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id: book-2-chapter-03 title: "OF THE ACCUMULATION OF CAPITAL, OR OF PRODUCTIVE AND UNPRODUCTIVE LABOUR." book: "2" chapter: 3 artifact_type: content
CHAPTER III. OF THE ACCUMULATION OF CAPITAL, OR OF PRODUCTIVE AND UNPRODUCTIVE LABOUR.
There is one sort of labour which adds to the value of the subject upon
which it is bestowed; there is another which has no such effect. The
former as it produces a value, may be called productive, the latter,
unproductive labour. {Some French authors of great learning and ingenuity
have used those words in a different sense. In the last chapter of the
fourth book, I shall endeavour to shew that their sense is an improper
one.} Thus the labour of a manufacturer adds generally to the value of the
materials which he works upon, that of his own maintenance, and of his
master’s profit. The labour of a menial servant, on the contrary, adds to
the value of nothing. Though the manufacturer has his wages advanced to
him by his master, he in reality costs him no expense, the value of those
wages being generally restored, together with a profit, in the improved
value of the subject upon which his labour is bestowed. But the
maintenance of a menial servant never is restored. A man grows rich by
employing a multitude of manufacturers; he grows poor by maintaining a
multitude or menial servants. The labour of the latter, however, has its
value, and deserves its reward as well as that of the former. But the
labour of the manufacturer fixes and realizes itself in some particular
subject or vendible commodity, which lasts for some time at least after
that labour is past. It is, as it were, a certain quantity of labour
stocked and stored up, to be employed, if necessary, upon some other
occasion. That subject, or, what is the same thing, the price of that
subject, can afterwards, if necessary, put into motion a quantity of
labour equal to that which had originally produced it. The labour of the
menial servant, on the contrary, does not fix or realize itself in any
particular subject or vendible commodity. His services generally perish in
the very instant of their performance, and seldom leave any trace of value
behind them, for which an equal quantity of service could afterwards be
procured.
The labour of some of the most respectable orders in the society is, like
that of menial servants, unproductive of any value, and does not fix or
realize itself in any permanent subject, or vendible commodity, which
endures after that labour is past, and for which an equal quantity of
labour could afterwards be procured. The sovereign, for example, with all
the officers both of justice and war who serve under him, the whole army
and navy, are unproductive labourers. They are the servants of the public,
and are maintained by a part of the annual produce of the industry of
other people. Their service, how honourable, how useful, or how necessary
soever, produces nothing for which an equal quantity of service can
afterwards be procured. The protection, security, and defence, of the
commonwealth, the effect of their labour this year, will not purchase its
protection, security, and defence, for the year to come. In the same class
must be ranked, some both of the gravest and most important, and some of
the most frivolous professions; churchmen, lawyers, physicians, men of
letters of all kinds; players, buffoons, musicians, opera-singers,
opera-dancers, etc. The labour of the meanest of these has a certain
value, regulated by the very same principles which regulate that of every
other sort of labour; and that of the noblest and most useful, produces
nothing which could afterwards purchase or procure an equal quantity of
labour. Like the declamation of the actor, the harangue of the orator, or
the tune of the musician, the work of all of them perishes in the very
instant of its production.
Both productive and unproductive labourers, and those who do not labour at
all, are all equally maintained by the annual produce of the land and
labour of the country. This produce, how great soever, can never be
infinite, but must have certain limits. According, therefore, as a smaller
or greater proportion of it is in any one year employed in maintaining
unproductive hands, the more in the one case, and the less in the other,
will remain for the productive, and the next year’s produce will be
greater or smaller accordingly; the whole annual produce, if we except the
spontaneous productions of the earth, being the effect of productive
labour.
Though the whole annual produce of the land and labour of every country is
no doubt ultimately destined for supplying the consumption of its
inhabitants, and for procuring a revenue to them; yet when it first comes
either from the ground, or from the hands of the productive labourers, it
naturally divides itself into two parts. One of them, and frequently the
largest, is, in the first place, destined for replacing a capital, or for
renewing the provisions, materials, and finished work, which had been
withdrawn from a capital; the other for constituting a revenue either to
the owner of this capital, as the profit of his stock, or to some other
person, as the rent of his land. Thus, of the produce of land, one part
replaces the capital of the farmer; the other pays his profit and the rent
of the landlord; and thus constitutes a revenue both to the owner of this
capital, as the profits of his stock, and to some other person as the rent
of his land. Of the produce of a great manufactory, in the same manner,
one part, and that always the largest, replaces the capital of the
undertaker of the work; the other pays his profit, and thus constitutes a
revenue to the owner of this capital.
That part of the annual produce of the land and labour of any country
which replaces a capital, never is immediately employed to maintain any
but productive hands. It pays the wages of productive labour only. That
which is immediately destined for constituting a revenue, either as profit
or as rent, may maintain indifferently either productive or unproductive
hands.
Whatever part of his stock a man employs as a capital, he always expects
it to be replaced to him with a profit. He employs it, therefore, in
maintaining productive hands only; and after having served in the function
of a capital to him, it constitutes a revenue to them. Whenever he employs
any part of it in maintaining unproductive hands of any kind, that part is
from that moment withdrawn from his capital, and placed in his stock
reserved for immediate consumption.
Unproductive labourers, and those who do not labour at all, are all
maintained by revenue; either, first, by that part of the annual produce
which is originally destined for constituting a revenue to some particular
persons, either as the rent of land, or as the profits of stock; or,
secondly, by that part which, though originally destined for replacing a
capital, and for maintaining productive labourers only, yet when it comes
into their hands, whatever part of it is over and above their necessary
subsistence, may be employed in maintaining indifferently either
productive or unproductive hands. Thus, not only the great landlord or the
rich merchant, but even the common workman, if his wages are considerable,
may maintain a menial servant; or he may sometimes go to a play or a
puppet-show, and so contribute his share towards maintaining one set of
unproductive labourers; or he may pay some taxes, and thus help to
maintain another set, more honourable and useful, indeed, but equally
unproductive. No part of the annual produce, however, which had been
originally destined to replace a capital, is ever directed towards
maintaining unproductive hands, till after it has put into motion its full
complement of productive labour, or all that it could put into motion in
the way in which it was employed. The workman must have earned his wages
by work done, before he can employ any part of them in this manner. That
part, too, is generally but a small one. It is his spare revenue only, of
which productive labourers have seldom a great deal. They generally have
some, however; and in the payment of taxes, the greatness of their number
may compensate, in some measure, the smallness of their contribution. The
rent of land and the profits of stock are everywhere, therefore, the
principal sources from which unproductive hands derive their subsistence.
These are the two sorts of revenue of which the owners have generally most
to spare. They might both maintain indifferently, either productive or
unproductive hands. They seem, however, to have some predilection for the
latter. The expense of a great lord feeds generally more idle than
industrious people. The rich merchant, though with his capital he
maintains industrious people only, yet by his expense, that is, by the
employment of his revenue, he feeds commonly the very same sort as the
great lord.
The proportion, therefore, between the productive and unproductive hands,
depends very much in every country upon the proportion between that part
of the annual produce, which, as soon as it comes either from the ground,
or from the hands of the productive labourers, is destined for replacing a
capital, and that which is destined for constituting a revenue, either as
rent or as profit. This proportion is very different in rich from what it
is in poor countries.
Thus, at present, in the opulent countries of Europe, a very large,
frequently the largest, portion of the produce of the land, is destined
for replacing the capital of the rich and independent farmer; the other
for paying his profits, and the rent of the landlord. But anciently,
during the prevalency of the feudal government, a very small portion of
the produce was sufficient to replace the capital employed in cultivation.
It consisted commonly in a few wretched cattle, maintained altogether by
the spontaneous produce of uncultivated land, and which might, therefore,
be considered as a part of that spontaneous produce. It generally, too,
belonged to the landlord, and was by him advanced to the occupiers of the
land. All the rest of the produce properly belonged to him too, either as
rent for his land, or as profit upon this paltry capital. The occupiers of
land were generally bond-men, whose persons and effects were equally his
property. Those who were not bond-men were tenants at will; and though the
rent which they paid was often nominally little more than a quit-rent, it
really amounted to the whole produce of the land. Their lord could at all
times command their labour in peace and their service in war. Though they
lived at a distance from his house, they were equally dependent upon him
as his retainers who lived in it. But the whole produce of the land
undoubtedly belongs to him, who can dispose of the labour and service of
all those whom it maintains. In the present state of Europe, the share of
the landlord seldom exceeds a third, sometimes not a fourth part of the
whole produce of the land. The rent of land, however, in all the improved
parts of the country, has been tripled and quadrupled since those ancient
times; and this third or fourth part of the annual produce is, it seems,
three or four times greater than the whole had been before. In the
progress of improvement, rent, though it increases in proportion to the
extent, diminishes in proportion to the produce of the land.
