Literature Study GuidesThe Wealth Of NationsVolume 1 Book 2 Chapter 1 Summary

The Wealth of Nations | Study Guide

Adam Smith

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The Wealth of Nations | Volume 1, Book 2, Chapter 1 : Of the Division of Stock | Summary



This chapter sets forth some basic definitions, then supplies a few examples of each. A person's stock—the total assets at their disposal—can be divided into two parts. One part goes to "immediate consumption," which includes food, clothing, lodging, furniture, and other living expenses. The other part is called capital and may be further subdivided into fixed and circulating capitals. Fixed capital is defined as the capital expended in acquiring land, buildings, tools, machines, and other "instruments of trade." Circulating capital, in contrast, consists of wages, inventory purchased for resale, livestock feed, and other purchases with a shorter useful lifetime. Most trades, Smith points out, involve both types of capital. A cattle farmer, for instance, has fixed capital in the form of livestock and farm implements, but to get any profit out of the livestock, he also has to feed them and hire people to look after them (both circulating capital). Smith then applies this model of capital to society at large, outlining many different types of capital a population might possess.


Smith's definition of "immediate consumption" bears a little explaining. In modern speech, to consume something "immediately" suggests using it up all at once, with nothing left over—the way a person might, for example, consume food or drink, or the way a chemical reaction consumes reactants to yield a product. Smith, however, proceeds from a slightly broader and less intuitive definition in which durable goods are also "immediately consumed," in the sense that one begins to use them up as soon as they are acquired. Clothes, he points out, are good only for a certain number of uses before they are worn through, and even furniture will gradually lose its value—if not its physical integrity—over time (the modern term for this loss in value is depreciation). Despite the quirky terminology, the underlying concept is quite simple: every asset a person owns is either earmarked for turning a profit or set aside ("reserved") for some non-profit-earning use.

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