--- MAPPING: circulating capital-to-System-1 ---
# Circulating Capital -> System 1

## Economic Entity Reference

--- ENTITY: circulating capital ---

# Circulating Capital

## Definition

That portion of a society's capital which is continually being used up and replaced in the course of production and distribution. It consists of money, provisions, materials, and finished work that circulate among the different members of society, being used up and reproduced in a continuous cycle.

## Source Chapter

Book II, Chapter 2

## Context

Smith distinguishes circulating capital from fixed capital as part of his analysis of the components of a society's general stock. He explains how circulating capital differs from fixed capital in that it is continually withdrawn from circulation and replaced, while fixed capital remains in the society and only requires maintenance.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 1 ---

# System 1 (S1) — Operations

## Definition

The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).

## Key Properties

- Autonomy within constraints
- Self-organisation
- Direct engagement with the environment
- Primary value creation

---

## Mapping Rationale

Circulating capital directly performs the primary productive activities in Smith's economic system. It consists of the materials, provisions, and finished work that are actively being used up and replaced in the continuous cycle of production and distribution. This matches System 1's function as the operational units that directly create value through their primary activities. The continual use and replacement of circulating capital represents the ongoing operational processes that constitute the economy's core productive functions.

## Mapping Strength

Strong

---

--- MAPPING: fixed capital-to-System-1 ---
# Fixed Capital -> System 1

## Economic Entity Reference

--- ENTITY: fixed capital ---

# Fixed Capital

## Definition

That portion of a society's capital which provides permanent facilities for production and is not consumed in the process of production. It includes useful machines and instruments of trade, profitable buildings, and improvements to land that enable the same number of labourers to perform a much greater quantity of work.

## Source Chapter

Book II, Chapter 2

## Context

Smith introduces fixed capital as one of the two main components of a society's capital stock, distinguishing it from circulating capital. He explains how fixed capital increases the productive powers of labour by enabling more efficient production methods.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 1 ---

# System 1 (S1) — Operations

## Definition

The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).

## Key Properties

- Autonomy within constraints
- Self-organisation
- Direct engagement with the environment
- Primary value creation

---

## Mapping Rationale

Fixed capital represents the permanent facilities and instruments that directly enable production activities. Like System 1's operational units, fixed capital is directly engaged in the primary productive processes of the economy. It provides the infrastructure and tools that allow labour to perform work more efficiently, constituting the operational foundation of economic production. The productive power it provides is directly engaged in creating economic value.

## Mapping Strength

Strong

---

--- MAPPING: gross revenue-to-System-5 ---
# Gross Revenue -> System 5

## Economic Entity Reference

--- ENTITY: gross revenue ---

# Gross Revenue

## Definition

The total annual produce of a country's land and labour before deducting the expenses of maintaining both fixed and circulating capital. It represents the entire value of goods and services produced by a society in a given year.

## Source Chapter

Book II, Chapter 2

## Context

Smith introduces the concept of gross revenue as analogous to gross rent of a private estate, distinguishing it from neat revenue. He uses this distinction to explain how the maintenance of capital reduces the actual wealth available for consumption.

## Economic Domain

Distribution

---

## VSM Concept Reference

--- CONCEPT: System 5 ---

# System 5 (S5) — Policy / Identity

## Definition

The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.

## Key Properties

- Identity
- Ethos
- Supreme command
- Policy closure
- Balancing internal and external perspectives

---

## Mapping Rationale

Gross revenue represents the total economic output that defines the society's productive capacity and economic identity. As the complete measure of annual production, it serves as the fundamental metric by which the society's economic health and purpose are evaluated. This aligns with System 5's role in defining the identity and purpose of the organisation, providing the overarching measure by which economic success is judged and policy decisions are made.

## Mapping Strength

Moderate

---

--- MAPPING: neat revenue-to-System-5 ---
# Neat Revenue -> System 5

## Economic Entity Reference

--- ENTITY: neat revenue ---

# Neat Revenue

## Definition

The portion of a society's annual produce that remains free after deducting the expense of maintaining both fixed and circulating capital. It represents the actual wealth available for consumption and enjoyment by the society's members.

## Source Chapter

Book II, Chapter 2

## Context

Smith defines neat revenue as what remains free to a society after maintaining its capital, analogous to neat rent in private estates. He argues that a society's real wealth is in proportion to its neat revenue, not its gross revenue.

