Study Guide

The Wealth of Nations Book II, Chapter 1

By Adam Smith

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Book II, Chapter 1

Of the Division of Stock

  • As mentioned earlier, people with savings will often use part of those savings to invest and make more money. There are two types of savings: the part that immediately allows you to buy stuff (like pocket money or walking-around money) and the part that you want to invest to make even more money.
  • Adam Smith calls this second kind of savings "capital."
  • And of all capital, Smith makes a distinction between "circulating capital" and "fixed capital." The first kind is always moving around, and it doesn't turn into any actual money until the owner cashes it in.
  • For example, if someone invests a bunch of capital in pumpkins, then they won't actually make money until they sell those pumpkins for more than they bought them for. This capital is called circulating capital because it tends to move around and take on different forms (pumpkins, gold, machines) until the owner sells it off to get money back.
  • The second kid of capital—fixed capital—is used to improve a piece of land. For example, a landowner might spend money to renovate a building.
  • They will make more money off the rents of this building because the renovations will make it more desirable. But this capital always stays in the owner's direct possession, unlike circulating capital.

The Wealth of Nations Book II, Chapter 1 Study Group

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