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Book 2, Chapter 2
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Some labor is productive, because it adds value to the object it acts upon, and some labor is unproductive because it does not. For instance, manufacturers’ labor is productive because it adds value to the things it creates, which can then be sold to procure a greater quantity of labor, while menial servants’ labor is unproductive because it doesn’t “leave any trace or value behind.” Government officials, soldiers, “churchmen, lawyers, physicians, men of letters,” and entertainers are also all unproductive laborers.
Like the distinction between fixed and circulating capital, the difference between productive and unproductive labor may seem fuzzy or confusing at first, but it is absolutely essential to understanding what makes the economy grow. Productive labor generates revenue, which usually means it is a net positive for the economy: the productive worker creates at least as much value as they are paid in wages. In contrast, unproductive labor is like luxury consumption: it just eats up the invested capital. This is why the balance between productive and unproductive laborers shapes economic growth. But this doesn’t mean we should simply do away with unproductive labor, much of which is absolutely essential to the functioning of society. In fact, many contemporary critics reject the notion that the labor that happens at home is truly unproductive, because no productive economic activity could take place without it. Many feminist scholars see this distinction between productive and unproductive labor as a key tool for writing women out of economic theory.
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The more a country’s laborers are productive, the more it will produce in the future. Indeed, its annual produce must maintain all its laborers, both productive and unproductive. One part of this produce goes to replace the capital stock used up in production, which means it must go to productive labor. (However, once they receive that money, productive laborers can in turn choose to spend it on unproductive labor.) A second part goes to the producer’s profits, and a third part goes to the landlord; these can go to productive laborers, but they mainly go to unproductive laborers and people who do not work.
Productive labor expands the nation’s capital stock by generating more revenue than was invested in it. In contrast, unproductive labor shrinks the capital stock, because the capital invested in it does not yield returns. Thus, one valuable way to raise economic growth is by reducing the proportion of unproductive labor (and making the unproductive labor needed to fulfill crucial social functions as efficient and low-cost as possible). Smith’s point about the way money circulates is also crucial here: every laborer, employer, and landlord can choose how to spend their wages, profits, or rent. Their basic subsistence expenses on food, clothing, and provisions are generally unproductive. But they generally have discretion to spend their excess income on either productive or unproductive labor, as they see fit. The more they spend on productive labor, the better it is for the economy.
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Thus, the proportion of revenue that goes to replace capital helps determine the ratio of productive to unproductive labor. This portion is high in 18th century Europe, both in agriculture and trade, but was much lower in the past. This means that more and more Europeans have become productive laborers over time. The difference between trade and manufacturing towns where most of the people are industrious and ones that live off revenue, where most people are idle, is abundantly clear in Europe. English and Dutch towns are usually the first, and French and Italian ones the latter. In general, “the proportion between capital and revenue [...] regulate[s] the proportion between industry and idleness.”
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People can grow their capital by saving a portion of their annual revenue to invest. This enables them to employ more productive labor and increases the value of their annual produce. Rich people may spend some of their revenue on productive labor, but frugal people save that money so they can employ productive labor in perpetuity. Irresponsible people spend it away, destroying their (and their country’s) wealth. When a country’s annual produce shrinks, it starts to have too much money circulating, and some of it goes abroad. Conversely, as a country’s annual produce grows, more and more money flows into it.
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Frugality is thus a public good. It’s also the most reliable way for people to better their financial condition, and so it tends to predominate. Most private business ventures are prudent, and most businesspeople manage to avoid bankruptcy. The same isn’t true of public funds, which tend to be spent on unproductive workers. When their number grows too high, the economy starts to shrink. But responsible private individuals generally outnumber and compensate for “the public extravagance of government.”
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Increasing a nation’s annual produce requires additional capital stock. Nearly all countries steadily increase their capital stocks and revenues during peacetime. England grew steadily over the previous few centuries, and it would be far richer if it hadn’t waged so many unnecessary wars. But private frugality was enough to compensate for public wastefulness.
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People who spend on long-lasting products end up wealthier than those who spend on perishable ones. The same applies to a nation. For instance, the houses and furniture built for the wealthy can eventually pass into the hands of the middle class. Buying durable things is easier to stop and employs more people than simply paying unproductive laborers.
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