## Economic Domain

Distribution

---

## VSM Concept Reference

--- CONCEPT: System 5 ---

# System 5 (S5) — Policy / Identity

## Definition

The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.

## Key Properties

- Identity
- Ethos
- Supreme command
- Policy closure
- Balancing internal and external perspectives

---

## Mapping Rationale

Neat revenue represents the actual wealth available for consumption and enjoyment, serving as the true measure of a society's economic success and well-being. This aligns with System 5's function of defining the organisation's identity and purpose, as neat revenue represents the ultimate goal and measure of economic policy effectiveness. It provides the policy closure by determining what portion of production actually contributes to societal welfare.

## Mapping Strength

Moderate

---

--- MAPPING: paper money-to-System-2 ---
# Paper Money -> System 2

## Economic Entity Reference

--- ENTITY: paper money ---

# Paper Money

## Definition

Promissory notes issued by banks and bankers that serve as a substitute for gold and silver money in circulation. These notes are accepted as currency because of confidence that they can be exchanged for metal money on demand.

## Source Chapter

Book II, Chapter 2

## Context

Smith discusses paper money as a less expensive instrument of commerce that can replace gold and silver in circulation. He explains how paper money can reduce the expense of maintaining a country's circulating medium while still facilitating the same quantity of exchanges.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Paper money serves as a coordination mechanism that facilitates communication and exchange between different economic actors. By providing a common medium of exchange, it coordinates the activities of producers and consumers, dampens the oscillations that would occur with direct barter, and resolves conflicts in value determination. This matches System 2's function of coordinating between operational units and maintaining stable communication channels.

## Mapping Strength

Strong

---

--- MAPPING: promissory notes-to-System-2 ---
# Promissory Notes -> System 2

## Economic Entity Reference

--- ENTITY: promissory notes ---

# Promissory Notes

## Definition

Written promises by bankers to pay a specified sum of money on demand or at a future date. These notes circulate as money when the public has confidence in the banker's ability and willingness to honour them.

## Source Chapter

Book II, Chapter 2

## Context

Smith describes how promissory notes issued by reputable bankers can circulate as money, reducing the need for gold and silver. He explains the mechanism by which these notes facilitate trade while requiring less precious metal in circulation.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Promissory notes function as coordination instruments that enable trade and exchange between economic actors. They provide a standardized means of facilitating transactions, reducing the need for immediate physical exchange of precious metals, and coordinating economic activities across time and space. This coordination function aligns with System 2's role in providing communication channels and resolving conflicts between operational units.

## Mapping Strength

Strong

---

--- MAPPING: bank notes-to-System-2 ---
# Bank Notes -> System 2

## Economic Entity Reference

--- ENTITY: bank notes ---

# Bank Notes

## Definition

Paper currency issued by banks that circulates as money based on public confidence in the issuing institution. These notes are payable on demand and can replace gold and silver in many transactions.

## Source Chapter

Book II, Chapter 2

## Context

Smith discusses bank notes as the primary form of paper money, explaining how they can circulate at par with gold and silver when issued by reputable banks. He analyses their role in reducing the quantity of precious metals needed for circulation.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Bank notes serve as a coordination mechanism that standardizes and facilitates economic exchanges. They provide a common medium that coordinates transactions between different economic actors, reducing the complexity and oscillation that would occur with direct barter or precious metal exchange. This coordination function matches System 2's role in providing stable communication channels and resolving conflicts between operational units.

## Mapping Strength

Strong

---

--- MAPPING: cash accounts-to-System-2 ---
# Cash Accounts -> System 2

## Economic Entity Reference

--- ENTITY: cash accounts ---

# Cash Accounts

## Definition

Credit arrangements where banks allow merchants to borrow money up to a certain limit, repaying and re-borrowing as needed. This system provides merchants with access to capital without maintaining large cash reserves.

## Source Chapter

Book II, Chapter 2

## Context

Smith describes cash accounts as a Scottish banking innovation that allows merchants to operate with less idle capital. He explains how this system increases the efficiency of capital use and enables merchants to carry on larger trades.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Cash accounts coordinate the flow of capital between banks and merchants, providing a standardized mechanism for credit extension and repayment. This coordination reduces the oscillation in capital availability and resolves conflicts between the need for liquidity and the desire for productive investment. The system standardizes credit relationships and schedules repayments, matching System 2's coordination and dampening functions.

