significant poverty - and in many instances, the reason for decline has been poor government: the extravagance of the ruling class, and the significant amounts spent in warfare (a pursuit that is not only nonproductive, but often quite destructive), and the constant plague of legislation harmful to the progress of nations.