2.5 The Different Employment of Capital
The quantity and diversity of capital exceeds society's ability and inventiveness in putting it to productive use. Thus capital, in and of itself, is of less interest in the ways in which it may be used. To that end, there are four different ways that capital can be used:
- Procuring "rude produce" (that which can be consumed in its raw state, or supplied for the second use) for the use and consumption of a society. This is the function of farms, mines, quarries, and the like.
- Preparing "rude produce" to make it more suitable for use or consumption. This is the function of craftsmen and manufacturers.
- Transporting materials and finished goods to the place where they are wanted. This is the function of logistics and wholesale.
- Parceling large quantities of goods into smaller portions that are better suited to the demands of those who want them. This is the function of retail merchants.
All four of these functions are necessary to the availability of usable goods to those who would make use of them. And all four of these functions might be attended by a single individual, but specialization of labor creates greater efficiency and allows each worker to focus on the specific task at which he is most adept.
Smith reconsiders his notion of "productive labor" to encompass all four of these functions. By his earlier definition, a sailor would not be considered to be a productive worker, as his effort does not lead to the creation a good, but in light of the third function, his effort makes a good available to a consumer, and is thus his contribution as necessary to the ability of the consumer to have a good as the person who manufactures it.
Production of Rude Produce
The production of raw materials is necessary to the wealth of society, in a fairly self-evident way: were no materials harvested, there would be nothing to manufacture, sell, or consume.
The capital of the farmer, woodsman, and miner is invested primarily in land, though the more common practice is for these to rent individuals to rent the land. Very little equipment is necessary to any of these trades.
In Smith's time, the majority of labor was employed in the agricultural industry, much labor being necessary to the various tasks necessary to prepare the soil, sow a crop, maintain the growing plants, and harvest their bounty. It is a misperception to assume that food crops grow as naturally as any other foliage - it requires considerable and constant labor.
The operations of producers are land-locked for a majority of the time. While the farmer can sell his fields and purchase fields elsewhere, he cannot move the crops that are in the process of growing, and even if he moves his operations after the harvest of one crop and prior to the planting of another, there is considerable risk and expense in doing so.
Manufacturing
Manufacturing of goods is necessary to the wealth of society, in that few commodities are at all consumable in the state in which they are harvested. Even an agricultural product such as wheat must be milled to flour and baked to bread before it can be consumed.
The capital of the manufacturer is largely invested in his facilities: the workshop, equipment, and machinery. It is also invested in raw materials, work in progress, and an inventory of finished goods. The proportion of investment in equipment and materials varies greatly by the nature of the goods he manufactures.
In terms of labor, manufacturing employs more individuals than wholesale or retail, but less in most instances than production of raw materials. (EN: This was true in Smith's time, but changed during the industrial revolution, where the output of fewer harvesters of raw materials gave rise to the employment of a greater number of factory-workers.)
While it is generally assumed that the facilities of manufacture must reside proximate to the source of raw materials, this is only for convenience of logistics (transport of materials from their source to the workshop), and it could be argued for the same reason that a manufacturer might choose to situate himself closer to the marketplace (to save on transport of goods from workshop to market). However, manufacturing can be done in any location. For example, the clothiers of Sicily to bring to their location cloth from distant locations (wool from Ireland, cotton from America, silk from China) and ship their goods to equally distant markets. It is also a relatively simple matter for a manufacturer to move their operations at any time.
Logistics and Wholesale
Logistics is necessary to the wealth of society, in that it moves goods from the locations where they are produced and manufactured to the places where they are consumed and stored until such time as they are needed.
The capital of the wholesaler is largely invested in the equipment of logistics: wagons and ships. To a lesser degree, he may need facilities such as warehouses for the storage of goods. In the strictest sense, the wholesaler takes ownership of no material goods - those goods in his possession are in transit among others, and remain the property of the producer, manufacturer, or retailer until they are transferred - though in a few instances, the wholesaler takes on a retail function, buying goods from one party for sale to another.
In terms of labor, the number of individuals employed by a wholesaler is generally somewhat less than a producer, about equal to a manufacturer, and less than a retailer of similar.
The operations of a wholesaler are the most transportable, his chief assets being the vehicles of transportation. If cotton is cheaper in India than America, he moves his ships from one to the other and is not locked by land or land-locked facilities to a specific location, as are those who serve all other functions described.
(EN: Smith overlooks the function of logistics in delivering merchandise from retailer to consumer, as I expect it was unusual in his time, but in later development, it became common for catalog and Internet sales to enable customers to purchase from remote retailers, necessitating the movement of merchandise from retail to consumer.)
Retail
Retail is necessary to the wealth of society, in that it parallels the functions of logistics (goods are brought to the consumer and stored until they are needed), but more significantly, in that the act of retail parcels large quantities of goods into smaller units, such as individual consumers need.
The capital of the retailer is largely invested in obtaining and replenishing a standing inventory of goods for sale. While some amount of facilities and equipment is necessary, it is negligible by comparison.
In terms of labor, very few workers are needed by the retailer. A small merchant can run his own shop, and even a larger merchant needs very few to assist him in proportion to the other functions.
However, of all the functions, only the retail function requires that the capitals employed are done within the location where the goods are consumed. For any other act, the business may be operated at any location, so long as the goods arrive at a retailer in the local market: cotton may be grown in India, woven to cloth in Spain, and loaded onto a Dutch ship for transportation to England - but the merchant who sells to the citizens of England must be located in England itself.