## Mapping Strength

Strong

---

--- MAPPING: bills of exchange-to-System-2 ---
# Bills of Exchange -> System 2

## Economic Entity Reference

--- ENTITY: bills of exchange ---

# Bills of Exchange

## Definition

Written orders from one merchant to another directing payment of a specified sum at a future date. These instruments facilitate trade by allowing merchants to conduct business without immediate payment in cash.

## Source Chapter

Book II, Chapter 2

## Context

Smith discusses bills of exchange as a key instrument of commercial credit, explaining how banks discount these bills to provide merchants with ready money. He analyses their role in the circulation of capital and trade.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Bills of exchange coordinate trade relationships by providing a standardized mechanism for deferred payment. They facilitate communication between merchants across time and space, dampening the oscillations that would occur with immediate cash settlement and resolving conflicts in timing of payments. This coordination function aligns with System 2's role in providing stable communication channels between operational units.

## Mapping Strength

Strong

---

--- MAPPING: discount of bills-to-System-2 ---
# Discount of Bills -> System 2

## Economic Entity Reference

--- ENTITY: discount of bills ---

# Discount of Bills

## Definition

The practice of banks advancing money on bills of exchange before they become due, deducting interest for the time remaining. This provides merchants with immediate liquidity while awaiting payment from customers.

## Source Chapter

Book II, Chapter 2

## Context

Smith explains how banks make most of their profits through discounting bills of exchange, advancing money to merchants before their bills become due. He analyses this as a key banking service that facilitates trade.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

Discounting bills coordinates the timing of payments and liquidity provision between merchants and banks. It provides a standardized mechanism for converting future payment promises into present liquidity, dampening the oscillations in cash flow that would otherwise disrupt trade. This coordination of temporal mismatches aligns with System 2's function of resolving conflicts and maintaining stable communication channels.

## Mapping Strength

Strong

---

--- MAPPING: drawing and redrawing-to-System-3* ---
# Drawing and Redrawing -> System 3*

## Economic Entity Reference

--- ENTITY: drawing and redrawing ---

# Drawing and Redrawing

## Definition

A practice where merchants draw bills on each other in a circular pattern to raise money through repeated discounting, often involving accumulated interest and commission. This creates artificial credit that can be very expensive.

## Source Chapter

Book II, Chapter 2

## Context

Smith criticises drawing and redrawing as an expensive method of raising money that often leads to over-trading and eventual bankruptcy. He describes it as a practice that emerged when banks refused to extend excessive credit.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 3* ---

# System 3* (S3*) — Audit / Monitoring

## Definition

The audit and monitoring channel that allows System 3 to verify information coming from System 1 through channels other than those provided by System 2. System 3* provides sporadic, direct access to operational reality.

## Key Properties

- Sporadic direct investigation
- Reality checking
- Bypassing normal reporting channels
- Audit and verification

---

## Mapping Rationale

Drawing and redrawing represents a practice that requires monitoring and audit to detect its artificial and potentially harmful nature. It bypasses normal credit channels and creates artificial credit that can lead to systemic problems. The need to identify and stop such practices aligns with System 3*'s function of providing audit and verification that bypasses normal channels to check operational reality.

## Mapping Strength

Moderate

---

--- MAPPING: circulation of money-to-System-2 ---
# Circulation of Money -> System 2

## Economic Entity Reference

--- ENTITY: circulation of money ---

# Circulation of Money

## Definition

The continuous movement of money through the economy as it passes from hand to hand in exchange for goods and services. This circulation distributes revenue to different members of society and facilitates all economic transactions.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses the circulation of money as distinct from the goods being circulated, arguing that money itself makes no part of a society's revenue. He explains how the same money pieces can facilitate multiple transactions.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

The circulation of money coordinates economic activities by providing a standardized medium of exchange that facilitates communication between all economic actors. It dampens the oscillations that would occur with direct barter and resolves conflicts in value determination across different transactions. This coordination function matches System 2's role in providing stable communication channels and resolving conflicts between operational units.

