Adam Smith's Simplified Wealth of Nations, Book 2, Chapter 1: Division of Stock
Chapter 1a: The Division of Stock
1 When a man's stock can only maintain him for a few weeks, he seldom thinks of deriving any revenue from it.
He consumes it as sparingly as he can.
He tries to acquire new supplies before it is consumed altogether.
In this case, his revenue is derived from his labour only.
This is the state of most of the labouring poor in all countries.
2 But when he has stock sufficient to maintain him for months or years, he tries to derive a revenue from it.
He reserves some for his immediate consumption until this revenue begins to come in.
His whole stock is distinguished into two parts:
Capital - the stock that gives him this revenue
Stock for immediate consumption- consisting of:
A part of his original stock reserved for immediate consumption
The stock that becomes his revenue
Stock which has not yet been consumed (clothes, furniture, etc.)
The stock for immediate consumption can be a mix of those three.
3 Capital may yield a revenue or profit to its employer in two ways:
4 It may be employed in raising, manufacturing, or buying goods and selling them again with a profit.
The capital employed this way yields no revenue or profit to its employer while it:
remains in his possession or
continues in the same shape
A merchant's goods yield him no revenue or profit until he sells them for money.
The money yields him as little until it is again exchanged for goods.
His capital is continually going from him in one shape and returning to him in another.
Only such successive exchanges or circulation can yield him any profit.
Such capitals are 'circulating capitals'.
5 It may be employed to yield a revenue or profit without changing masters or circulating any further, such as:
the purchase of useful machines and instruments of trade
Such capitals are 'fixed capitals'.6"Different occupations require very different proportions between the fixed and circulating capitals employed in them."7 A merchant's capital is a circulating capital.
He uses no machines or instruments of trade other than his shop or warehouse.
8 Some of the capital of every master artificer or manufacturer must be fixed in the tools of his trade.
This part may be very small in some while very great in others.
A tailor only requires needles as his tools.
A shoemaker needs more expensive tools.
A weaver needs more expensive tools than a shoemaker.
However, most of the capital of all such artificers is circulated in:
the wages of their workers, or
the price of their materials
They are repaid with a profit by the price of the work.
9 In other works, more fixed capital is required.
In a big iron-work, for example, the furnace, forge, and slit-mill are very expensive instruments.
In coal-works and mines, the machinery for drawing out the water is still more expensive.
10 A farmer's instruments of agriculture is a fixed capital.
He makes a profit from his instruments by keeping them.
The wages and maintenance of his labouring servants are a circulating capital.
He profits from wages by by parting with it.
The price of his labouring cattle is a fixed capital.
The farmer profits by keeping them.
The maintenance of his cattle is a circulating capital.
He profits by parting with their maintenance.
Cattle, which are sold and not used for labour, are a circulating capital.
The farmer profits by parting with them.
A flock of sheep or a herd of cattle used for wool and milk is a fixed capital.
Profits are made by keeping and increasing them.
Their maintenance is a circulating capital.
The profit is made by parting with it.
It comes back with:
its own profit and
the profit from the whole price of the cattle, wool, and milk.
The whole value of the seed is a fixed capital.
It never changes masters even if it is planted in the ground and harvested into the granary.
It does not circulate.
The farmer profits by its increase, not by its sale.