(EN: Smith overlooks the traveling merchant: rather than owning a shop in a fixed location, some merchants would operate a traveling store. This was likely practiced in Smith's time, for rare, small, and valuable goods, and the practice largely became extinct by the mid-twentieth century.)
Financial Services
(EN: The necessity of financial services is omitted entirely, but it would seem to me this is just as much a necessity as any other function, even in Smith's time. He previously mentioned the value of credit and banking as methods by which capital necessary to the various functions above can be had. While it could be argued that it is not a necessary function if the individuals who perform the other functions have sufficient capital, it would be akin to suggesting that logistics should be excluded if every farmer had a ship.)
Specialization of the Functions
In any given location, there may be conditions more suited to one particular function more so than the others. Geography determines the suitability of land to producing crops, and population density larger towns a more efficient location for manufacturers and retailers, for the availability of many laborers and many consumers.
This phenomenon, with the support of wholesaling and logistics, gives rise in the specialization in certain locations, and in certain nations, to specific industries ad, in turn, the exchange of goods between towns and nations.
Smith considers the specific case of America, which in his time progressed rapidly toward "wealth and greatness" due to the vast expanse of land: given that land was so widely available and at a far lower price than in Europe, it is only natural that the Americas have become the chief producer and exporter of raw goods to the developed (European) world.
Smith also asserts that it would make little sense for America to take on the manufacture of finished goods, as the nation has so few inhabitants as to necessitate the costly institution of slave labor to produce agricultural goods, and the diversion of its inhabitants to manufacturing would be a less efficient use of their time. "Were the Americans, either buy combination or by any other sort of violence, to stop the importation of European manufacturers ... they would obstruct rather than promoting the progress of their country toward real wealth and greatness."
(EN: The above passage has been used by some to ridicule and dismiss Smith- but given that the original edition of this book was published just prior to the American revolution, justified entirely by the desire of Americans to enter manufacturing, Smith's motivation in making such a statement is likely to have been fear of reprisal rather than the application of logic. To write or speak in favor manufacture in America was considered treasonous.)
Smith further asserts that China and India have long been great and wealthy nations, chiefly for their agriculture and manufacturing of goods that were shipped abroad for sales. They have for centuries drained the gold of Europe in exchange for spices and silk. Meanwhile, the English, Dutch, and Spanish have excelled in logistics, with great fleets of merchant vessels to carry the produce and manufactures among nations for trade.
However, most nations seek a balance of trade, such that the value of goods they import from abroad is equaled to the value of goods exported abroad. This is necessarily achieved by the exchange of value for value: while it is said that China and India have drained Europe of its gold, it is also true that Europe has drained China an India of the bounty of its lands. So in truth, neither has robbed the other of its resources, but given them in fair trade for items of equal value.
(EN: the source of dissatisfaction would seem to be in the way in which each nation has made use of the goods it received from the other. In the spice trade, the east has retained and safeguarded to gold it gained from Europe, whereas the Europeans have consumed or wasted the spices it purchased from abroad. It implies, and rightly so, that it is the prodigal behavior of Europeans, rather than any deceit of foreign suppliers, that has drained Europe of its metals.)
Another criticism of foreign trade is its inefficiency. Even if it is accepted that trade among nations is mutually beneficial, and that each receives equal value in the exchange, Smith suggests that there is a time-lag. Were an Englishman to buy shoes of a cobbler in his own town, the proceeds of sale are immediately used in the local economy, to employee workers and pay herdsmen for leather. If the same Englishman were to buy shoes manufactured in Italy, it takes greater time for the funds of purchase to travel back through the production chain to the cobbler in Italy, who hires more workers and buys more materials in his own local market. And while Italian consumers reciprocate by buying, in equal measure, some quantity of would produced in England, this too takes time for the profits of sale to reach the village in England where sheep are raised and their wool woven into cloth.
(EN: This is a peculiar analysis, and I wonder if it's ultimately of any value. True, that if you were to maker a specific good and a specific coin, you could track their travels over time, but on any given day and Englishman is buying Italian shoes and an Italian is buying English wool, and production in either country does not wait for the very same coin to travel back to their hands. Moreover, it's my sense that any objection to international trade is one of foolish and arbitrary prejudice - there would be no objection to trading wool for shoes if they were made in the same town, or in towns in the same nation, nor would it seem logical to suggest that people in a given location must locally manufacture all the goods needed within their community - in essence, this is to promote a return to tribalism.)
Conclusion
In spending money, it is the pursuit of one's own needs and desires that motivates a customer to procure any specific good. And in investing money, it is pursuit of one's own desire for profit that motivates a producer to produce any specific good, or to participate in any function of the productive trades. And it follows that, buy virtue of judgments, consumes choose to consume and producers to produce those specific items that best and most efficiently suit their needs. It is for no other reason that specific industries arise in any given location - and to attempt to compel consumption and production for any other reason is counter-productive.
In a money-economy, the profits of any line of business would seem to have no superiority over those of any other line of business, and as consumption provides the motive for production, it is the interest of society as a while to determine what goods need be manufactured for their use.
As a result of prudence and good judgment, men acquire "the most splendid fortunes" in a relatively short amount of time by the efficient production of goods desired by society. A farmer, merchant, or manufacturer can amass more wealth in a shorter period of time than the nobility of medieval Europe could obtain over the course of numerous generations.
And in all of the world, there exists so much good land that still remains cultivated, and even that which is cultivated can be improved in its capability to produce. This is so, even in Europe. It is the culture and the policy of different nations that give rise to the wealth that they are capable of generating with their own resources, a notion that will be considered in greater length in the following two books.