The Wealth of Nations 18
Book 2 Chapter 5
Of The Different Employments Of Capital
Putting Capital To Its Proper Use
“Though all capitals are destined for the maintenance of productive labour only, (otherwise it is charity, waste and not investment) yet the quantity of that labour which equals capitals are capable of putting into motion, varies extremely according to the diversity of their employment; as does likewise the value which that employment adds to the annual produce of the land and labour of the country.”
This is just plain fun. We are figuring out where capital is best applied in order to generate the greatest wealth for the nation.
Four (4) Ways To Employ Capital
There are four ways to employ capital.
1. Raw material production including agriculture and mining/drilling
2. Manufacturing with the raw materials
3. Transportation or logistics associated with moving manufactured goods or raw materials
4. Wholesale to retail sales and trade
Smith states, “Each of those four methods of employing capital is essentially necessary, either to the existence or extension of the other three, or to the general conveniency of the society.”
So, which one of these adds the greatest wealth to a nation?
Answering The Question
Plain and simple, raw material production including agriculture is the basis for wealth generation and is fundamentally sound as a wealth generator. In Adam Smith’s day, there was no microchip or computing power to facilitate the knowledge economy.
However, all of the information and knowledge zipping around the internet and contained on all the hard drives in the world all supposedly go to the same end, helping to make the system better or more efficient. Better or more efficient to do what?
The answer is to meet the basic needs of the people with food, goods and services.
Keep in mind, everything stops if there is no food.
Great quantities of money can be made trading mysteriously backed instruments like derivatives. But does this really add wealth to the nation or just shift it around rewarding the puzzle masters with more and more fiat fluff?
Also Very Important
In addition to the core essential of a nation feeding itself, comes the ability of the marketplace to distribute and sell the products in a way that is useful to the consumers. Thus, retail and wholesale sales channels are essential to building national wealth.
Also keep in mind, nothing happens in economics until you get the order.
Important, But Variable
Manufacturing is important, if and only if it is conducted in the nation. Manufacturing is not bound, however to any on particular piece of ground. Goods are made all over the world and sold all over the world depending on the needs of the market.
So, if manufacturing is occurring at home, it is a wealth builder.
Finally, logistics and shipping is important but can be managed from a distance and changes rapidly. Without reliable logistics, wealth is impossible to build. Yet, logistics comes in last in the wealth building beauty contest.
What Does This Mean According To Smith?
To gauge the future wealth potential of a nation look at the effectiveness of raw material and agriculture, retail/wholesale distribution and how much of the goods are produced at home in that order.
1. Agriculture/Raw Material Production 2. Retail Sales
The goods will always find a way to move.
What do you think? Does this still apply?
God Bless You and God Bless America!