In the opulent countries of Europe, great capitals are at present employed
in trade and manufactures. In the ancient state, the little trade that was
stirring, and the few homely and coarse manufactures that were carried on,
required but very small capitals. These, however, must have yielded very
large profits. The rate of interest was nowhere less than ten per cent.
and their profits must have been sufficient to afford this great interest.
At present, the rate of interest, in the improved parts of Europe, is
nowhere higher than six per cent.; and in some of the most improved, it is
so low as four, three, and two per cent. Though that part of the revenue
of the inhabitants which is derived from the profits of stock, is always
much greater in rich than in poor countries, it is because the stock is
much greater; in proportion to the stock, the profits are generally much
less.
That part of the annual produce, therefore, which, as soon as it comes
either from the ground, or from the hands of the productive labourers, is
destined for replacing a capital, is not only much greater in rich than in
poor countries, but bears a much greater proportion to that which is
immediately destined for constituting a revenue either as rent or as
profit. The funds destined for the maintenance of productive labour are
not only much greater in the former than in the latter, but bear a much
greater proportion to those which, though they may be employed to maintain
either productive or unproductive hands, have generally a predilection for
the latter.
The proportion between those different funds necessarily determines in
every country the general character of the inhabitants as to industry or
idleness. We are more industrious than our forefathers, because, in the
present times, the funds destined for the maintenance of industry are much
greater in proportion to those which are likely to be employed in the
maintenance of idleness, than they were two or three centuries ago. Our
ancestors were idle for want of a sufficient encouragement to industry. It
is better, says the proverb, to play for nothing, than to work for
nothing. In mercantile and manufacturing towns, where the inferior ranks
of people are chiefly maintained by the employment of capital, they are in
general industrious, sober, and thriving; as in many English, and in most
Dutch towns. In those towns which are principally supported by the
constant or occasional residence of a court, and in which the inferior
ranks of people are chiefly maintained by the spending of revenue, they
are in general idle, dissolute, and poor; as at Rome, Versailles,
Compeigne, and Fontainbleau. If you except Rouen and Bourdeaux, there is
little trade or industry in any of the parliament towns of France; and the
inferior ranks of people, being chiefly maintained by the expense of the
members of the courts of justice, and of those who come to plead before
them, are in general idle and poor. The great trade of Rouen and Bourdeaux
seems to be altogether the effect of their situation. Rouen is necessarily
the entrepot of almost all the goods which are brought either from foreign
countries, or from the maritime provinces of France, for the consumption
of the great city of Paris. Bourdeaux is, in the same manner, the entrepot
of the wines which grow upon the banks of the Garronne, and of the rivers
which run into it, one of the richest wine countries in the world, and
which seems to produce the wine fittest for exportation, or best suited to
the taste of foreign nations. Such advantageous situations necessarily
attract a great capital by the great employment which they afford it; and
the employment of this capital is the cause of the industry of those two
cities. In the other parliament towns of France, very little more capital
seems to be employed than what is necessary for supplying their own
consumption; that is, little more than the smallest capital which can be
employed in them. The same thing may be said of Paris, Madrid, and Vienna.
Of those three cities, Paris is by far the most industrious, but Paris
itself is the principal market of all the manufactures established at
Paris, and its own consumption is the principal object of all the trade
which it carries on. London, Lisbon, and Copenhagen, are, perhaps, the
only three cities in Europe, which are both the constant residence of a
court, and can at the same time be considered as trading cities, or as
cities which trade not only for their own consumption, but for that of
other cities and countries. The situation of all the three is extremely
advantageous, and naturally fits them to be the entrepots of a great part
of the goods destined for the consumption of distant places. In a city
where a great revenue is spent, to employ with advantage a capital for any
other purpose than for supplying the consumption of that city, is probably
more difficult than in one in which the inferior ranks of people have no
other maintenance but what they derive from the employment of such a
capital. The idleness of the greater part of the people who are maintained
by the expense of revenue, corrupts, it is probable, the industry of those
who ought to be maintained by the employment of capital, and renders it
less advantageous to employ a capital there than in other places. There
was little trade or industry in Edinburgh before the Union. When the
Scotch parliament was no longer to be assembled in it, when it ceased to
be the necessary residence of the principal nobility and gentry of
Scotland, it became a city of some trade and industry. It still continues,
however, to be the residence of the principal courts of justice in
Scotland, of the boards of customs and excise, etc. A considerable
revenue, therefore, still continues to be spent in it. In trade and
industry, it is much inferior to Glasgow, of which the inhabitants are
chiefly maintained by the employment of capital. The inhabitants of a
large village, it has sometimes been observed, after having made
considerable progress in manufactures, have become idle and poor, in
consequence of a great lord’s having taken up his residence in their
neighbourhood.
The proportion between capital and revenue, therefore, seems everywhere to
regulate the proportion between industry and idleness. Wherever capital
predominates, industry prevails; wherever revenue, idleness. Every
increase or diminution of capital, therefore, naturally tends to increase
or diminish the real quantity of industry, the number of productive hands,
and consequently the exchangeable value of the annual produce of the land
and labour of the country, the real wealth and revenue of all its
inhabitants.
Capitals are increased by parsimony, and diminished by prodigality and
misconduct.
Whatever a person saves from his revenue he adds to his capital, and
either employs it himself in maintaining an additional number of
productive hands, or enables some other person to do so, by lending it to
him for an interest, that is, for a share of the profits. As the capital
of an individual can be increased only by what he saves from his annual
revenue or his annual gains, so the capital of a society, which is the
same with that of all the individuals who compose it, can be increased
only in the same manner.
Parsimony, and not industry, is the immediate cause of the increase of
capital. Industry, indeed, provides the subject which parsimony
accumulates; but whatever industry might acquire, if parsimony did not
save and store up, the capital would never be the greater.
Parsimony, by increasing the fund which is destined for the maintenance of
productive hands, tends to increase the number of those hands whose labour
adds to the value of the subject upon which it is bestowed. It tends,
therefore, to increase the exchangeable value of the annual produce of the
land and labour of the country. It puts into motion an additional quantity
of industry, which gives an additional value to the annual produce.
What is annually saved, is as regularly consumed as what is annually
spent, and nearly in the same time too: but it is consumed by a different
set of people. That portion of his revenue which a rich man annually
spends, is, in most cases, consumed by idle guests and menial servants,
who leave nothing behind them in return for their consumption. That
portion which he annually saves, as, for the sake of the profit, it is
immediately employed as a capital, is consumed in the same manner, and
nearly in the same time too, but by a different set of people: by
labourers, manufacturers, and artificers, who reproduce, with a profit,
the value of their annual consumption. His revenue, we shall suppose, is
paid him in money. Had he spent the whole, the food, clothing, and
lodging, which the whole could have purchased, would have been distributed
among the former set of people. By saving a part of it, as that part is,
for the sake of the profit, immediately employed as a capital, either by
himself or by some other person, the food, clothing, and lodging, which
may be purchased with it, are necessarily reserved for the latter. The
consumption is the same, but the consumers are different.
By what a frugal man annually saves, he not only affords maintenance to an
additional number of productive hands, for that of the ensuing year, but
like the founder of a public work-house he establishes, as it were, a
perpetual fund for the maintenance of an equal number in all times to
come. The perpetual allotment and destination of this fund, indeed, is not
always guarded by any positive law, by any trust-right or deed of
mortmain. It is always guarded, however, by a very powerful principle, the
plain and evident interest of every individual to whom any share of it
shall ever belong. No part of it can ever afterwards be employed to
maintain any but productive hands, without an evident loss to the person
who thus perverts it from its proper destination.
The prodigal perverts it in this manner: By not confining his expense
within his income, he encroaches upon his capital. Like him who perverts
the revenues of some pious foundation to profane purposes, he pays the
wages of idleness with those funds which the frugality of his forefathers
had, as it were, consecrated to the maintenance of industry. By
diminishing the funds destined for the employment of productive labour, he
necessarily diminishes, so far as it depends upon him, the quantity of
that labour which adds a value to the subject upon which it is bestowed,
and, consequently, the value of the annual produce of the land and labour
of the whole country, the real wealth and revenue of its inhabitants. If
the prodigality of some were not compensated by the frugality of others,
the conduct of every prodigal, by feeding the idle with the bread of the
industrious, would tend not only to beggar himself, but to impoverish his
country.
