THE NATURE AND USE OF CAPITAL
The second book investigates the nature and employment of “capital stock,” which is the force that sets laborers at work and puts industry in motion. Smith holds that capital originates in saving, that its function is to maintain productive labor, and that it may be either fixed or circulating.
Unproductive labor, the reader should observe, is not useless labor; it may, indeed, be very useful〖See “The Wealth of Nations,” H. C., X, 258, 259.〗; but it does not produce any durable material product, and for that reason Smith does not consider it productive. Parsimony, or saving, leads to an increase of the capital available for the employment of productive labor; while spending consumes funds which otherwise might have been given such employment.
Private frugality, due to the desire to better one’s condition, is the cause of the growth of capital and the increase of national opulence; while government can do nothing more than protect the individual and allow him liberty to act in the manner he finds most advantageous. Finally Smith considers the different employments of capital. Agriculture gives more employment to productive labor than manufactures, and both are superior, in this regard, to transportation and trade. Domestic trade gives more employment than foreign, and foreign trade gives more than the carrying trade.
All these employments are useful; but a country with insufficient capital to engage in all of them will increase in opulence most rapidly if it employs its capital in agriculture first of all, then engages in manufactures and the home trade, and refrains from entering upon foreign commerce and the carrying trade until the natural increase of capital makes such a course advantageous. If governments merely withhold their hands, this is the course that industrial development will actually follow under the free play of individual self-interest. Smith’s argument at this point is exceedingly important, for it lays the foundation for his doctrine of freedom of trade.