Capital can be employed in two fundamentally different ways: as circulating capital that yields profit only through continual changes of form and ownership, and as fixed capital that yields revenue while remaining with the same owner and in the same form.

By Adam Smith, from La Richesse des nations

Key Arguments

  • Smith introduces the distinction: 'There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer.'
  • First, capital may be used 'in raising, manufacturing, or purchasing goods, and selling them again with a profit,' but 'The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession, or continues in the same shape.'
  • He illustrates circulation by the merchant: 'The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. His capital is continually going from him in one shape, and returning to him in another; and it is only by means of such circulation, or successive changes, that it can yield him any profit.'
  • On this basis he names it: 'Such capitals, therefore, may very properly be called circulating capitals.'
  • Secondly, capital may be 'employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in such like things as yield a revenue or profit without changing masters, or circulating any further.'
  • He concludes: 'Such capitals, therefore, may very properly be called fixed capitals.'
  • He notes that 'Different occupations require very different proportions between the fixed and circulating capitals employed in them,' implying that this structural distinction helps analyze different trades.

Source Quotes

In one or other, or all of these three articles, consists the stock which men commonly reserve for their own immediate consumption. There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer. First, it may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit.
First, it may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession, or continues in the same shape. The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods.
The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. His capital is continually going from him in one shape, and returning to him in another; and it is only by means of such circulation, or successive changes, that it can yield him any profit. Such capitals, therefore, may very properly be called circulating capitals.
His capital is continually going from him in one shape, and returning to him in another; and it is only by means of such circulation, or successive changes, that it can yield him any profit. Such capitals, therefore, may very properly be called circulating capitals. Secondly, it may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in such like things as yield a revenue or profit without changing masters, or circulating any further.
Such capitals, therefore, may very properly be called circulating capitals. Secondly, it may be employed in the improvement of land, in the purchase of useful machines and instruments of trade, or in such like things as yield a revenue or profit without changing masters, or circulating any further. Such capitals, therefore, may very properly be called fixed capitals. Different occupations require very different proportions between the fixed and circulating capitals employed in them.

Key Concepts

  • There are two different ways in which a capital may be employed so as to yield a revenue or profit to its employer.
  • The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession, or continues in the same shape.
  • His capital is continually going from him in one shape, and returning to him in another; and it is only by means of such circulation, or successive changes, that it can yield him any profit.
  • Such capitals, therefore, may very properly be called circulating capitals.
  • in such like things as yield a revenue or profit without changing masters, or circulating any further. Such capitals, therefore, may very properly be called fixed capitals.

Context

Early in Chapter I of Book II, Smith defines the general categories of circulating and fixed capital in terms of how they yield revenue.