Adam Smith’s Three Divisions of Stock

Adam Smith classified every thing in an economy under three groups:

  1. Stock for immediate consumption
    • provides no revenue
    • Subcategories:
      • stock that a person already had
      • stock that a person received as revenue
      • stock that a person had purchased but not totally consumed yet
        • Examples are clothes, furniture, etc
  2. Circulating Capitals
    • provides revenue by leaving their master
    • Examples:
      • weaver’s needles
      • shoemaker’s leather
    • Subcategories
      • money
      • food items for sale
      • unfinished items for sale
      • finished items for sale
  3. Fixed Capitals
    • provides revenue without leaving their master
    • Examples:
      • Furnace in an iron works
      • A planted seed
    • Subcategories:
      • Useful machines and tools
      • Profitable buildings
      • Land improvements
      • Skills

 

Differences with Modern Economics

Modern economics does not make a distinction between fixed and circulating capitals and instead merges both into a single ‘capital’ concept. This in turn is the effect of enshrining the idea that money is wealth. ‘Capital’ nowadays means an amount of money that is set aside for investment over a long period.

Another key difference is that Smith’s system treats skills as a fixed capital that is more important than money. Nowadays, speculators can get rich by making the right bets with money, and this would seem to disprove Smith’s system, as proven by George Soros and by stock and currency speculators. However, successful speculators have skill and this fixed capital is really what gives them their revenue, and not their money.

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