Though the expense of the prodigal should be altogether in home made, and
no part of it in foreign commodities, its effect upon the productive funds
of the society would still be the same. Every year there would still be a
certain quantity of food and clothing, which ought to have maintained
productive, employed in maintaining unproductive hands. Every year,
therefore, there would still be some diminution in what would otherwise
have been the value of the annual produce of the land and labour of the
country.
This expense, it may be said, indeed, not being in foreign goods, and not
occasioning any exportation of gold and silver, the same quantity of money
would remain in the country as before. But if the quantity of food and
clothing which were thus consumed by unproductive, had been distributed
among productive hands, they would have reproduced, together with a
profit, the full value of their consumption. The same quantity of money
would, in this case, equally have remained in the country, and there
would, besides, have been a reproduction of an equal value of consumable
goods. There would have been two values instead of one.
The same quantity of money, besides, can not long remain in any country in
which the value of the annual produce diminishes. The sole use of money is
to circulate consumable goods. By means of it, provisions, materials, and
finished work, are bought and sold, and distributed to their proper
consumers. The quantity of money, therefore, which can be annually
employed in any country, must be determined by the value of the consumable
goods annually circulated within it. These must consist, either in the
immediate produce of the land and labour of the country itself, or in
something which had been purchased with some part of that produce. Their
value, therefore, must diminish as the value of that produce diminishes,
and along with it the quantity of money which can be employed in
circulating them. But the money which, by this annual diminution of
produce, is annually thrown out of domestic circulation, will not be
allowed to lie idle. The interest of whoever possesses it requires that it
should be employed; but having no employment at home, it will, in spite of
all laws and prohibitions, be sent abroad, and employed in purchasing
consumable goods, which may be of some use at home. Its annual exportation
will, in this manner, continue for some time to add something to the
annual consumption of the country beyond the value of its own annual
produce. What in the days of its prosperity had been saved from that
annual produce, and employed in purchasing gold and silver, will
contribute, for some little time, to support its consumption in adversity.
The exportation of gold and silver is, in this case, not the cause, but
the effect of its declension, and may even, for some little time,
alleviate the misery of that declension.
The quantity of money, on the contrary, must in every country naturally
increase as the value of the annual produce increases. The value of the
consumable goods annually circulated within the society being greater,
will require a greater quantity of money to circulate them. A part of the
increased produce, therefore, will naturally be employed in purchasing,
wherever it is to be had, the additional quantity of gold and silver
necessary for circulating the rest. The increase of those metals will, in
this case, be the effect, not the cause, of the public prosperity. Gold
and silver are purchased everywhere in the same manner. The food,
clothing, and lodging, the revenue and maintenance, of all those whose
labour or stock is employed in bringing them from the mine to the market,
is the price paid for them in Peru as well as in England. The country
which has this price to pay, will never belong without the quantity of
those metals which it has occasion for; and no country will ever long
retain a quantity which it has no occasion for.
Whatever, therefore, we may imagine the real wealth and revenue of a
country to consist in, whether in the value of the annual produce of its
land and labour, as plain reason seems to dictate, or in the quantity of
the precious metals which circulate within it, as vulgar prejudices
suppose; in either view of the matter, every prodigal appears to be a
public enemy, and every frugal man a public benefactor.
The effects of misconduct are often the same as those of prodigality.
Every injudicious and unsuccessful project in agriculture, mines,
fisheries, trade, or manufactures, tends in the same manner to diminish
the funds destined for the maintenance of productive labour. In every such
project, though the capital is consumed by productive hands only, yet as,
by the injudicious manner in which they are employed, they do not
reproduce the full value of their consumption, there must always be some
diminution in what would otherwise have been the productive funds of the
society.
It can seldom happen, indeed, that the circumstances of a great nation can
be much affected either by the prodigality or misconduct of individuals;
the profusion or imprudence of some being always more than compensated by
the frugality and good conduct of others.
With regard to profusion, the principle which prompts to expense is the
passion for present enjoyment; which, though sometimes violent and very
difficult to be restrained, is in general only momentary and occasional.
But the principle which prompts to save, is the desire of bettering our
condition; a desire which, though generally calm and dispassionate, comes
with us from the womb, and never leaves us till we go into the grave. In
the whole interval which separates those two moments, there is scarce,
perhaps, a single instance, in which any man is so perfectly and
completely satisfied with his situation, as to be without any wish of
alteration or improvement of any kind. An augmentation of fortune is the
means by which the greater part of men propose and wish to better their
condition. It is the means the most vulgar and the most obvious; and the
most likely way of augmenting their fortune, is to save and accumulate
some part of what they acquire, either regularly and annually, or upon
some extraordinary occasion. Though the principle of expense, therefore,
prevails in almost all men upon some occasions, and in some men upon
almost all occasions; yet in the greater part of men, taking the whole
course of their life at an average, the principle of frugality seems not
only to predominate, but to predominate very greatly.
With regard to misconduct, the number of prudent and successful
undertakings is everywhere much greater than that of injudicious and
unsuccessful ones. After all our complaints of the frequency of
bankruptcies, the unhappy men who fall into this misfortune, make but a
very small part of the whole number engaged in trade, and all other sorts
of business; not much more, perhaps, than one in a thousand. Bankruptcy
is, perhaps, the greatest and most humiliating calamity which can befal an
innocent man. The greater part of men, therefore, are sufficiently careful
to avoid it. Some, indeed, do not avoid it; as some do not avoid the
gallows.
Great nations are never impoverished by private, though they sometimes are
by public prodigality and misconduct. The whole, or almost the whole
public revenue is, in most countries, employed in maintaining unproductive
hands. Such are the people who compose a numerous and splendid court, a
great ecclesiastical establishment, great fleets and armies, who in time
of peace produce nothing, and in time of war acquire nothing which can
compensate the expense of maintaining them, even while the war lasts. Such
people, as they themselves produce nothing, are all maintained by the
produce of other men’s labour. When multiplied, therefore, to an
unnecessary number, they may in a particular year consume so great a share
of this produce, as not to leave a sufficiency for maintaining the
productive labourers, who should reproduce it next year. The next year’s
produce, therefore, will be less than that of the foregoing; and if the
same disorder should continue, that of the third year will be still less
than that of the second. Those unproductive hands who should be maintained
by a part only of the spare revenue of the people, may consume so great a
share of their whole revenue, and thereby oblige so great a number to
encroach upon their capitals, upon the funds destined for the maintenance
of productive labour, that all the frugality and good conduct of
individuals may not be able to compensate the waste and degradation of
produce occasioned by this violent and forced encroachment.
This frugality and good conduct, however, is, upon most occasions, it
appears from experience, sufficient to compensate, not only the private
prodigality and misconduct of individuals, but the public extravagance of
government. The uniform, constant, and uninterrupted effort of every man
to better his condition, the principle from which public and national, as
well as private opulence is originally derived, is frequently powerful
enough to maintain the natural progress of things towards improvement, in
spite both of the extravagance of government, and of the greatest errors
of administration. Like the unknown principle of animal life, it
frequently restores health and vigour to the constitution, in spite not
only of the disease, but of the absurd prescriptions of the doctor.
The annual produce of the land and labour of any nation can be increased
in its value by no other means, but by increasing either the number of its
productive labourers, or the productive powers of those labourers who had
before been employed. The number of its productive labourers, it is
evident, can never be much increased, but in consequence of an increase of
capital, or of the funds destined for maintaining them. The productive
powers of the same number of labourers cannot be increased, but in
consequence either of some addition and improvement to those machines and
instruments which facilitate and abridge labour, or of more proper
division and distribution of employment. In either case, an additional
capital is almost always required. It is by means of an additional capital
only, that the undertaker of any work can either provide his workmen with
better machinery, or make a more proper distribution of employment among
them. When the work to be done consists of a number of parts, to keep
every man constantly employed in one way, requires a much greater capital
than where every man is occasionally employed in every different part of
the work. When we compare, therefore, the state of a nation at two
different periods, and find that the annual produce of its land and labour
is evidently greater at the latter than at the former, that its lands are
better cultivated, its manufactures more numerous and more flourishing,
and its trade more extensive; we may be assured that its capital must have
increased during the interval between those two periods, and that more
must have been added to it by the good conduct of some, than had been
taken from it either by the private misconduct of others, or by the public
extravagance of government. But we shall find this to have been the case
of almost all nations, in all tolerably quiet and peaceable times, even of
those who have not enjoyed the most prudent and parsimonious governments.
