48 pages • 1 hour read
Adam SmithThe Wealth of Nations. The Theory of Moral Sentiments
Nonfiction | Book | Adult | Published in 1776A modern alternative to SparkNotes and CliffsNotes, SuperSummary offers high-quality Study Guides with detailed chapter summaries and analysis of major themes, characters, and more.
Book 2Chapter Summaries & Analyses
Book 2: “On the Nature, Accumulation, and Employment of Stock”
Book 2, Introduction Summary
Book 2 addresses stock. Smith uses the term “stock” in reference to assets used either for consumption or from which to earn a profit. Smith explains that the amount of industry, and consequently wealth generated by a nation, increases with the amount of stock employed by that nation in commerce. With it, the quantity of labor also increases. By this, Smith means that as stock increases, society progresses. In advanced economies, much of people’s needs are supplied through voluntary exchange with others, rather than solely through their own efforts. Before this division of labor occurs, capital must be accumulated. The growth of capital promotes specialization, which creates larger surpluses to be reinvested, which in turn creates further specialization and growth.
Book 2, Chapter 1 Summary: “Of the Division of Stock”
There are two kinds of stock: stock for immediate consumption consists of food, clothing, lodging, furniture, and other necessities for living; capital stock consists of two kinds—fixed capital and circulating capital.
Fixed capital remains with its owner and consists of land, buildings, tools, machines, and other instruments of trade. Circulating capital does not remain with its owner, and consists of wages and inventory, among others. Most trades and nations utilize both types of capital. Stock used for immediate consumption, while necessary, provides no societal benefit, as it does not grow the wealth of a society. Capital stock is always more productive.
Book 2, Chapter 2 Summary: “Of Money, Considered as a Particular Branch of the General Stock of the Society, or of the Expense of Maintaining the National Capital, or of Productive and Unproductive Labour”
Smith distinguishes between gross and neat rent, which can be likened to gross and net in modern terminology. Smith’s proposal is that wealth should be calculated after deducting costs, not from the gross total. It is like the distinction between revenue and profit in a business.
Smith explains that money itself has no intrinsic value and is not a part of a nation’s revenue, but is rather a tool that permits commerce by facilitating the distribution of revenue. The cost of maintaining monetary supply actually detracts from a nation’s revenue. Because of this, Smith favors paper money to metal coins because paper money is less expensive. However, Smith notes that paper money has the drawback of permitting banks and merchants to overextend themselves.
The concept of paper money possessing no intrinsic value is important to Smith’s assertion that wealth is comprised of neat rent, rather than gross rent. By subtracting the cost of producing money from gross rent and thus excluding it from a nation’s wealth, such assertion illustrates clearly that money is not a source of societal wealth. Commodities and labor are the sources of a nation’s wealth. Money is simply a useful tool to facilitate commerce.
Book 2, Chapter 3 Summary: “Of the Accumulation of Capital, or of Productive and Unproductive Labour”
Productive labor adds to the value of the materials on which the labor works. Unproductive labor adds no value; it is consumed immediately. Smith explains that productive labor is that of a manufacturer, while unproductive labor is that of a menial servant, but also includes any other work that produces no commodities, including singers and surgeons. Productive labor replaces capital by producing goods for trade. Unproductive labor is maintained by the revenue generated through productive labor.
Unproductive labor has value and must be maintained by the revenue generated through productive labor for the benefit of society. Smith states:
The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value, and does not fix or realize itself in any permanent subject, or vendible commodity, which endures after that labour is past, and for which an equal quantity of labour could afterwards be procured (106).
By his own definition, Smith was an unproductive laborer. The distinction is simply that unproductive labor produces no value in itself.
Book 2, Chapter 4 Summary: “Of Stock Lent at Interest”
Smith describes interest as a rent paid for the use of lent capital over time. A lender expects their capital to be returned at some point, but until it is returned, they collect a rent on it in the form of interest, as compensation for lending the capital. Smith explains that, “The borrower may use it either as a capital, or as a stock reserved for immediate consumption” (112). If the loan is used for immediate consumption, the borrower has no means to repay the interest and the loan to the lender. Therefore, Smith reasons that lent capital must be employed on productive labour, which will reproduce the value of the loan, repay interest, and allow a profit.
Smith describes interest as a rent paid to lenders by borrowers, for the use of their capital. What the borrower desires is not the money, but rather what the money will purchase. When a nation has more capital available, borrowers can command a lower interest rate. This borrowed capital will boost productivity and raise wages. A dearth of capital will have the opposite effect, raising interest rates, reducing productivity, and reducing wages.
Smith concludes the chapter by arguing that if interest rates are set too low or interest rates are banned altogether, interest will simply be charged at illegally high rates. Smith does not advocate abolishing a maximum interest rate, but does condone allowing interest rates to be set naturally by free markets. In Smith’s endorsement of a maximum interest rate, he is attempting to protect the national economy from irresponsible borrowers, not attempting to protect irresponsible borrowers from predatory lenders. Smith believes that unreasonably high interest rates will discourage level-headed businesspeople from borrowing, leaving only irresponsible borrowers who will fail to repay their loans, thereby injuring the national economy.
Book 2, Chapter 5 Summary: “Of the Different Employments of Capitals”
Capital can be used in four different ways:
· capital can yield raw produce for immediate consumption;
· capital can prepare raw materials for consumption;
· capital can transport products to market;
· capital can divide goods into smaller amounts for retailing.
Capital utilized in agriculture is the most productive because nature assists in realizing the product of labour. Smith distinguishes between the home trade, the foreign trade of consumption, and the carrying trade. The home trade is domestic trade, the foreign trade of consumption is importing, and the carrying trade is exporting. Smith concludes that economic progress is the result of nations producing a surplus—some amount more than they can consume, to trade with other nations.
Countries are advantaged by foreign trade and disadvantaged by restricting such trade. Of the three trades Smith outlines, he views the home trade most positively because it encourages domestic labor, and the carrying trade most disfavorably because it supports the industry of foreign countries rather than that of a merchant’s homeland. Smith believes that a nation should first fully satisfy its home trade, then, when there is a surplus, next satisfy its foreign trade of consumption, then, once there is a surplus, apply itself to the carrying trade. Smith argues that this will occur naturally in a nation free from trade restrictions.