## Mapping Strength

Strong

---

--- MAPPING: water-pond metaphor-to-System-3 ---
# Water-Pond Metaphor -> System 3

## Economic Entity Reference

--- ENTITY: water-pond metaphor ---

# Water-Pond Metaphor

## Definition

Smith's analogy comparing a well-functioning bank to a pond where water flows in and out at equal rates, maintaining a constant level. This illustrates how proper banking maintains steady circulation without requiring excessive reserves.

## Source Chapter

Book II, Chapter 2

## Context

Smith uses this metaphor to explain how a properly managed bank can maintain steady operations when its lending and repayments are balanced. The metaphor illustrates the ideal relationship between bank advances and repayments.

## Economic Domain

General Theory

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

The water-pond metaphor illustrates the regulatory function of maintaining balance in banking operations, which aligns with System 3's role in internal regulation and control. The metaphor describes how banks must regulate the flow of credit to maintain stability, establishing rules and constraints on lending while ensuring the system remains viable. This represents the day-to-day control and optimisation of internal operations.

## Mapping Strength

Moderate

---

--- MAPPING: waggon-way through the air metaphor-to-System-4 ---
# Waggon-Way Through the Air Metaphor -> System 4

## Economic Entity Reference

--- ENTITY: waggon-way through the air metaphor ---

# Waggon-Way Through the Air Metaphor

## Definition

Smith's analogy comparing paper money to an aerial waggon-way that converts highways (gold and silver) into productive land. This illustrates how paper money can reduce the capital tied up in circulation and make it available for productive use.

## Source Chapter

Book II, Chapter 2

## Context

Smith uses this vivid metaphor to explain how paper money can reduce the capital needed for circulation, freeing up resources for productive investment. The metaphor illustrates the efficiency gains from substituting paper for metal money.

## Economic Domain

General Theory

---

## VSM Concept Reference

--- CONCEPT: System 4 ---

# System 4 (S4) — Intelligence / Adaptation

## Definition

The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.

## Key Properties

- Environmental scanning
- Future orientation
- Strategic planning
- Modelling
- Research and development

---

## Mapping Rationale

The waggon-way metaphor represents a forward-looking innovation that transforms the economic environment by making capital more efficient. It captures the strategic vision of how new financial instruments can adapt the economy to be more productive. This aligns with System 4's function of scanning the environment for opportunities and planning strategic adaptations to improve viability.

## Mapping Strength

Moderate

---

--- MAPPING: dead stock-to-System-3 ---
# Dead Stock -> System 3

## Economic Entity Reference

--- ENTITY: dead stock ---

# Dead Stock

## Definition

Capital that is not currently productive, including money kept idle for occasional demands and gold and silver money that circulates but produces nothing. This represents capital that could potentially be made productive.

## Source Chapter

Book II, Chapter 2

## Context

Smith uses the concept of dead stock to explain how banking can increase productivity by converting idle capital into active capital. He distinguishes between dead stock in individual hands and in the economy as a whole.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Dead stock represents capital that is not being optimally allocated within the economic system. The identification and conversion of dead stock to productive use aligns with System 3's function of optimising internal resources and managing performance. System 3 would be responsible for establishing the rules and mechanisms that identify dead stock and reallocate it to more productive uses.

## Mapping Strength

Moderate

---

--- MAPPING: active and productive stock-to-System-1 ---
# Active and Productive Stock -> System 1

## Economic Entity Reference

--- ENTITY: active and productive stock ---

# Active and Productive Stock

## Definition

Capital that is currently engaged in production or distribution of goods and services, as opposed to dead stock that is idle. This includes materials, tools, provisions, and labour that are actively contributing to economic output.

## Source Chapter

Book II, Chapter 2

## Context

Smith contrasts active and productive stock with dead stock to show how banking operations can increase the proportion of capital that is productive. He argues that converting dead stock to active stock increases a society's wealth.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 1 ---

# System 1 (S1) — Operations

## Definition

The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).

## Key Properties

- Autonomy within constraints
- Self-organisation
- Direct engagement with the environment
- Primary value creation

---

## Mapping Rationale

Active and productive stock directly represents the operational units that are creating economic value through production and distribution. Like System 1's operational elements, this stock is directly engaged in the primary productive activities of the economy. The materials, tools, and labour that constitute active stock are autonomously producing value within the constraints of the economic system.