To form a right judgment of it, indeed, we must compare the state of the
country at periods somewhat distant from one another. The progress is
frequently so gradual, that, at near periods, the improvement is not only
not sensible, but, from the declension either of certain branches of
industry, or of certain districts of the country, things which sometimes
happen, though the country in general is in great prosperity, there
frequently arises a suspicion, that the riches and industry of the whole
are decaying.
The annual produce of the land and labour of England, for example, is
certainly much greater than it was a little more than a century ago, at
the restoration of Charles II. Though at present few people, I believe,
doubt of this, yet during this period five years have seldom passed away,
in which some book or pamphlet has not been published, written, too, with
such abilities as to gain some authority with the public, and pretending
to demonstrate that the wealth of the nation was fast declining; that the
country was depopulated, agriculture neglected, manufactures decaying, and
trade undone. Nor have these publications been all party pamphlets, the
wretched offspring of falsehood and venality. Many of them have been
written by very candid and very intelligent people, who wrote nothing but
what they believed, and for no other reason but because they believed it.
The annual produce of the land and labour of England, again, was certainly
much greater at the Restoration than we can suppose it to have been about
a hundred years before, at the accession of Elizabeth. At this period,
too, we have all reason to believe, the country was much more advanced in
improvement, than it had been about a century before, towards the close of
the dissensions between the houses of York and Lancaster. Even then it
was, probably, in a better condition than it had been at the Norman
conquest: and at the Norman conquest, than during the confusion of the
Saxon heptarchy. Even at this early period, it was certainly a more
improved country than at the invasion of Julius Caesar, when its
inhabitants were nearly in the same state with the savages in North
America.
In each of those periods, however, there was not only much private and
public profusion, many expensive and unnecessary wars, great perversion of
the annual produce from maintaining productive to maintain unproductive
hands; but sometimes, in the confusion of civil discord, such absolute
waste and destruction of stock, as might be supposed, not only to retard,
as it certainly did, the natural accumulation of riches, but to have left
the country, at the end of the period, poorer than at the beginning. Thus,
in the happiest and most fortunate period of them all, that which has
passed since the Restoration, how many disorders and misfortunes have
occurred, which, could they have been foreseen, not only the
impoverishment, but the total ruin of the country would have been expected
from them? The fire and the plague of London, the two Dutch wars, the
disorders of the revolution, the war in Ireland, the four expensive French
wars of 1688, 1701, 1742, and 1756, together with the two rebellions of
1715 and 1745. In the course of the four French wars, the nation has
contracted more than £145,000,000 of debt, over and above all the other
extraordinary annual expense which they occasioned; so that the whole
cannot be computed at less than £200,000,000. So great a share of the
annual produce of the land and labour of the country, has, since the
Revolution, been employed upon different occasions, in maintaining an
extraordinary number of unproductive hands. But had not those wars given
this particular direction to so large a capital, the greater part of it
would naturally have been employed in maintaining productive hands, whose
labour would have replaced, with a profit, the whole value of their
consumption. The value of the annual produce of the land and labour of the
country would have been considerably increased by it every year, and every
years increase would have augmented still more that of the following year.
More houses would have been built, more lands would have been improved,
and those which had been improved before would have been better
cultivated; more manufactures would have been established, and those which
had been established before would have been more extended; and to what
height the real wealth and revenue of the country might by this time have
been raised, it is not perhaps very easy even to imagine.
But though the profusion of government must undoubtedly have retarded the
natural progress of England towards wealth and improvement, it has not
been able to stop it. The annual produce of its land and labour is
undoubtedly much greater at present than it was either at the Restoration
or at the Revolution. The capital, therefore, annually employed in
cultivating this land, and in maintaining this labour, must likewise be
much greater. In the midst of all the exactions of government, this
capital has been silently and gradually accumulated by the private
frugality and good conduct of individuals, by their universal, continual,
and uninterrupted effort to better their own condition. It is this effort,
protected by law, and allowed by liberty to exert itself in the manner
that is most advantageous, which has maintained the progress of England
towards opulence and improvement in almost all former times, and which, it
is to be hoped, will do so in all future times. England, however, as it
has never been blessed with a very parsimonious government, so parsimony
has at no time been the characteristic virtue of its inhabitants. It is
the highest impertinence and presumption, therefore, in kings and
ministers to pretend to watch over the economy of private people, and to
restrain their expense, either by sumptuary laws, or by prohibiting the
importation of foreign luxuries. They are themselves always, and without
any exception, the greatest spendthrifts in the society. Let them look
well after their own expense, and they may safely trust private people
with theirs. If their own extravagance does not ruin the state, that of
the subject never will.
As frugality increases, and prodigality diminishes, the public capital, so
the conduct of those whose expense just equals their revenue, without
either accumulating or encroaching, neither increases nor diminishes it.
Some modes of expense, however, seem to contribute more to the growth of
public opulence than others.
The revenue of an individual may be spent, either in things which are
consumed immediately, and in which one day’s expense can neither alleviate
nor support that of another; or it may be spent in things mere durable,
which can therefore be accumulated, and in which every day’s expense may,
as he chooses, either alleviate, or support and heighten, the effect of
that of the following day. A man of fortune, for example, may either spend
his revenue in a profuse and sumptuous table, and in maintaining a great
number of menial servants, and a multitude of dogs and horses; or,
contenting himself with a frugal table, and few attendants, he may lay out
the greater part of it in adorning his house or his country villa, in
useful or ornamental buildings, in useful or ornamental furniture, in
collecting books, statues, pictures; or in things more frivolous, jewels,
baubles, ingenious trinkets of different kinds; or, what is most trifling
of all, in amassing a great wardrobe of fine clothes, like the favourite
and minister of a great prince who died a few years ago. Were two men of
equal fortune to spend their revenue, the one chiefly in the one way, the
other in the other, the magnificence of the person whose expense had been
chiefly in durable commodities, would be continually increasing, every
day’s expense contributing something to support and heighten the effect of
that of the following day; that of the other, on the contrary, would be no
greater at the end of the period than at the beginning. The former too
would, at the end of the period, be the richer man of the two. He would
have a stock of goods of some kind or other, which, though it might not be
worth all that it cost, would always be worth something. No trace or
vestige of the expense of the latter would remain, and the effects of ten
or twenty years’ profusion would be as completely annihilated as if they
had never existed.
As the one mode of expense is more favourable than the other to the
opulence of an individual, so is it likewise to that of a nation. The
houses, the furniture, the clothing of the rich, in a little time, become
useful to the inferior and middling ranks of people. They are able to
purchase them when their superiors grow weary of them; and the general
accommodation of the whole people is thus gradually improved, when this
mode of expense becomes universal among men of fortune. In countries which
have long been rich, you will frequently find the inferior ranks of people
in possession both of houses and furniture perfectly good and entire, but
of which neither the one could have been built, nor the other have been
made for their use. What was formerly a seat of the family of Seymour, is
now an inn upon the Bath road. The marriage-bed of James I. of Great
Britain, which his queen brought with her from Denmark, as a present fit
for a sovereign to make to a sovereign, was, a few years ago, the ornament
of an alehouse at Dunfermline. In some ancient cities, which either have
been long stationary, or have gone somewhat to decay, you will sometimes
scarce find a single house which could have been built for its present
inhabitants. If you go into those houses, too, you will frequently find
many excellent, though antiquated pieces of furniture, which are still
very fit for use, and which could as little have been made for them. Noble
palaces, magnificent villas, great collections of books, statues,
pictures, and other curiosities, are frequently both an ornament and an
honour, not only to the neighbourhood, but to the whole country to which
they belong. Versailles is an ornament and an honour to France, Stowe and
Wilton to England. Italy still continues to command some sort of
veneration, by the number of monuments of this kind which it possesses,
though the wealth which produced them has decayed, and though the genius
which planned them seems to be extinguished, perhaps from not having the
same employment.
The expense, too, which is laid out in durable commodities, is favourable
not only to accumulation, but to frugality. If a person should at any time
exceed in it, he can easily reform without exposing himself to the censure
of the public. To reduce very much the number of his servants, to reform
his table from great profusion to great frugality, to lay down his
equipage after he has once set it up, are changes which cannot escape the
observation of his neighbours, and which are supposed to imply some
acknowledgment of preceding bad conduct. Few, therefore, of those who have
once been so unfortunate as to launch out too far into this sort of
expense, have afterwards the courage to reform, till ruin and bankruptcy
oblige them. But if a person has, at any time, been at too great an
expense in building, in furniture, in books, or pictures, no imprudence
can be inferred from his changing his conduct. These are things in which
further expense is frequently rendered unnecessary by former expense; and
when a person stops short, he appears to do so, not because he has
exceeded his fortune, but because he has satisfied his fancy.
