In other words, a man's total stock or capital-wealth may be divided into the part which he invests in a business intended to bring in a money return and the part which he retains for his own use, and Adam Smith chooses to call only the first of these two parts his 'capital.' The stock of John Brown, baker, is the whole of John Brown's possessions other than land, but his 'capital' is only that part of his possessions which is employed in the bakery business. Now even as regards the individual, this definition of capital gives us rather an unsatisfactory and useless entity. In the first place, it is neither customary nor convenient to exclude land from the capital of an individual or company. A factoryowner includes in the sum of money at which he reckons his capital the cost or value of the land he has bought for his business; and it would puzzle any one to exclude land from the capital of a railway or dock company. In the second place, so long as an individual derives a benefit from the possession of his stock, it is of little importance whether he receives that benefit directly or first receives money which he exchanges for it. According to Adam Smith, if a man goes to live in his own house, which is worth £2000, instead of continuing to let it for £120 a year and hiring some other person's house for £120 a year, he thereby reduces his capital by £2000. If this is so, all that can be said is that the magnitude of a man's capital is not of much importance.

Not content with having made a somewhat trivial distinction in the case of the individual, Adam Smith, according to his usual practice of reasoning from the individual to the community, endeavoured to apply it, with but slight modification, to the case of the nation.

Before doing so, however, he divided an individual's capital into two parts: (1) circulating capital,' and (2) 'fixed capital.' These terms were probably used in his time in the ordinary conversation of men of business very much as they are to-day, an individual's fixed capital being the amount of money he has invested in buildings, stationary machines, and other immovable instruments of trade, and his circulating capital being the portion of his capital which he is in the habit of laying out at regular intervals in the form of money, with the expectation of seeing it come round again to him in the same

form. But when the words are used in this sense there is obviously a good deal of capital which is neither fixed nor circulating. No one who had kept himself free from the infection of political economy would classify a carrier's cart as either fixed or circulating capital.1 So in some trades the terms might convey a useful meaning, and might between them exhaust the whole of the capital; in others they would not be applicable. The efforts of Adam Smith and his followers were directed towards finding definitions of the terms which would give them a precise meaning and make them cover all kinds of capital.

Adam Smith makes the distinction turn on the question whether the individual obtains his profit on the capital by keeping and using or by selling the articles of which it is composed :

'There are,' he says, 'two different ways in which a capital may be employed so as to yield a revenue or profit to its employer.

'First, It may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit. . . .

...

'Secondly, It may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in such like things as yield a revenue or profit without changing masters or circulating any further.' 2

If employed in the first way it is a circulating, and if employed the second way it is a fixed, capital. Adam Smith proceeds to observe that different occupations require very different proportionate amounts of fixed and circulating capital. The capital of a merchant,' he assures us, 'is altogether a circulating capital. He has occasion for no machines or instruments of trade unless his shop or warehouse be considered as such,' and why not? The needles of a master tailor are, it seems, his fixed capital; but the far greater part of the capital of all such master artificers' as tailors, shoemakers, weavers, 'is circulated either in the wages of their workmen or in the price of their materials, and repaid with a profit by the price of the work.'

'That part of the capital of the farmer which is employed in the

1 Malthus, Political Economy, p. 263, speaks of horses as 'fixed capital.' 2 P. 120 a.

instruments of agriculture is a fixed, that which is employed in the wages and maintenance of his labouring servants is a circulating, capital. He makes a profit of the one by keeping it in his own possession, and of the other by parting with it. The price or value of his labouring cattle is a fixed capital in the same manner as that of the instruments of husbandry; their maintenance is a circulating capital in the same manner as that of the labouring servants. The farmer makes his profit by keeping the labouring cattle, and by parting with their maintenance. Both the price and the maintenance of the cattle which are bought in and fattened, not for labour but for sale, are a circulating capital. The farmer makes his profit by parting with them. A flock of sheep or a herd of cattle that in a breeding country is bought in neither for labour nor for sale, but in order to make a profit by their wool, by their milk, and by their increase, is a fixed capital. The profit is made by keeping them. Their maintenance is a circulating capital. The profit is made by parting with it, and it comes back with both its own profit and the profit on the whole price of the cattle, in the price of the wool, the milk, and the increase. The whole value of the seed, too, is properly a fixed capital. Though it goes backwards and forwards between the ground and the granary, it never changes masters, and therefore does not properly circulate. The farmer makes his profit not by its sale but by its increase.'1

This is exceedingly, not to say excessively, ingenious. The cost or value of your fruit-tree is fixed capital, because you only sell the fruit and not the tree itself; but the cost or value of your growing corn, or so much of it as will not be kept for seed, is circulating capital, because you sell the stalk or straw as well as the fruit or grain. If you reserve part of your grain for seed, the value of this part is fixed capital; but if, for any reason, you sell the whole of your grain, and buy your seed from some one else, the value of the whole of your grain is circulating capital.