## Mapping Strength

Strong

---

--- MAPPING: two branches of circulation-to-System-2 ---
# Two Branches of Circulation -> System 2

## Economic Entity Reference

--- ENTITY: two branches of circulation ---

# Two Branches of Circulation

## Definition

The distinction between circulation among dealers (wholesale) and circulation between dealers and consumers (retail). Each requires its own stock of money, with wholesale transactions typically requiring larger sums that circulate more slowly.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how circulation divides into two distinct flows, explaining why different amounts of money are needed for each. He uses this distinction to discuss how paper money can be regulated to serve different types of transactions.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 2 ---

# System 2 (S2) — Coordination

## Definition

The information channels and bodies that allow the primary activities in System 1 to communicate with each other and that allow System 3 to monitor and coordinate activities. System 2 dampens oscillations and resolves conflicts between operational units.

## Key Properties

- Anti-oscillatory
- Dampening
- Scheduling
- Conflict resolution
- Standardisation

---

## Mapping Rationale

The two branches of circulation coordinate different types of economic transactions through distinct monetary flows. This coordination ensures that wholesale and retail transactions can occur efficiently without interfering with each other, dampening potential oscillations in the overall monetary system. The distinction helps resolve conflicts in money demand between different types of economic actors.

## Mapping Strength

Strong

---

--- MAPPING: requisite variety in banking-to-System-3 ---
# Requisite Variety in Banking -> System 3

## Economic Entity Reference

--- ENTITY: requisite variety in banking ---

# Requisite Variety in Banking

## Definition

The principle that banks must maintain sufficient reserves and prudent lending practices to match the variety of demands placed upon them. This ensures stability and prevents the excessive circulation of paper money.

## Source Chapter

Book II, Chapter 2

## Context

Smith applies the concept of requisite variety to banking operations, arguing that banks must maintain appropriate reserves and lending practices to remain stable. He shows how failure to maintain requisite variety leads to banking crises.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Requisite variety in banking represents the internal regulatory mechanisms that ensure banking operations remain stable and effective. It establishes the rules and constraints under which banks must operate, allocating resources appropriately to match the variety of demands. This internal regulation and optimisation of banking operations aligns with System 3's function of controlling and managing internal systems.

## Mapping Strength

Strong

---

--- MAPPING: natural liberty in banking-to-System-5 ---
# Natural Liberty in Banking -> System 5

## Economic Entity Reference

--- ENTITY: natural liberty in banking ---

# Natural Liberty in Banking

## Definition

The principle that banking should be free from excessive regulation, allowing individuals to engage in banking activities as they choose, provided basic safeguards are maintained. Smith argues this freedom promotes efficiency and security.

## Source Chapter

Book II, Chapter 2

## Context

Smith defends the freedom of banking from excessive regulation, arguing that natural liberty in this sphere promotes both efficiency and security. He compares banking regulation to building regulations that prevent fire spread.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 5 ---

# System 5 (S5) — Policy / Identity

## Definition

The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.

## Key Properties

- Identity
- Ethos
- Supreme command
- Policy closure
- Balancing internal and external perspectives

---

## Mapping Rationale

Natural liberty in banking represents the overarching policy framework that defines the identity and purpose of the banking system. It establishes the fundamental principles by which banking should operate, balancing the need for regulation (System 3) with the benefits of freedom. This policy framework provides closure to the banking system and represents the supreme authority on how banking should be structured.

## Mapping Strength

Moderate

---

--- MAPPING: bank capital structure-to-System-3 ---
# Bank Capital Structure -> System 3

## Economic Entity Reference

--- ENTITY: bank capital structure ---

# Bank Capital Structure

## Definition

The division of a bank's capital into fixed capital (buildings, equipment) and circulating capital (reserves, loanable funds). This structure determines a bank's ability to lend and maintain stability.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how banks must balance their fixed and circulating capital, explaining that the smaller the fixed capital portion, the greater the circulating capital available for loans. He shows how this affects a bank's profitability and stability.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank capital structure represents the internal resource allocation and control mechanisms that determine how banks can operate. The division between fixed and circulating capital establishes the rules and constraints under which banks function, optimising their internal environment for stability and profitability. This internal management and resource allocation aligns with System 3's function of controlling and optimising internal operations.

## Mapping Strength

Strong

---

--- MAPPING: bank reserves-to-System-3 ---
# Bank Reserves -> System 3

## Economic Entity Reference

--- ENTITY: bank reserves ---

# Bank Reserves

## Definition

The gold and silver money that banks must keep on hand to meet demands for redemption of their notes. The appropriate level of reserves depends on the quantity of notes in circulation and the confidence of the public.