The expense, besides, that is laid out in durable commodities, gives
maintenance, commonly, to a greater number of people than that which is
employed in the most profuse hospitality. Of two or three hundred weight
of provisions, which may sometimes be served up at a great festival, one
half, perhaps, is thrown to the dunghill, and there is always a great deal
wasted and abused. But if the expense of this entertainment had been
employed in setting to work masons, carpenters, upholsterers, mechanics,
etc. a quantity of provisions of equal value would have been distributed
among a still greater number of people, who would have bought them in
pennyworths and pound weights, and not have lost or thrown away a single
ounce of them. In the one way, besides, this expense maintains productive,
in the other unproductive hands. In the one way, therefore, it increases,
in the other it does not increase the exchangeable value of the annual
produce of the land and labour of the country.
I would not, however, by all this, be understood to mean, that the one
species of expense always betokens a more liberal or generous spirit than
the other. When a man of fortune spends his revenue chiefly in
hospitality, he shares the greater part of it with his friends and
companions; but when he employs it in purchasing such durable commodities,
he often spends the whole upon his own person, and gives nothing to any
body without an equivalent. The latter species of expense, therefore,
especially when directed towards frivolous objects, the little ornaments
of dress and furniture, jewels, trinkets, gew-gaws, frequently indicates,
not only a trifling, but a base and selfish disposition. All that I mean
is, that the one sort of expense, as it always occasions some accumulation
of valuable commodities, as it is more favourable to private frugality,
and, consequently, to the increase of the public capital, and as it
maintains productive rather than unproductive hands, conduces more than
the other to the growth of public opulence.
Extracted Entities
--- ENTITY: productive and unproductive labour ---
Productive and Unproductive Labour
Definition
A fundamental classification of economic activity distinguishing labour that adds value to materials through transformation into vendible commodities from labour that provides services without creating lasting value. Productive labour fixes and realizes itself in particular subjects or commodities that endure after the labour is past and can be stored, exchanged, or employed again, while unproductive labour perishes in the very instant of performance without leaving any vendible commodity or value that can be stored or exchanged.
Source Chapter
Book II, Chapter 3
Context
The central analytical framework of this chapter, introduced to explain how different types of labour affect capital accumulation and economic growth. Smith uses this distinction to show why manufacturers grow rich while those maintaining unproductive servants grow poor, and how this affects the overall productive capacity of a nation.
Economic Domain
Production
--- ENTITY: capital accumulation ---
Capital Accumulation
Definition
The process by which savings from revenue are added to capital stock, enabling the employment of additional productive labour. Capital grows through parsimony when individuals save part of their revenue and either employ it themselves in maintaining productive hands or lend it to others, creating a perpetual fund for maintaining productive labour across time.
Source Chapter
Book II, Chapter 3
Context
The chapter's primary focus, explaining how individual saving behavior accumulates into national capital growth. Smith argues that parsimony, not industry, is the immediate cause of capital increase, and that this process determines whether a nation tends toward industry or idleness.
Economic Domain
Accumulation
--- ENTITY: revenue destined for capital replacement ---
Revenue Destined for Capital Replacement
Definition
That portion of annual produce which immediately replaces capital by renewing provisions, materials, and finished work withdrawn from capital. This revenue maintains only productive hands and pays wages of productive labour, forming the foundation for continued production and economic growth.
Source Chapter
Book II, Chapter 3
Context
Smith divides annual produce into two parts: one replacing capital and one constituting revenue. This portion is crucial because it determines the proportion between productive and unproductive hands in society and thus the general character of inhabitants as to industry or idleness.
Economic Domain
Accumulation
--- ENTITY: revenue constituting profit and rent ---
Revenue Constituting Profit and Rent
Definition
That portion of annual produce which forms revenue either as profit of stock or rent of land. This revenue may maintain either productive or unproductive hands indifferently, unlike capital replacement revenue which maintains only productive labour. It represents the surplus after capital renewal.
Source Chapter
Book II, Chapter 3
Context
The second major division of annual produce, distinguished from capital replacement revenue. Smith notes that owners of this revenue often show predilection for maintaining unproductive hands, affecting the overall productive capacity of society.
Economic Domain
Distribution
--- ENTITY: spare revenue ---
Spare Revenue
Definition
That portion of revenue which remains after necessary subsistence is met and which may be employed in maintaining either productive or unproductive hands. Productive labourers have little spare revenue, while landlords and merchants have most to spare, giving them greater influence over the proportion of productive versus unproductive labour in society.
Source Chapter
Book II, Chapter 3
Context
Smith explains how different social classes use their revenue, noting that spare revenue is the key determinant of whether additional labour will be productive or unproductive, thus affecting capital accumulation and economic growth.
Economic Domain
Distribution
--- ENTITY: funds for maintaining productive labour ---
Funds for Maintaining Productive Labour
Definition
The capital and revenue sources that employ productive hands whose labour adds value to materials. These funds are much greater in rich countries and bear a much greater proportion to those likely to be employed in maintaining idleness, determining the general character of inhabitants as industrious or idle.
Source Chapter
Book II, Chapter 3
Context
Smith argues that the proportion between these funds and those for maintaining unproductive hands determines whether a country tends toward industry or idleness, with rich countries having larger proportions of productive labour.
Economic Domain
Production
--- ENTITY: funds for maintaining unproductive hands ---
Funds for Maintaining Unproductive Hands
Definition
Capital and revenue sources that employ unproductive labourers and those who do not labour at all, including servants, soldiers, churchmen, lawyers, physicians, and entertainers. These funds tend to have predilection for unproductive labour, especially among the wealthy, affecting the overall productive capacity of society.
Source Chapter
Book II, Chapter 3
Context
Smith contrasts these funds with those for productive labour, noting that their proportion determines whether a society tends toward industry or idleness, and that rich countries often maintain larger proportions of unproductive hands.
Economic Domain
Production
--- ENTITY: proportion between productive and unproductive hands ---
Proportion Between Productive and Unproductive Hands
Definition
The ratio determining the relative numbers of productive labourers who add value to materials versus unproductive labourers who provide services without creating vendible commodities. This proportion depends on the relative size of funds for maintaining productive versus unproductive hands, and determines whether a country tends toward industry or idleness.
Source Chapter
Book II, Chapter 3
Context
The central analytical relationship in the chapter, showing how the division of annual produce between capital replacement and revenue affects the overall productive capacity and economic character of a nation.
Economic Domain
General Theory
--- ENTITY: frugality versus prodigality ---
Frugality Versus Prodigality
Frugality Versus Prodigality
Definition
The contrasting principles governing individual and public expenditure that determine capital accumulation. Frugality increases public capital by saving revenue for productive employment, while prodigality diminishes it by consuming capital through excessive expenditure on unproductive labour and consumption.
Source Chapter
Book II, Chapter 3
Context
Smith presents this as the fundamental economic choice affecting national wealth, arguing that individual frugality accumulates capital while prodigality destroys it, with public prodigality being particularly harmful when it employs revenue in maintaining unproductive hands.
Economic Domain
Accumulation
--- ENTITY: perpetual fund for maintenance of labour ---
Perpetual Fund for Maintenance of Labour
Perpetual Fund for Maintenance of Labour
Definition
The accumulated capital created through individual saving that provides continuous employment for productive labour across all future time periods. Like a founder of a public work-house, a frugal person establishes a fund that, though not legally protected, is guarded by the evident interest of all who may ever possess any share of it.
Source Chapter
Book II, Chapter 3
Context
Smith uses this concept to show how individual saving creates lasting economic benefits beyond the immediate year, establishing a permanent capacity for productive employment that characterizes wealthy nations.
Economic Domain
Accumulation
--- ENTITY: encroachment upon capital ---
Encroachment Upon Capital
Definition
The process by which individuals who spend beyond their income consume their capital stock, perverting funds consecrated to productive employment for maintaining unproductive labour. This diminishes the quantity of labour that adds value to subjects and consequently reduces the real wealth and revenue of the country's inhabitants.
Source Chapter
Book II, Chapter 3
Context
Smith describes how prodigality leads to capital consumption, comparing it to perverting revenues of pious foundations to profane purposes, and showing how this behavior impoverishes both the individual and the country.
Economic Domain
Accumulation
--- ENTITY: exportation of gold and silver as effect of declension ---
Exportation of Gold and Silver as Effect of Declension
Definition
The consequence rather than cause of economic decline, where diminishing annual produce leads to reduced domestic circulation of money, forcing its exportation to purchase consumable goods abroad. This exportation continues for some time to support consumption beyond the value of domestic produce.