It is curious to notice how Adam Smith, in his account of the capital of an individual, wavers between the conception of the capital as a sum of money 'employed,' as he calls it, or 'invested,' as we should call it, in the purchase of some commodity, and the conception of the capital as the commodity itself. The capital is employed in raising, manufacturing, or purchasing goods, and selling them again with a profit,'

1 Pp. 120 b, 121 a.

or 'in the improvement of land, in the purchase of useful machines and instruments of trade'; it is fixed in the instruments' of a master artificer's trade; it is 'the price or value' of a farmer's labouring cattle and 'the value of the seed' which he uses; in all these cases the capital is a sum of money laid out. In other cases it is the articles obtained by means of this money: 'the goods of the merchant' are his circulating capital, and 'a flock of sheep or a herd of cattle' is a part of the farmer's capital. The first conception -that in which the capital appears to be a sum of moneyis, of course, the popular one; in ordinary conversation, if the question be asked, 'What is the capital of such and such an individual or company?' every one expects the answer to be, 'So many thousand or so many million pounds.' The capital of an individual is the number of pounds his property is supposed to be worth; the capital of a company is the sum of money which has been nominally, but not necessarily actually, invested in the business by the shareholders. The second conception, that in which the capital appears as the actual property possessed by the individual, is the more appropriate to the purposes of economic inquiry, and when Adam Smith proceeds to consider the capital of the community he keeps it very steadily before him.

In discussing the division of the stock of a community Adam Smith does not, as in the case of the individual, first divide it into the reserve for consumption and the capital, and then subdivide the capital into the fixed and the circulating capital, but divides the whole stock at once into three portions: (i.) the reserve for consumption, (ii.) the fixed capital, and (iii.) the circulating capital.1

(i.) The reserve for consumption consists of the 'stock of food, clothes, household furniture, etc., which have been purchased by their proper consumers, but which are not yet entirely consumed,' and also of the whole stock of mere dwelling-houses' subsisting at any one time.'

(ii.) The fixed capital consists chiefly of (1) 'useful machines and instruments of trade'; (2) 'profitable buildings which are the means of procuring a revenue, not only to their proprietor

1 P. 121 a.

who lets them for a rent, but to the person who possesses them and pays that rent for them'; (3) 'improvements of land'; and (4) the acquired and useful abilities of all the inhabitants or members of the society.'

(iii) The circulating capital consists of (1) money; (2) provisions in the possession of sellers; (3) materials and unfinished goods in the possession of makers; and (4) finished goods in the possession of makers, merchants, or retailers. 1

Adam Smith had begun by assuming that prima facie, or as he expresses it, 'naturally,' the community's stock might be expected to divide itself into the same three portions as an individual's stock, each part doubtless consisting of the sum of the corresponding parts of individual's capitals. The characteristic of the first part is, he says, that it affords no revenue or profit, the characteristic of the second part is that it affords a revenue without circulating or changing masters, and the characteristic of the third part is that it affords a revenue only by circulating or changing masters. Now, as regards the community, the distinction between stock which brings in a revenue in money to its owner, and stock which brings in immediate benefits, is even more trivial than it is as regards the individual. There may be some slight reason for distinguishing the stock of John Brown, baker, into stock invested in the bakery business and other stock, since, in all probability, the stock invested in the business is the only part of which John Brown keeps any accurate accounts; the rest of the stock will be cared for on rule of thumb principles by Mrs. Brown. But to the community in general the distinction can in itself be of no importance. Whether a thing brings in a money revenue to its owner or not, depends on the prevalence of exchange. Thus, where people live in their own houses and bake their own bread, ovens bring in no money revenue to their owners; when division of labour and exchange is carried so far that people buy their bread from a baker, some ovens begin to yield a money revenue. The advantage which the community obtains from the possession of ovens, is of exactly the same nature as before. Having some inkling of this, Adam Smith, while he says that the

1 Pp. 121, 122.