## Source Chapter

Book II, Chapter 2

## Context

Smith explains how banks must maintain adequate reserves to meet demands for note redemption, analysing the relationship between reserves, circulation, and bank stability. He shows how excessive note issuance forces banks to maintain larger reserves.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank reserves represent the internal control mechanism that regulates banking stability. They establish the rules and constraints under which banks must operate to maintain viability, allocating resources (gold and silver) to ensure the system can meet demands. This internal regulation and resource management aligns with System 3's function of controlling and optimising internal operations.

## Mapping Strength

Strong

---

--- MAPPING: bank circulation limits-to-System-3 ---
# Bank Circulation Limits -> System 3

## Economic Entity Reference

--- ENTITY: bank circulation limits ---

# Bank Circulation Limits

## Definition

The maximum amount of paper money that can circulate in an economy without causing instability or returning to the issuing bank for redemption. This limit is determined by the needs of commerce and the quantity of precious metals that would otherwise circulate.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how banks must limit their note issuance to the amount that can be absorbed by the economy's circulation needs. He explains the mechanisms by which excessive circulation returns to the bank and the consequences of exceeding these limits.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank circulation limits represent the internal regulatory framework that controls banking operations. They establish the rules and constraints under which banks must operate to maintain stability, allocating the resource of monetary circulation appropriately. This internal regulation and optimisation of banking operations aligns with System 3's function of controlling and managing internal systems.

## Mapping Strength

Strong

---

--- MAPPING: bank credit extension-to-System-3 ---
# Bank Credit Extension -> System 3

## Economic Entity Reference

--- ENTITY: bank credit extension ---

# Bank Credit Extension

## Definition

The practice of banks providing credit to merchants through various means including discounting bills, granting cash accounts, and issuing notes. This extension of credit facilitates trade but must be carefully managed to avoid instability.

## Source Chapter

Book II, Chapter 2

## Context

Smith examines how banks extend credit to merchants and the benefits and risks of such extension. He analyses the appropriate limits of credit extension and the consequences of excessive lending.

## Economic Domain

Exchange

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank credit extension represents the internal control and regulation of how banks allocate their resources to support economic activity. It establishes the rules and constraints under which credit is extended, optimising the internal environment for stability and economic benefit. This internal management and resource allocation aligns with System 3's function of controlling and optimising internal operations.

## Mapping Strength

Strong

---

--- MAPPING: bank failure mechanisms-to-System-3* ---
# Bank Failure Mechanisms -> System 3*

## Economic Entity Reference

--- ENTITY: bank failure mechanisms ---

# Bank Failure Mechanisms

## Definition

The processes by which banks can become insolvent, including excessive note issuance, inadequate reserves, and over-extension of credit. These mechanisms often involve a cycle of drawing and redrawing bills to maintain liquidity.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how banks can fail through various mechanisms, particularly focusing on the cycle of excessive credit extension followed by attempts to maintain liquidity through increasingly desperate measures.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3* ---

# System 3* (S3*) — Audit / Monitoring

## Definition

The audit and monitoring channel that allows System 3 to verify information coming from System 1 through channels other than those provided by System 2. System 3* provides sporadic, direct access to operational reality.

## Key Properties

- Sporadic direct investigation
- Reality checking
- Bypassing normal reporting channels
- Audit and verification

---

## Mapping Rationale

Bank failure mechanisms represent the critical points where normal monitoring must be supplemented with direct audit and verification. The cycle of excessive credit extension and desperate liquidity measures requires sporadic, direct investigation to detect and prevent. This bypassing of normal channels to check operational reality aligns with System 3*'s function of providing audit and verification.

## Mapping Strength

Strong

---

--- MAPPING: bank public utility-to-System-5 ---
# Bank Public Utility -> System 5

## Economic Entity Reference

--- ENTITY: bank public utility ---

# Bank Public Utility

## Definition

The role of banks in serving the public interest by facilitating commerce, reducing the need for precious metals in circulation, and converting dead stock into productive capital. This utility must be balanced against the risks of bank operations.

## Source Chapter

Book II, Chapter 2

## Context

Smith argues that banks serve a vital public utility by facilitating commerce and making more efficient use of capital. He shows how this utility must be balanced against the need for prudent management and appropriate regulation.