Source Chapter
Book II, Chapter 3
Context
Smith refutes the mercantilist view that gold and silver export causes economic decline, arguing instead that it is the effect of declining production and can even temporarily alleviate the misery of declension.
Economic Domain
Exchange
--- ENTITY: increase of money as effect of prosperity ---
Increase of Money as Effect of Prosperity
Definition
The natural consequence of economic growth where increased annual produce requires greater money circulation. The increased produce naturally employs itself in purchasing additional gold and silver necessary for circulating the rest, making monetary increase the effect rather than cause of public prosperity.
Source Chapter
Book II, Chapter 3
Context
Smith's complementary argument to the previous entity, showing that monetary growth follows rather than leads economic development, refuting mercantilist concerns about money scarcity.
Economic Domain
Exchange
--- ENTITY: private misconduct versus public prodigality ---
Private Misconduct Versus Public Prodigality
Private Misconduct Versus Public Prodigality
Definition
The distinction between individual economic errors and government extravagance as causes of reduced productive funds. While private misconduct rarely affects great nations due to compensation by others' good conduct, public prodigality employing revenue in maintaining unproductive hands can significantly diminish funds for productive labour.
Source Chapter
Book II, Chapter 3
Context
Smith argues that public prodigality is more dangerous than private misconduct because it operates at scale and is not compensated by others' frugality, potentially leading to national impoverishment.
Economic Domain
Regulation
--- ENTITY: natural progress of improvement ---
Natural Progress of Improvement
Definition
The inherent tendency of societies to accumulate capital and improve through individual efforts to better their condition, protected by law and allowed by liberty. This principle frequently restores health to the economic constitution despite government extravagance and administrative errors.
Source Chapter
Book II, Chapter 3
Context
Smith's optimistic conclusion that individual self-interest and frugality generally overcome government interference, allowing England's progress toward opulence despite public prodigality.
Economic Domain
General Theory
--- ENTITY: modes of expense affecting public opulence ---
Modes of Expense Affecting Public Opulence
Definition
The distinction between spending revenue on immediately consumable items versus durable commodities, where the latter contributes more to public opulence by providing useful goods to inferior ranks, encouraging frugality, and maintaining more productive hands than extravagant hospitality.
Source Chapter
Book II, Chapter 3
Context
Smith's final analysis showing how different spending patterns affect national wealth, arguing that investment in durable goods creates more lasting economic benefits than consumption of perishable items.
Economic Domain
Consumption
VSM Mappings
--- MAPPING: productive-and-unproductive-labour-to-system-1-operations ---
Productive and Unproductive Labour -> System 1 (Operations)
Economic Entity Reference
Entity Name: productive and unproductive labour
Definition: A fundamental classification of economic activity distinguishing labour that adds value to materials through transformation into vendible commodities from labour that provides services without creating lasting value. Productive labour fixes and realizes itself in particular subjects or commodities that endure after the labour is past and can be stored, exchanged, or employed again, while unproductive labour perishes in the very instant of performance without leaving any vendible commodity or value that can be stored or exchanged.
Source: Book II, Chapter 3
Context: The central analytical framework of this chapter, introduced to explain how different types of labour affect capital accumulation and economic growth. Smith uses this distinction to show why manufacturers grow rich while those maintaining unproductive servants grow poor, and how this affects the overall productive capacity of a nation.
Economic Domain: Production
VSM Concept Reference
System Name: System 1 (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.
Mapping Rationale
Productive labour directly maps to System 1 as it represents the operational units that create value through transformation of materials into vendible commodities. These labourers are the primary value-producing activities of the economic system, analogous to operational units in an organisation that directly produce outputs. Unproductive labour, while not creating vendible commodities, still performs operational functions within the economic system, though they do not add value in the same way. The distinction between productive and unproductive labour reflects the fundamental operational structure of economic activity.
Mapping Strength
Strong
--- MAPPING: capital-accumulation-to-system-3-control ---
Capital Accumulation -> System 3 (Control)
Economic Entity Reference
Entity Name: capital accumulation
Definition: The process by which savings from revenue are added to capital stock, enabling the employment of additional productive labour. Capital grows through parsimony when individuals save part of their revenue and either employ it themselves in maintaining productive hands or lend it to others, creating a perpetual fund for maintaining productive labour across time.
Source: Book II, Chapter 3
Context: The chapter's primary focus, explaining how individual saving behavior accumulates into national capital growth. Smith argues that parsimony, not industry, is the immediate cause of capital increase, and that this process determines whether a nation tends toward industry or idleness.
Economic Domain: Accumulation
VSM Concept Reference
System Name: System 3 (Control)
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
Capital accumulation functions as a control mechanism that regulates the internal economic environment by determining how resources are allocated between productive and unproductive labour. Smith's analysis shows how parsimony (saving) controls the growth of capital stock, which in turn determines the capacity for productive employment. This mirrors System 3's role in establishing rules and resources that govern operational units. The control function is evident in how capital accumulation determines the proportion between productive and unproductive hands, effectively managing the internal economic structure.
Mapping Strength
Strong
--- MAPPING: revenue-destined-for-capital-replacement-to-system-3-control ---
Revenue Destined for Capital Replacement -> System 3 (Control)
Economic Entity Reference
Entity Name: revenue destined for capital replacement
Definition: That portion of annual produce which immediately replaces capital by renewing provisions, materials, and finished work withdrawn from capital. This revenue maintains only productive hands and pays wages of productive labour, forming the foundation for continued production and economic growth.
Source: Book II, Chapter 3
Context: Smith divides annual produce into two parts: one replacing capital and one constituting revenue. This portion is crucial because it determines the proportion between productive and unproductive hands in society and thus the general character of inhabitants as to industry or idleness.
Economic Domain: Accumulation
VSM Concept Reference
System Name: System 3 (Control)
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
Revenue destined for capital replacement functions as a control mechanism that regulates the internal economic environment by determining resource allocation specifically for productive purposes. This portion of annual produce controls the maintenance of productive labour and the renewal of capital stock, establishing the rules for continued production. Like System 3, it manages the internal economic structure by determining which operations (productive hands) receive resources, thereby controlling the overall productive capacity of the system.
Mapping Strength
Strong
--- MAPPING: revenue-constituting-profit-and-rent-to-system-3-control ---
Revenue Constituting Profit and Rent -> System 3 (Control)
Economic Entity Reference
Entity Name: revenue constituting profit and rent
Definition: That portion of annual produce which forms revenue either as profit of stock or rent of land. This revenue may maintain either productive or unproductive hands indifferently, unlike capital replacement revenue which maintains only productive labour. It represents the surplus after capital renewal.
Source: Book II, Chapter 3
Context: The second major division of annual produce, distinguished from capital replacement revenue. Smith notes that owners of this revenue often show predilection for maintaining unproductive hands, affecting the overall productive capacity of society.
Economic Domain: Distribution
VSM Concept Reference
System Name: System 3 (Control)
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
Revenue constituting profit and rent functions as a control mechanism that influences the internal economic environment through discretionary resource allocation. Unlike capital replacement revenue, this revenue can maintain either productive or unproductive hands, giving owners significant control over the economic structure. This discretionary power mirrors System 3's role in managing resource allocation and establishing rules for operational units. The tendency of this revenue to maintain unproductive hands represents a control choice that affects the overall productive capacity of the system.
Mapping Strength
Strong
--- MAPPING: spare-revenue-to-system-3-control ---
Spare Revenue -> System 3 (Control)
Economic Entity Reference
Entity Name: spare revenue
Definition: That portion of revenue which remains after necessary subsistence is met and which may be employed in maintaining either productive or unproductive hands. Productive labourers have little spare revenue, while landlords and merchants have most to spare, giving them greater influence over the proportion of productive versus unproductive labour in society.
Source: Book II, Chapter 3
Context: Smith explains how different social classes use their revenue, noting that spare revenue is the key determinant of whether additional labour will be productive or unproductive, thus affecting capital accumulation and economic growth.
Economic Domain: Distribution
VSM Concept Reference
System Name: System 3 (Control)
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
Spare revenue functions as a control mechanism that determines resource allocation decisions beyond subsistence needs. The discretionary nature of spare revenue allows owners to choose between maintaining productive or unproductive labour, effectively controlling the internal economic structure. This mirrors System 3's role in managing resource allocation and establishing operational rules. The influence of spare revenue on the proportion of productive versus unproductive labour demonstrates how this economic concept controls the overall productive capacity of the system.
Mapping Strength
Strong
--- MAPPING: funds-for-maintaining-productive-labour-to-system-1-operations ---
Funds for Maintaining Productive Labour -> System 1 (Operations)
Economic Entity Reference
Entity Name: funds for maintaining productive labour
Definition: The capital and revenue sources that employ productive hands whose labour adds value to materials. These funds are much greater in rich countries and bear a much greater proportion to those likely to be employed in maintaining idleness, determining the general character of inhabitants as industrious or idle.
