6 - The Role of Capital in the Progress of Opulence: The Analysis of Book II of The Wealth of Nations

Summary

ON THE CENTRALITY OF CAPITAL TO THE PROGRESS OF OPULENCE

Capital is a central concept, maybe the central concept, in Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nations.

• “[T]he whole annual produce [of a nation], if we except the spontaneous productions of the earth … [is] the effect of productive labour” (WN, 332).

• The share of a nation's accumulation that is used as capital is directly related to the proportion of its labor that is productive and to the productivity of that labor.

• An increase in accumulation allocated to capital expands the productive labor of a nation and/or increases its productivity.

• Thus, it is the growth of capital that fuels the progress of opulence in Smith's representation of The Nature and Causes of the Wealth of Nations.

Now we turn our attention directly to capital and the role it plays in the progress of opulence, the analysis Smith presents in Book II of his Wealth of Nations.

HOW CAPITAL FUELS THE PROGRESS OF OPULENCE

In the early days of the rude state of society, an individual accumulates to smooth the pattern of his own consumption. “He seldom thinks of deriving any revenue from it” (WN, 279). With time, however, a person's stock can grow beyond the level necessary to cover any contingencies in life. When that occurs, “he naturally endeavours to derive a revenue from the greater part of it… .” (WN, 279). At that point,

[h]is whole stock … is distinguished into two parts. That part which, he expects, is to afford him … revenue, is called his capital. […]