## Economic Domain

General Theory

---

## VSM Concept Reference

--- CONCEPT: System 5 ---

# System 5 (S5) — Policy / Identity

## Definition

The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.

## Key Properties

- Identity
- Ethos
- Supreme command
- Policy closure
- Balancing internal and external perspectives

---

## Mapping Rationale

Bank public utility represents the overarching purpose and identity of the banking system within the economy. It defines the fundamental role banks play in serving societal needs and provides the policy framework for balancing utility against risk. This policy closure and definition of purpose aligns with System 5's function of establishing the organisation's identity and supreme authority.

## Mapping Strength

Moderate

---

--- MAPPING: bank competition effects-to-System-5 ---
# Bank Competition Effects -> System 5

## Economic Entity Reference

--- ENTITY: bank competition effects ---

# Bank Competition Effects

## Definition

The impact of multiple banks competing in the same market, which tends to promote prudence, efficiency, and better service to customers while reducing the risk of systemic failure through diversification.

## Source Chapter

Book II, Chapter 2

## Context

Smith argues that competition among banks promotes stability and efficiency by forcing banks to be more circumspect in their operations and to provide better service to customers. He sees competition as a natural regulator of banking practice.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 5 ---

# System 5 (S5) — Policy / Identity

## Definition

The policy-making body that balances demands from Systems 3 and 4 and defines the identity, values, and purpose of the organisation. System 5 provides closure to the whole system and represents its supreme authority.

## Key Properties

- Identity
- Ethos
- Supreme command
- Policy closure
- Balancing internal and external perspectives

---

## Mapping Rationale

Bank competition effects represent the fundamental policy framework that shapes the identity and operation of the banking system. Competition serves as the supreme authority that balances the need for stability with the benefits of efficiency, providing closure to the system through natural market forces. This policy framework and balancing of competing demands aligns with System 5's function.

## Mapping Strength

Moderate

---

--- MAPPING: bank credit cycles-to-System-4 ---
# Bank Credit Cycles -> System 4

## Economic Entity Reference

--- ENTITY: bank credit cycles ---

# Bank Credit Cycles

## Definition

The recurring patterns of credit expansion and contraction in banking, often involving initial over-extension followed by restriction as banks attempt to restore stability. These cycles can have significant effects on the broader economy.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how bank credit tends to expand beyond sustainable limits before contracting, creating cycles that affect the entire economy. He shows how these cycles emerge from the interaction of bank behaviour and economic conditions.

## Economic Domain

General Theory

---

## VSM Concept Reference

--- CONCEPT: System 4 ---

# System 4 (S4) — Intelligence / Adaptation

## Definition

The bodies and processes that look outward to the environment to monitor how the organisation needs to adapt to remain viable. System 4 captures all relevant information about the outside-and-then environment. It is responsible for strategic responses.

## Key Properties

- Environmental scanning
- Future orientation
- Strategic planning
- Modelling
- Research and development

---

## Mapping Rationale

Bank credit cycles represent the external environmental patterns that the banking system must monitor and adapt to. Understanding these cycles requires scanning the broader economic environment and developing strategic responses to maintain viability. This forward-looking analysis of environmental patterns and adaptation strategies aligns with System 4's function of environmental intelligence and strategic planning.

## Mapping Strength

Strong

---

--- MAPPING: bank monetary policy-to-System-3 ---
# Bank Monetary Policy -> System 3

## Economic Entity Reference

--- ENTITY: bank monetary policy ---

# Bank Monetary Policy

## Definition

The practices and decisions by which banks manage their note issuance, credit extension, and reserve levels to maintain stability and serve economic needs. This includes decisions about discounting, cash accounts, and note circulation.

## Source Chapter

Book II, Chapter 2

## Context

Smith examines how banks must make policy decisions about their operations to maintain stability while serving economic needs. He analyses the trade-offs involved in different policy choices and their effects on the broader economy.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank monetary policy represents the internal control mechanisms that regulate banking operations. It establishes the rules and constraints under which banks must operate, allocating resources and managing performance to maintain stability. This day-to-day control and optimisation of internal operations aligns with System 3's function of operational management.