Source: Book II, Chapter 3
Context: Smith argues that the proportion between these funds and those for maintaining unproductive hands determines whether a country tends toward industry or idleness, with rich countries having larger proportions of productive labour.
Economic Domain: Production
VSM Concept Reference
System Name: System 1 (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.
Mapping Rationale
Funds for maintaining productive labour directly map to System 1 as they represent the operational resources that employ value-creating activities. These funds are the economic equivalent of operational budgets that support productive units in an organisation. The autonomy of productive labour within these funds, constrained by the need to add value to materials, mirrors the operational autonomy granted to System 1 units within organisational constraints. The direct engagement with material transformation and value creation establishes these funds as the primary operational activity of the economic system.
Mapping Strength
Strong
--- MAPPING: funds-for-maintaining-unproductive-hands-to-system-1-operations ---
Funds for Maintaining Unproductive Hands -> System 1 (Operations)
Economic Entity Reference
Entity Name: funds for maintaining unproductive hands
Definition: Capital and revenue sources that employ unproductive labourers and those who do not labour at all, including servants, soldiers, churchmen, lawyers, physicians, and entertainers. These funds tend to have predilection for unproductive labour, especially among the wealthy, affecting the overall productive capacity of society.
Source: Book II, Chapter 3
Context: Smith contrasts these funds with those for productive labour, noting that their proportion determines whether a society tends toward industry or idleness, and that rich countries often maintain larger proportions of unproductive hands.
Economic Domain: Production
VSM Concept Reference
System Name: System 1 (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.
Mapping Rationale
Funds for maintaining unproductive hands represent operational activities within the economic system, though they do not create vendible commodities. These funds employ operational units (unproductive labourers) that perform essential functions within the economic structure, analogous to support services in an organisation. The autonomy granted to these funds in maintaining unproductive labour, constrained by their non-value-creating nature, mirrors the operational autonomy of System 1 units. Their direct engagement with service provision establishes them as operational activities within the economic system.
Mapping Strength
Moderate
--- MAPPING: proportion-between-productive-and-unproductive-hands-to-system-3-control ---
Proportion Between Productive and Unproductive Hands -> System 3 (Control)
Economic Entity Reference
Entity Name: proportion between productive and unproductive hands
Definition: The ratio determining the relative numbers of productive labourers who add value to materials versus unproductive labourers who provide services without creating vendible commodities. This proportion depends on the relative size of funds for maintaining productive versus unproductive hands, and determines whether a country tends toward industry or idleness.
Source: Book II, Chapter 3
Context: The central analytical relationship in the chapter, showing how the division of annual produce between capital replacement and revenue affects the overall productive capacity and economic character of a nation.
Economic Domain: General Theory
VSM Concept Reference
System Name: System 3 (Control)
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 proportion between productive and unproductive hands functions as a control mechanism that regulates the internal economic structure. This ratio determines how resources are allocated between value-creating and non-value-creating activities, effectively controlling the overall productive capacity of the system. Like System 3, it establishes the rules for operational activity by determining the balance between different types of labour. The control function is evident in how this proportion determines whether a country tends toward industry or idleness, managing the internal economic environment.
Mapping Strength
Strong
--- MAPPING: frugality-versus-prodigality-to-system-3-control ---
Frugality Versus Prodigality -> System 3 (Control)
Economic Entity Reference
Entity Name: frugality versus prodigality
Definition: The contrasting principles governing individual and public expenditure that determine capital accumulation. Frugality increases public capital by saving revenue for productive employment, while prodigality diminishes it by consuming capital through excessive expenditure on unproductive labour and consumption.
Source: Book II, Chapter 3
Context: Smith presents this as the fundamental economic choice affecting national wealth, arguing that individual frugality accumulates capital while prodigality destroys it, with public prodigality being particularly harmful when it employs revenue in maintaining unproductive hands.
Economic Domain: Accumulation
VSM Concept Reference
System Name: System 3 (Control)
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
Frugality versus prodigality represents a control mechanism that regulates capital accumulation through expenditure choices. This principle controls the internal economic environment by determining whether revenue is saved for productive employment or consumed unproductively. Like System 3, it establishes rules for resource allocation that affect the overall economic structure. The control function is evident in how this choice determines capital growth or decline, managing the internal economic capacity through expenditure regulation.
Mapping Strength
Strong
--- MAPPING: perpetual-fund-for-maintenance-of-labour-to-system-3-control ---
Perpetual Fund for Maintenance of Labour -> System 3 (Control)
Economic Entity Reference
Entity Name: perpetual fund for maintenance of labour
Definition: The accumulated capital created through individual saving that provides continuous employment for productive labour across all future time periods. Like a founder of a public work-house, a frugal person establishes a fund that, though not legally protected, is guarded by the evident interest of all who may ever possess any share of it.
Source: Book II, Chapter 3
Context: Smith uses this concept to show how individual saving creates lasting economic benefits beyond the immediate year, establishing a permanent capacity for productive employment that characterizes wealthy nations.
Economic Domain: Accumulation
VSM Concept Reference
System Name: System 3 (Control)
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 perpetual fund for maintenance of labour functions as a control mechanism that establishes long-term resource allocation rules for productive employment. This accumulated capital controls the continuous employment of productive labour across time periods, establishing permanent operational capacity. Like System 3, it manages the internal economic structure by creating enduring rules for resource allocation that affect all future operations. The control function is evident in how this fund guards productive employment through time, maintaining the internal economic environment.
Mapping Strength
Strong
--- MAPPING: encroachment-upon-capital-to-system-3-control ---
Encroachment Upon Capital -> System 3 (Control)
Economic Entity Reference
Entity Name: encroachment upon capital
Definition: The process by which individuals who spend beyond their income consume their capital stock, perverting funds consecrated to productive employment for maintaining unproductive labour. This diminishes the quantity of labour that adds value to subjects and consequently reduces the real wealth and revenue of the country's inhabitants.
Source: Book II, Chapter 3
Context: Smith describes how prodigality leads to capital consumption, comparing it to perverting revenues of pious foundations to profane purposes, and showing how this behavior impoverishes both the individual and the country.
Economic Domain: Accumulation
VSM Concept Reference
System Name: System 3 (Control)
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
Encroachment upon capital represents a control failure that regulates the internal economic environment through capital consumption. This process controls the productive capacity by determining whether capital is maintained for productive employment or consumed unproductively. Like System 3, it affects resource allocation rules, though in this case through destructive rather than constructive means. The control function is evident in how this behavior diminishes the quantity of value-adding labour, managing the internal economic capacity through capital regulation.
Mapping Strength
Strong
--- MAPPING: exportation-of-gold-and-silver-as-effect-of-declension-to-system-4-intelligence ---
Exportation of Gold and Silver as Effect of Declension -> System 4 (Intelligence)
Economic Entity Reference
Entity Name: exportation of gold and silver as effect of declension
Definition: The consequence rather than cause of economic decline, where diminishing annual produce leads to reduced domestic circulation of money, forcing its exportation to purchase consumable goods abroad. This exportation continues for some time to support consumption beyond the value of domestic produce.
Source: Book II, Chapter 3
Context: Smith refutes the mercantilist view that gold and silver export causes economic decline, arguing instead that it is the effect of declining production and can even temporarily alleviate the misery of declension.
Economic Domain: Exchange
VSM Concept Reference
System Name: System 4 (Intelligence)
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 exportation of gold and silver as an effect of declension functions as an intelligence mechanism that monitors the external economic environment and signals strategic adaptation needs. This phenomenon provides information about the declining productive capacity of the economy and its relationship with foreign markets. Like System 4, it captures environmental data (declining domestic production) and indicates strategic responses (importing consumables). The intelligence function is evident in how this exportation signals the need for economic adaptation to maintain viability.
Mapping Strength
Moderate
--- MAPPING: increase-of-money-as-effect-of-prosperity-to-system-4-intelligence ---
Increase of Money as Effect of Prosperity -> System 4 (Intelligence)
Economic Entity Reference
Entity Name: increase of money as effect of prosperity
Definition: The natural consequence of economic growth where increased annual produce requires greater money circulation. The increased produce naturally employs itself in purchasing additional gold and silver necessary for circulating the rest, making monetary increase the effect rather than cause of public prosperity.
Source: Book II, Chapter 3
Context: Smith's complementary argument to the previous entity, showing that monetary growth follows rather than leads economic development, refuting mercantilist concerns about money scarcity.
