Adam Smith's Simplified Wealth of Nations, Book 2, Chapter 2a: The Net Revenue of Society
Chapter 2a: Money as Part of the General Stock of Society
(the Cost of Maintaining the National Capital)
1 Book 1 showed that the price of most commodities is made up of wages, profits, and rent.
There are some commodities which has a price made up of wages and profits only.
There are very few in which it consists in wages only.
The price of every commodity resolves itself into some one, or other, or all of these three parts.
If it goes neither to rent nor wages, then it goes to somebody's profit.
2This is the case for every commodity taken both separately and complexly.
The whole exchangeable value of that annual produce must resolve itself into the same three parts.
It must be parceled out among the people either as wages, profits, or rent.
3The total annual produce of a country is divided as a revenue to its inhabitants.
The total revenue of all its inhabitants can be be divided into a gross revenue and net revenue, just like the gross rent, net rent, and total rent of a private farm.
4 The gross rent of a private farm is paid by the farmer.
The net rent is what remains free to the landlord, after deducting the expences in management, repairs, etc.
The net rent is what the landlord can spend or use as his stock for immediate consumption.
His real wealth is in proportion to his net rent, not his gross rent.
[Net Rent + Expences (management, repairs, etc) = Gross Rent] (paid by the farmer to the landlord)
The Net Revenue of Society
5The gross revenue of everyone in a country makes up their total national annual produce.
The net revenue is what remains free to them after deducting the expence of maintaining their:
The net revenue is their stock which they can reserve for their immediate consumption or spend on their subsistence, conveniencies, and amusements, without encroaching on their capital.
Their real wealth is in proportion to their net revenue, not to their gross revenue.
6 The whole expence of maintaining the fixed capital must be excluded from the net revenue of society.
The following cannot be part of the society's net revenue:
the materials for supporting society's:
instruments of trade
the products and services needed to make those materials which support fixed capital.
The wages paid to create those materials may make a part of the society's net revenue if the workers spend all their wages on consumption.
But in other kinds of labour, the wages and the produce both go to consumption.
The wages go to the workers' consumption.
The produce go to the consumption of other people, whose subsistence, conveniences, and amusements, are increased.
7 The intention of the fixed capital is to increase productivity.
The same number of labourers and labouring cattle will raise more produce in an improved farm with the necessary buildings, fences, drains, communications, etc. than in an unimproved farm.
In manufactures, the same number of workers assisted with the best machinery, will work up more goods than those with imperfect ones.
The cost of any fixed capital is always repaid with great profit.
This cost increases the annual produce to more than what is needed to support such improvements.
However, this support still requires a certain portion of that produce.
The increase in productivity diverts a certain amount of labour and materials to another advantageous employment.
This is why all such improvements in mechanics are always regarded as advantageous to society.
A certain amount of materials and labour previously used to support complex and expensive machinery, can now be used to increase the amount of work which that machine is useful for.
Let us say that an undertaker of a big factory employs 1,000 workers a year to maintain his machinery.
If he can reduce this expence to 500, he will naturally employ the other 500 in buying more materials to be processed by more workers.
The amount of that work will naturally increase, providing more advantage and convenience for society.
8 The expence of maintaining the fixed capital in a country may be compared to the repairs in a private farm.
The expence of repairs may be needed to support the farm's produce and the gross and net rent for the landlord.
When the expenses can be reduced without reducing the produce, the gross rent remains same and the net rent is increased.
9The cost of maintaining the fixed capital is excluded from the society's net revenue.
The cost of maintaining the circulating capital is included in the society's net revenue.
The last three parts of circulating capital are provisions, materials, and finished work.
These are regularly withdrawn and placed:
in the fixed capital, or
in the stock reserved for society's immediate consumption.
The circulating capital employed in maintaining fixed capital, all goes to the stock for immediate consumption.
It makes a part of the society's net revenue.
The maintenance of provisions, materials, and finished work does not withdraw the annual produce from the society's net revenue, besides what is necessary for maintaining the fixed capital.
10 The society's circulating capital in this respect is different from an individual's circulating capital.
An individual's circulating capital is totally excluded from his net revenue.
His net revenue must all consist in his profits.
Every individual's circulating capital makes a part of his society's total circulating capital.
But it is not totally excluded from making a part of his society's net revenue.
A merchant must not consume all of the goods that he himself sells.
But they may be consumed by other people who pay for them, with profits, without reducing their capital or that of the merchant.
11Therefore, money is the only part of the society's circulating capital, of which the maintenance can reduce their net revenue.
12 The fixed capital, and that circulating capital called money, are very similar to one another in affecting the society's revenue.
13 Those machines and tools of trade, etc. require expences to build and support them.
Those expenses are deductions from the society's net revenue.
The stock of money which circulates in any country must require a certain expence:
to collect it, and
to support it.
Both expenses make a part of the society's gross revenue and are deductions from its net revenue.