## Mapping Strength

Strong

---

--- MAPPING: bank financial intermediation-to-System-1 ---
# Bank Financial Intermediation -> System 1

## Economic Entity Reference

--- ENTITY: bank financial intermediation ---

# Bank Financial Intermediation

## Definition

The role of banks in channeling funds from savers to borrowers, facilitating the efficient allocation of capital throughout the economy. This intermediation function is central to banking's contribution to economic development.

## Source Chapter

Book II, Chapter 2

## Context

Smith explains how banks serve as intermediaries between those with surplus capital and those who need it for productive purposes. He shows how this intermediation function increases the efficiency of capital allocation and promotes economic growth.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 1 ---

# System 1 (S1) — Operations

## Definition

The primary activities that produce the organisation's purpose. These are the operational units that directly create value. Each operational element is itself a viable system (the principle of recursion).

## Key Properties

- Autonomy within constraints
- Self-organisation
- Direct engagement with the environment
- Primary value creation

---

## Mapping Rationale

Bank financial intermediation directly performs the primary productive activity of channeling capital to its most productive uses. Like System 1's operational units, this function directly creates economic value by facilitating the flow of capital from savers to borrowers. The intermediation process autonomously operates within the constraints of the banking system to directly produce economic output.

## Mapping Strength

Strong

---

--- MAPPING: bank economic stability-to-System-3 ---
# Bank Economic Stability -> System 3

## Economic Entity Reference

--- ENTITY: bank economic stability ---

# Bank Economic Stability

## Definition

The condition of banking systems that maintain appropriate reserves, prudent lending practices, and stable note circulation to support rather than destabilise the broader economy. This stability is essential for economic development.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses the conditions necessary for banking stability and its importance for economic development. He shows how stable banking supports commerce and production while unstable banking can cause significant economic disruption.

## Economic Domain

General Theory

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank economic stability represents the internal control mechanisms that regulate banking operations to maintain viability. It establishes the rules and constraints under which banks must operate, allocating resources appropriately to ensure stability. This internal regulation and optimisation of banking operations aligns with System 3's function of controlling and managing internal systems.

## Mapping Strength

Strong

---

--- MAPPING: bank operational efficiency-to-System-3 ---
# Bank Operational Efficiency -> System 3

## Economic Entity Reference

--- ENTITY: bank operational efficiency ---

# Bank Operational Efficiency

## Definition

The effectiveness with which banks manage their operations to maximise their contribution to economic activity while minimising costs and risks. This includes efficient note issuance, prudent lending, and effective reserve management.

## Source Chapter

Book II, Chapter 2

## Context

Smith examines how banks can operate efficiently to serve economic needs while maintaining stability. He analyses the various operational decisions that affect efficiency and their impact on both the banks and the broader economy.

## Economic Domain

Accumulation

---

## VSM Concept Reference

--- CONCEPT: System 3 ---

# System 3 (S3) — Control / Operational Management

## Definition

The structures and controls that establish the rules, resources, rights, and responsibilities of System 1 and provide an interface between Systems 1 and Systems 4/5. System 3 represents the day-to-day control of the organisation. It optimises the internal environment.

## Key Properties

- Internal regulation
- Resource allocation
- Accountability
- Synergy extraction
- Performance management

---

## Mapping Rationale

Bank operational efficiency represents the internal control mechanisms that optimise banking operations. It establishes the rules and constraints under which banks must operate to maximise their contribution while minimising risks, managing resources effectively. This internal regulation and optimisation of operations aligns with System 3's function of controlling and managing internal systems.

## Mapping Strength

Strong

---

--- MAPPING: bank systemic risk-to-System-3* ---
# Bank Systemic Risk -> System 3*

## Economic Entity Reference

--- ENTITY: bank systemic risk ---

# Bank Systemic Risk

## Definition

The potential for problems in one bank or part of the banking system to spread throughout the entire financial system, potentially causing widespread economic disruption. This risk requires careful management and appropriate regulation.

## Source Chapter

Book II, Chapter 2

## Context

Smith analyses how problems in individual banks can spread through the banking system and affect the broader economy. He shows how systemic risk emerges from the interconnected nature of banking operations and the importance of prudent management.

## Economic Domain

Regulation

---

## VSM Concept Reference

--- CONCEPT: System 3* ---

# System 3* (S3*) — Audit / Monitoring

## Definition

The audit and monitoring channel that allows System 3 to