Economic Domain: Exchange
VSM Concept Reference
System Name: System 4 (Intelligence)
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 increase of money as an effect of prosperity functions as an intelligence mechanism that monitors the external economic environment and signals successful adaptation. This phenomenon provides information about growing productive capacity and its relationship with monetary circulation. Like System 4, it captures environmental data (increasing annual produce) and indicates strategic success (adequate monetary circulation). The intelligence function is evident in how this monetary increase signals the need for appropriate monetary adaptation to support economic growth.
Mapping Strength
Moderate
--- MAPPING: private-misconduct-versus-public-prodigality-to-system-5-policy ---
Private Misconduct Versus Public Prodigality -> System 5 (Policy)
Economic Entity Reference
Entity Name: private misconduct versus public prodigality
Definition: The distinction between individual economic errors and government extravagance as causes of reduced productive funds. While private misconduct rarely affects great nations due to compensation by others' good conduct, public prodigality employing revenue in maintaining unproductive hands can significantly diminish funds for productive labour.
Source: Book II, Chapter 3
Context: Smith argues that public prodigality is more dangerous than private misconduct because it operates at scale and is not compensated by others' frugality, potentially leading to national impoverishment.
Economic Domain: Regulation
VSM Concept Reference
System Name: System 5 (Policy)
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
Private misconduct versus public prodigality represents a policy-level distinction that defines the identity and values of the economic system. This distinction establishes the fundamental policy choice between individual and governmental economic behavior, balancing internal economic management with external viability concerns. Like System 5, it provides policy closure by determining the overarching principles that govern economic behavior. The policy function is evident in how this distinction defines the economic identity of the nation and establishes supreme authority over economic behavior.
Mapping Strength
Strong
--- MAPPING: natural-progress-of-improvement-to-system-5-policy ---
Natural Progress of Improvement -> System 5 (Policy)
Economic Entity Reference
Entity Name: natural progress of improvement
Definition: The inherent tendency of societies to accumulate capital and improve through individual efforts to better their condition, protected by law and allowed by liberty. This principle frequently restores health to the economic constitution despite government extravagance and administrative errors.
Source: Book II, Chapter 3
Context: Smith's optimistic conclusion that individual self-interest and frugality generally overcome government interference, allowing England's progress toward opulence despite public prodigality.
Economic Domain: General Theory
VSM Concept Reference
System Name: System 5 (Policy)
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
The natural progress of improvement represents a policy-level principle that defines the identity and values of the economic system. This principle establishes the fundamental policy framework that allows individual self-interest to drive economic improvement despite governmental interference. Like System 5, it provides policy closure by establishing the supreme authority of individual economic behavior over government intervention. The policy function is evident in how this principle defines the economic identity of the nation and establishes the overarching policy framework for economic development.
Mapping Strength
Strong
--- MAPPING: modes-of-expense-affecting-public-opulence-to-system-5-policy ---
Modes of Expense Affecting Public Opulence -> System 5 (Policy)
Economic Entity Reference
Entity Name: modes of expense affecting public opulence
Definition: The distinction between spending revenue on immediately consumable items versus durable commodities, where the latter contributes more to public opulence by providing useful goods to inferior ranks, encouraging frugality, and maintaining more productive hands than extravagant hospitality.
Source: Book II, Chapter 3
Context: Smith's final analysis showing how different spending patterns affect national wealth, arguing that investment in durable goods creates more lasting economic benefits than consumption of perishable items.
Economic Domain: Consumption
VSM Concept Reference
System Name: System 5 (Policy)
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
Modes of expense affecting public opulence represent a policy-level principle that defines the values and purpose of economic behavior. This distinction establishes the fundamental policy framework for how revenue should be spent to maximize public wealth. Like System 5, it provides policy closure by establishing the supreme authority of investment in durable goods over consumption of perishables. The policy function is evident in how this principle defines the economic identity of the nation and establishes the overarching policy framework for consumption behavior.
Mapping Strength
Strong
VSM Framework Reference
id: vsm-framework name: vsm_framework artifact_type: content description: Stafford Beer's Viable System Model reference for economic analysis version: 1.0.0
Stafford Beer's Viable System Model (VSM)
The Viable System Model (VSM) is a model of the organisational structure of any autonomous system capable of producing itself. It was created by management cybernetician Stafford Beer in his books Brain of the Firm (1972) and The Heart of Enterprise (1979).
Core Principle: Viability
A viable system is any system organised in such a way as to meet the demands of surviving in a changing environment. One of the prime features of systems that survive is that they are adaptable. The VSM expresses a model for a viable system, which is an abstracted cybernetic description applicable to any organisation that is a going concern.
The Five Systems
System 1 (S1) — Operations
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).
In economic terms: Productive enterprises, factories, farms, workshops, individual labourers performing specialised tasks, merchant operations.
Key properties: Autonomy within constraints, self-organisation, direct engagement with the environment.
System 2 (S2) — Coordination
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.
In economic terms: Market price mechanisms, trade customs, standard weights and measures, commercial law, banking clearinghouses, trade guilds.
Key properties: Anti-oscillatory, dampening, scheduling, conflict resolution, standardisation.
System 3 (S3) — Control / Operational Management
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.
In economic terms: Government regulation of trade, taxation policy, labour laws, enforcement of contracts, the "invisible hand" as emergent internal regulation, guilds and corporations governing members.
Key properties: Internal regulation, resource allocation, accountability, synergy extraction, performance management.
System 3* (S3*) — Audit / Monitoring
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.
In economic terms: Market inspections, quality checks, auditing of accounts, surprise investigations into trade practices, verification of weights and measures.
Key properties: Sporadic direct investigation, reality checking, bypassing normal reporting channels.
System 4 (S4) — Intelligence / Adaptation
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.
In economic terms: Foreign intelligence about trade opportunities, market research, new technology adoption, colonial exploration and trade route development, understanding of foreign economic systems.
Key properties: Environmental scanning, future orientation, strategic planning, modelling, research and development.
System 5 (S5) — Policy / Identity
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.
In economic terms: Sovereign authority, constitutional principles governing economic policy, national economic identity, the philosophical foundations of economic systems (mercantilism vs. free trade), the overarching purpose of the commonwealth.
Key properties: Identity, ethos, supreme command, policy closure, balancing internal and external perspectives.
Key Concepts
Recursion
Every viable system contains and is contained in a viable system. The same five-system structure recurs at every level of organisation. A workshop is a viable system within a factory, which is a viable system within an industry, which is a viable system within a national economy.
Variety
A measure of the number of possible states of a system. The Law of Requisite Variety (Ashby's Law) states that only variety can absorb variety. A controller must have at least as much variety as the system it controls.
Requisite Variety
The principle that for effective regulation, the variety of the regulator must match the variety of the system being regulated. This is achieved through variety attenuation (reducing the variety coming up from operations) and variety amplification (increasing the variety of management's responses).
Attenuation and Amplification
Variety engineering mechanisms. Attenuation reduces variety (e.g., reporting summaries, statistical aggregation, standardisation). Amplification increases variety (e.g., delegation, empowerment, decentralisation).
Algedonic Signals
Emergency signals that bypass the normal management hierarchy to alert higher systems of critical situations requiring immediate attention. Named from the Greek words for pain (algos) and pleasure (hedone).
In economic terms: Market panics, famine signals, sudden price collapses, trade embargoes, economic crises that demand immediate sovereign intervention.
Autonomy
The degree of freedom granted to operational units (System 1) to self-organise within constraints set by System 3. Beer argued that maximum autonomy consistent with systemic cohesion yields maximum viability.
Viability
The capacity of a system to maintain a separate existence and survive in a changing environment. A viable system continuously adapts while maintaining its identity.
Instructions
- Review the source chapter, extracted entities, and VSM mappings together.
- Produce a single chapter analysis document following the Chapter Analysis Schema v1.0.
- The analysis must include:
- An H1 heading with the chapter analysis title
- A Chapter Summary (50-300 words) of the main economic arguments
- An Entities Extracted section listing all entities with brief descriptions
- A VSM Mappings section listing all mappings with entity, concept, and strength
- A VSM Coverage section assessing which systems (S1-S5, S3*) are represented
- A Gaps & Observations section identifying uncovered systems and patterns
- In the VSM Coverage section, explicitly state which systems are covered and which are not, based on the mappings.
- In Gaps & Observations, note:
- Which VSM systems lack representation from this chapter
- Entities that were difficult to map
- Emerging themes or patterns
- Suggestions for enriching coverage in future analysis
Output Format
Output a single markdown document following the Chapter Analysis Schema v1.0.