Some gold and silver and labour is employed to support that great but expensive instrument of commerce, instead of increasing the stock reserved for immediate consumption.
Money allows everyone to have their subsistence, conveniencies, and amusements regularly distributed to them.
14 The machines, instruments of a trade, etc., which make up the fixed capital of an individual or a society make no part either of their gross or net revenue.
The money which circulates the society's whole revenue among its members makes no part of that revenue.
The great wheel of circulation is different from the goods which are circulated through it.
The society's revenue is in those goods, not in the wheel that circulates them.
In computing any society's gross or net revenue, we must always deduct the whole value of money from the whole annual circulation of money and goods.
The value of money can never make a part of the society's gross or net revenue.
15Only the ambiguity of language makes this proposition doubtful or paradoxical.
It is self-evident when properly understood.
16 When we talk of a sum of money, we sometimes only mean the metal pieces it is made of.
Sometimes we include in our meaning some obscure reference to the purchasing power it conveys.
This power is the goods which can be bought with it.
When we say that England's circulating money is £18 million, we only mean the amount of metal pieces which circulate in England.
But when we say that a man is worth £50-100 a year, we mean:
the amount of the metal pieces annually paid to him, and
the value of the goods he can annually buy.
We mean to estimate his way of living.
His way of living is the quantity and quality of the necessaries and conveniencies he can have.
17When we combine the two meanings ambiguously into the word 'money', or when we mean the amount of the metal pieces and some obscure reference to the goods which can be bought by that money, the wealth or revenue is equal only to one of the two amounts.
It is equal to the amount of goods which can be bought, not to the amount of those metal pieces.
It is equal to the money's worth, not the money.
[Translator's Note: The amount is money is objective, the money's worth is subjective]
18 Thus, if a guinea be one's weekly pension, he can buy a certain amount of goods and services worth a guinea with his pension.
His real weekly revenue is determined by the things he can buy with a guinea.
His weekly revenue is certainly not equal both to the guinea and to what can be bought with the guinea.
His weekly revenue is equal to the guinea's worth, not to the actual guinea.
19 If his pension were paid in a weekly paper bill for a guinea, his revenue would depend on what he could get for the paper and surely not the paper itself.
The bill will then be considered by all the tradesmen as worth the necessaries and conveniencies worth a guinea.
The person's revenue would not consist in paper guinea or gold guinea, but in what he can get for it.
If it could be exchanged for nothing, the paper bill would be like a bill upon a bankrupt and be worthless.
20 Though the weekly or yearly revenue of all a country's inhabitants is paid in money, their real riches must always be in proportion to the amount of consumable goods which they can buy with this money.
The whole revenue of all of them taken together is not equal to both the money and the consumable goods.
It is only only equal to the consumable goods and not the money.
21 We frequently express a person's revenue by the metal pieces paid to him because the amount of those pieces regulates his purchasing power, or the value of the goods which he can afford to consume.
We still consider his revenue as consisting in this power of purchasing or consuming, and not in the pieces which convey it.
22An individual's purchasing power is similar to the society's purchasing power.
The amount of the metal pieces annually paid to an individual, is often precisely equal to his revenue.
It is thus the shortest and best expression of its value.
"But the amount of the metal pieces which circulate in a society can never be equal to the revenue of all its members."
The same physical guinea may pay the weekly pension of one man today, another man tomorrow, and a third the day after.
The amount of the metal pieces which circulate in any country must always be of much less value than the worth of that money.
But the power of purchasing or the goods which can be bought with that money, must always be the same value with that money.
The revenue of those who receive that money must be of the same value with the money they receive.
That revenue consists in the power of purchasing or the goods which can be bought.
It cannot consist in those metal pieces of which the amount is so much inferior to its value.
23 Physical money is the great wheel of circulation and the great instrument of commerce.
Like all instruments of trade, it makes no part of the revenue of the society where it belongs.
Physical money makes no part of the revenue, even though it distributes to every man the revenue which belongs to him.
24 Every saving in the cost of collecting and supporting money (circulating capital) is an improvement exactly of the same kind as every saving and cost-reduction in the building and supporting of machines and the tools of trade (fixed capital), as long as the savings do not reduce labour productivity.
Both savings are an improvement of the society's net revenue.
25Reducing the expences of supporting the fixed capital improves the society's net revenue.
The undertaker's whole capital is divided between his fixed and circulating capital.
The smaller the one part, the greater must be the other.
The circulating capital furnishes the materials and wages of labour.
It puts industry into motion.
Every reduction in the cost of maintaining the fixed capital, which does not reduce productivity, must increase the fund which mobilizes industry.
The reduction in the cost increases the society's real revenue.
26 The substitution of gold and silver money with paper, replaces a very expensive instrument of commerce with one much less costly.
It is sometimes equally convenient.
Circulation is carried on by a new wheel.
This new wheel costs less to build and maintain.
But it is not obvious how this new wheel increases the gross or net revenue of society.