Book 2, chapter 5 of the
is about employment of capitals in different ways.
The chapter is called "Of the different employment of capitals,"
and it's actually one of the least well known and least discussed
parts of
even though it's an important part of Smith's argument.
Smith here is going to start with the premise that it matters a great deal
exactly how capital is invested because different capital investments
set in motion productive labor to varying degrees.
By the way, if you need to review
the concept of productive and unproductive labor,
just go back to our video on book 2, chapter 3.
In essence, productive labor replenishes the supply of capital,
but unproductive labor does not.
Smith focuses most of his attention on three different ways
of employing or investing capital,
and the first of those he cites is agriculture.
The second way of employing capital is through manufacturing.
A third method of investing capital is through
the transportation and trade of goods.
What's surprising is how strong a stance Smith takes that investing
in the transportation and trade of goods is a relatively unproductive way
of setting capital in motion.
Smith comes out very clearly that agriculture is the most productive way
to invest capital, with manufacturing in the middle
and trade and transportation coming last.
Here is one illustrative passage from this chapter, and I quote,
"The capital employed in agriculture, therefore, not only puts into motion
a greater quantity of productive labor
than any equal capital employed in manufactures,
but in proportion too to the quantity of productive labor which it employs,
it adds a much greater value to the annual produce of the country.
Of all the ways in which a capital can be employed,
it is by far the most advantageous to the society."
And there, again, he means agriculture.
You can, in this chapter, really see the continuing influence
of the physiocrats on Adam Smith.
Again, after agriculture, the next best way
of investing capital is through manufacturing.
For Smith, when you're building something, you're most likely to
be making investments, which are replenishing,
or somehow maintaining, your supply of capital.
The same is true with agriculture, in his view.
Note, however, that contemporary economists
would basically reject this argument.
It's not clear exactly why agriculture, and then manufacturing,
should in some way be more productive than transportation and trade.
They're complementary activities.
One can ask which of these investments has a greater positive social externality,
but Smith simply really never delivers on the point
that somehow that's going to be agriculture and then manufacturing.
So for a modern reader, this chapter of the
however important a link it may be in Smith's argument,
it really stands out as a piece of the puzzle
which he did not adequately defend.
Nonetheless, Smith proceeds, and he cites a few examples
of very wealthy societies which indeed emphasized agriculture.
He mentions the American colonies, China, Ancient Egypt and Indostan,
and it seems that Smith considers these the examples or the cases
when human beings have actually been the wealthiest.
Smith does make a few points against carrying goods.
For instance, he stresses that carrying goods is often a form
of what he calls unproductive labor, namely that after you've carried the good,
you have not in any way replenished or extended your capital.
Smith also points out that the benefits of the carrying trade
can accrue to the other country, rather than your own,
and Smith makes the point that doing a lot with carrying goods
tends to be a symptom of prosperity, rather than its cause.
Still, the modern economist probably is not convinced here.
In any case, Smith closes this chapter, and indeed all of book 2,
with a pretty potent claim.
He argues that Europe is sending too much of its capital abroad,
engaging it in trade and the transportation of goods,
and not investing enough capital in its own agriculture.
He then states that the next two books of the
will be devoted to figuring out which policies have led to these mistakes.
This will form an important part
of Smith's coming critique of mercantilism.