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be greater, is capital. The inducement to the practice of such frugality is always strong enough in a civilized community; for the ability to save increases in a geometrical ratio with its exercise. Cest le premier pas qui coute. The hardest struggle, the severest exercise of self-denial, is to make the beginning, to spare a little from our daily comforts when as yet we are entirely dependent upon the fruits of our unaided labor. Afterwards, that little which was reserved works along with us, and the surplus is greater at the end of the second year, though we have practised no additional self-restraint. Soon, the aggregate of these savings produces more than our original, individual earnings, and our expenditures may come up again to the full measure of what they would have been if no frugality had been practised at the outset; and yet accumulation goes on as rapidly as if we had been able to reserve the whole original product of our labor, and subsist upon nothing. The industrial organization of society is now so perfect, that the smallest savings can be utilized, or devoted immediately to active employment as capital. This rapid progress of accumulation, operating like the constantly accelerating force of gravitation, supplies the strong motive for frugality, which operates like a charm in the swift growth of national opulence.
It is now easy to explain the difference, on which so much stress is laid, between productive and unproductive consumption. Take the case, referred to in a former chapter, of a laborer who has saved $ 100 from his yearly earnings. At the end of the year, having this sum in reserve, he may immediately expend it all in giving an entertainment to his friends, or purchasing finer clothes and furniture for his family. In neither case would the values thus consumed aid either his labor or that of any other being; in the first case, it would be consumed all at once, the wine being drunk, the music heard, the delicacies eaten, and there would be an end of his savings; in the other case, the enjoyment would only be spread over a little longer time; the clothes and furniture, in the course of a few months or years, would be worn out, and the $ 100 would then have equally disappeared without return. Such is what is termed unproductive consumption.
But let us suppose, as before, that at the end of the year he placed the money in a savings' bank, or bought a machine with it, by the aid of which his labor would produce half as much again as in the former twelvemonth. In the bank, as has been shown, it would successively and rapidly assume different forms, at each transformation aiding labor or setting it in motion, at each yielding a profit, and leaving a final profit for the benefit of him who deposited it. This share of profit accruing to the owner is comparatively small, because he has committed the management of his property, and the risk of losing it, to others, and they must be paid for the labor and hazard of its superintendence. If he chooses to use it himself, as in the case supposed of purchasing a machine with it, his yearly earnings will be much increased, and the surplus will be enough to keep the machine in repair, to buy another when the first one is worn out, and to leave a larger profit at the end of the year, which surplus, again, he may spend productively or unproductively.
In all the cases now enumerated, it is evident that the laborer's surplus earnings are consumed. In the first two cases, being consumed only to obtain present enjoyment, whether of a longer or shorter duration, they never appear again; in the last two, being consumed only for the purpose of aiding labor, they reappear in the increased product of that labor. And so it must be in every supposable case, except where the savings are obtained in the form of gold or silver money, and are buried in the earth; then, indeed, they are not consumed, because they are not used at all, either for present gratification or future gain.
We see the fallacy, then, of the common opinion, that the prodigals who waste their substance in riotous or ostentatious living, though they and their families afterwards suffer for it, are yet benefactors to the community, because their liberal expenditures keep laborers in employ, increase the profits of shop keepers, and diffuse benefits all around them. He who saves, on the contrary, appears in the light of one who hoards; saving seems but another word for keeping a thing to one's self, while spending appears to be distributing it among others.
This popular error arises chiefly from the fact, that the wasteful person consumes his income and his capital mostly on the spot where he resides, where the public eye can follow his wealth, and see it passing into the hands of laborers, tradesmen, and dependents. But these persons do not obtain it for nothing. They give services, goods, articles of luxury, in exchange; and when these services are rendered, and the articles consumed, there is an end of the prodigal's wealth. He has nothing left, and they are but little richer than before, having only made their ordinary gains, or received their accustomed wages. The community, then, is the poorer by the whole amount which the prodigal has squandered. The savings of the frugal person, on the other hand, are often withdrawn from sight of the immediate neighborhood, being quietly invested in a bank or manufactory, where they are consumed productively; that is, they are still applied to the purchase of labor or goods, and so equally keep industry in motion, though this beneficial result is not easily traced back, and ascribed to the proper author of it.
