““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 the 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 … 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 … 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.… The workman must have earned his wages by work done, before he can employ any part of them in this manner. The rent of land and the profits of stock are everywhere… the principal sources from which unproductive hands derive their subsistence.” These two sorts of revenue “might both maintain indifferently, either productive or unproductive hands. They seem, however, to have some predilection for the latter….”” (p 261-2)
Smith, here though demonstrates the confusion referred to earlier by Ricardo. He overstates the importance of the gross product compared to the net product, or surplus value. For Smith, the important point is how much of the product is required to reproduce the capital, relative to that which forms the revenue as profit and rent. So, he writes,
““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” [Wealth of Nations, O.U.P. edition, Vol. I, pp. 370-73].” (p 262)
Smith draws his conclusion from comparing capitalist agriculture to feudal agriculture. In the former, where production advances more rapidly, a large part of the value of the product must reproduce the capital consumed in production, whereas in the latter, a large portion goes as rent to fund the lavish lifestyle of the landed aristocracy.
But, as Marx and Ricardo point out, it is not the proportion of the value of the commodity that is required to reproduce capital that determines the potential for accumulation, but the proportion of the surplus value, and the extent to which it is used productively rather than as revenue.
Smith makes a similar point, in relation to the profits of industry and commerce. In capitalist economies, he argues the rate of profit is lower than existed previously, and where these high profits facilitated high rates of interest. The amount of interest on stock, in capitalist economies, is much greater, he says, because the amount of stock itself is much greater. In fact, where he is speaking of the rate of profit here, he is speaking of the profit margin, and he could have made a similar point. That is that the mass of profit was much greater, because the quantity of commodities is much greater. By the same token, if the rate of profit is measured against the advanced capital, then it can be seen that the annual rate of profit rises, even as the profit margin shrinks.
Smith also draws social conclusions from this division of the product into capital and revenue. For example, where the population draw their livelihood from the investment of capital in productive activity they are “ industrious, sober and thriving”, whereas where they draw it from the expenditure of revenue, for example, the residents of a court, they are “idle, dissolute and poor”. (p 263)
Smith, therefore, in similar vein to Weber's Protestant Ethic, moralises over the virtue of frugality, whereby savings are used to provide for productive labour.
“The conclusion of this moral tale is that these (frugality and prodigality) average out among private individuals, that in fact “wisdom” prevails.” (p 263)
As a consequence, Smith argues, great nations are not laid low by private prodigality, but may be so by public prodigality. A state which maintains a large number of courtiers and other unproductive elements, such as clergy and so on, will thereby drain resources that could have been used productively. Smith includes in this category large armies, which produce nothing, either in peace or war, but which must be maintained.
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