To make this point clearer, I will take a particular example. Suppose a prodigal maintains an establishment of ten menial servants, at an expense of $ 3,000 a year. At the end of the year, he has expended this portion of his capital, and the servants have received their usual wages; but as they have toiled only to pamper his desire of enjoyment, and to gratify his love of ostentation, no products of their labor remain at the end of the year, and they are no better off than they would have been if they had obtained equal wages for making boots and shoes, or laboring on a farm. Then suppose a frugal person, having an equal sum of $ 3,000 a year to spend, instead of hiring menial servants with it, should invest it in the shoemaking business or in agriculture. It is obvious that an equal number of persons might thus be employed, and at the same wages; at the end of the year, moreover, instead of nothing being left, there would be an additional stock of one or two thousand pairs of boots and shoes, or of four or five thousand bushels of corn. The capital of the frugal person and the riches of the community would thus be augmented to the extent perhaps of $ 4,000 (ordinary allowance being made for profits); and this would be a fund for the support of industry for an indefinite period, or until it came into the hands of a prodigal who should waste it in luxuries and self-indulgence.
Adam Smith happily illustrates this subject, by comparing the frugal person to the founder of a public charity, in that he establishes, as it were, a perpetual fund for the purpose of supplying indigent laborers with employment at good wages for all time to come. But the prodigal is like him "who perverts the revenues of some pious foundation to profane purposes, as he pays the wages of idleness with those funds which the frugality of his forefathers had, as it were, consecrated to the maintenance of industry."
It should be observed, that the only fund from which savings can be made, and capital thereby increased, is the annual income or revenue of the individual. If the manufacturer, for instance, at the end of the year, has merely got his capital back again, the values created exactly replacing those which were consumed, though he has preserved his property, he has effected no saving; he is neither richer nor poorer than he was before. His capital ought to be replaced with a profit; and the aggregate of the profits for a year, not the aggregate of all the values produced during that time, constitutes his income or revenue. This income, like the year's wages of a laborer, seems to be the fund naturally designed for his own maintenance and that of his family. A portion of it must be spent in this manner, —that is, must be spent unproductively; for health and strength must be kept up by food, drink, and clothing; in addition to which, in order to keep up the full vigor of mind and body, a small portion of every one's income ought to be devoted to amusement and a few luxuries. But if these personal expenditures, and the replacement of the capital consumed during the year, do not absorb the whole income, what remains is a true saving, an addition to capital, a benefit both to the individual and the community.
"It would be a great error," says Mr. Mill, "to regret the large proportion of the annual produce, which, in an opulent country, goes to supply unproductive consumption. It would be to lament that the community has so much to spare from its necessities, for its pleasures and for all higher uses. This portion of the produce is the fund from which all the wants of the community, other than that of mere living, are provided for; the measure of its means of enjoyment, and of its power of accomplishing all purposes not productive. That so great a surplus should be available for such purposes, and that it should be applied to them, is a subject only of congratulation. The things to be regretted and to be remedied are the prodigious inequality with which this surplus is distributed, and the large share which falls to the lot of persons who render no equivalent service in return."
The wealth which is employed in creating more wealth has been divided by Adam Smith into Fixed and Circulating Capital. "There are two ways," he says, "in which a capital may be employed so as to yield a revenue or 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. 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 exchanges, that it can yield him any profit. Such capitals, therefore, may properly be called drewlating capitals.
"Secondly, it may be employed in the improvement of land, in the purchase of useful machines and implements of trade, or in such like things as yield a revenue or profit without changing masters or circulating any further. Such capitals, therefore, may properly be called fixed capitals."
This distinction has been further illustrated by the remark, that Circulating Capital fulfils the whole of its office in production by a single use; while Fixed Capital produces its effect, not by being parted with, but by being kept, and its efficacy is not exhausted by a single use. Observe, also, that the same articles may be Circulating Capital while in the hands of one person, and become Fixed Capital as soon as they are transferred to another. A stock of finished ploughs, for instance, belongs to the former class while they are owned by the manufacturer or the merchant, who expects not to use, but to sell them, and can obtain his profit only from the proceeds of such a sale; but they become Fixed Capital when they are purchased by the farmers, who expect to retain and use them till they are worn out.
Fixed Capital, Adam Smith remarks, "consists chiefly of the four following articles: —